How Federal Employees Can Manage Their Investments In Retirement: The Bucket Strategy

As federal employees prepare to retire, they must shift from the accumulation mindset to the distribution mindset; said differently, they must shift from the saving mindset to the spending mindset. This change comes with many challenges, chief among them is deciding on a retirement income strategy.

When developing a plan for turning your retirement assets into an income stream, you have three common strategies that you can select from, which include: systematic withdrawals (4% Rule), time-based segmentation (Buckets), and essential versus discretionary income (Income Floor). In this article, we will discuss the time-based segmentation or the bucket strategy.

What Is The Bucket Strategy?

The bucket or time-based segmentation strategy divides assets into different “buckets” based on time horizon and risk tolerance. For example, it’s common to divide the buckets according to the time you’ll most likely need them: short-term, mid-term, and long-term.

The goal of this retirement income strategy is to manage sequence-of-return risk (the risk of a large market decline early in retirement) while allowing your portfolio to grow and thus mitigating longevity risk (the risk of outliving your money).

This strategy works by transferring assets between buckets. The idea is that as you use money in your short-term bucket, you’ll replace it periodically by selling assets from your medium-term bucket. And when growth assets are performing well, you’ll sell a portion of your long-term bucket, capture the gains, and invest that money in assets that make up your medium-term bucket. Now let’s examine each bucket.

Bucket #1: The Short-term Bucket

The short-term bucket is where you’ll keep the money you need within the next three to five years. This bucket should be highly liquid, risk-free, and readily available. Because this bucket is meant to provide stable income and Not Generate Growth, it should be invested in cash or cash equivalents (checkings, savings, CDs, or the G fund).

There are a few different ways to determine the amount of money to hold in the short-term bucket. My preferred method is to apply the 4% rule. We won’t cover the details of the rule in this article, but the premise is that your portfolio can safely distribute 4% (inflation-adjusted) of its balance with a low probability of running out of money.

So, using the 4% rule, if you decide to hold three years’ worth of distributions in your short-term bucket and have a portfolio balance of 1 million, your short-term bucket would hold about $113k (assuming 3% inflation).

Once you’ve determined an appropriate balance, you’ll want to rebalance your portfolio regularly. So, as you spend cash, you’ll sell portions from your mid or long-term buckets to replenish the cash bucket. If stocks are up, you’ll likely want to refill from your long-term bucket, and if stocks are down, you’ll sell from your mid-term bucket.

Bucket #2: The Mid-Term Bucket

The money you won’t need for between four and eight years is kept in your mid-term bucket.
Like bucket 1, the purpose of this bucket is income production and stability. However, the assets in this bucket are not required to be liquid or risk-free, although they should have low volatility.

With a higher risk than the cash and cash-like assets in your short-term bucket, the assets in the mid-term bucket usually consist of high-quality fixed-income assets, such as bond funds (think F fund), real estate investments, and even high-quality dividend-paying stock funds. Unlike the assets in the short-term bucket, these assets will likely lose value during a downturn, yet they will generally be much more stable than those in the long-term bucket.

Again, assets from this bucket and your long-term bucket will refill bucket one as needed. Additionally, dividend and interest earnings can be diverted as an income stream to bucket one.

Bucket #3: The Long-Term Bucket

Lastly, we’ve reached the growth engine of the bucket strategy: the long-term bucket. The purpose of this bucket is to grow as much as possible. Whereas buckets one and two are meant to help protect your portfolio from sequence risk, this bucket helps protect you against the risk of outliving your money.

The funds in this bucket won’t be needed for between seven and ten years. Hence, the long-time horizon allows this bucket to be dominated by growth assets, such as small-cap stocks and growth stock funds. Since the remaining money will be held in this bucket, it will generally be the largest portion of the overall portfolio.

Unlike buckets one and two, which had low risk with low returns, bucket three will have significantly more risk and growth potential. And though this bucket will see large swings in value due to market volatility, the long-time horizon means that you can rely on the first two buckets until bucket three recoups its value. Likewise, during strong stock market performance, you can trim bucket three to keep your total portfolio from becoming too equity heavy and divert the funds to the other buckets.


The bucket strategy doesn’t guarantee a successful retirement, yet, it does have some clear advantages, such as the following:

Psychological Benefits: Confidence is essential for sticking to your investment plan throughout retirement. And since many find having years of spending in cash reserves comforting, one of the major benefits of this strategy is that it can help you remain calm during market turbulence. This psychological benefit cannot be overstated as it can save you significantly by preventing costly emotional decisions.

Can Help Mitigate Sequence and Longevity Risk: The years immediately before and after retirement are often referred to as the fragile decade for your portfolio because of the disproportionate impact your investment returns have on your retirement. This risk is known as the sequence of return risk. This is where the bucket strategy really shines. Since buckets one and two provide stable income, you can avoid selling stocks from bucket three during a down market.

The other major risk that the bucket strategy helps mitigate is the risk of outliving your money. Because buckets one and two are invested in low risk and low return assets, bucket three can be aggressively invested in growth assets. Thus, bucket three can provide the overall portfolio with the necessary growth to maintain a safe withdrawal rate.


Although the bucket strategy has some significant advantages, it is certainly not without drawbacks. Here are a couple:

Complexity: Unlike the systematic withdrawal strategy, which is fairly straightforward, establishing the bucket strategy can get a bit complex. From competing views on two versus three buckets to the vast amount of investment options for each bucket, to the lack of standardized tools to track the allocations of all the buckets, implementing this strategy can involve several moving parts.

Maintenance: Another drawback to this strategy is the necessary maintenance. While most diversified portfolios will require rebalancing, the bucket strategy can make this process much more cumbersome. In addition to the routine rebalancing required to maintain an appropriately weighted portfolio, this strategy requires periodically transferring assets from one bucket to another.

Rebalancing becomes even more fun if you’re taking distributions from the TSP, as all distributions will be disbursed proportionally between funds. This means that once you start withdrawing from your TSP if you’re invested in more than one fund, you will not be able to pick which funds to sell.

For example, let’s say you have a portion of your short-term bucket (50% G fund) and your mid-term bucket (50% F fund) in the TSP. If you withdraw $10k from your short-term bucket, $5k will be distributed from the G fund, and the other $5k will be distributed from the F fund. Thus, after every distribution, you’ll have to rebalance your TSP.

Final Thoughts

Although the bucket strategy can effectively transition your portfolio from the saving phase to the spending phase while mitigating stock market swings and the risk of outliving your money. A pivotal decision is whether the added complexities associated with this strategy are worth the benefits. This can depend on several factors, such as your risk tolerance and comfort with maintaining this strategy. If you are not confident selecting and implementing your retirement income strategy, consult with a qualified financial planner.

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2023 Legislative Change Notice

The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.

Author: Jose Armenta, MsBA, CFP®, ChFC®, EA

Hi, I’m Jose Armenta, a Certified Financial Planner practitioner. For over 14 years, I have worked with or among federal employees, from serving in the Marine Corps to my stint as a police dispatcher and now as a financial planner specializing in helping FERS federal employees. In that time, I have spoken to hundreds of federal employees about their benefits and retirement. Helping federal employees maximize their benefits, reduce taxes, and live confidently is a passion of mine. When I am not perfecting financial plans, you’ll find me at the shooting range, playing the drums, or breaching blanket forts with my three little ones.