Buckets and Guaranteed Income: A Floor Under Your Spending

Split your savings into piles, sorted by when you’ll spend them. Near-term spending goes in cash. The next several years go in bonds. Everything else goes in stocks. That money has the longest time to recover.

That is a bucket plan. It takes the cash reserve from the lesson on sequence risk and extends it, so that a crash in the stock market never forces you to sell stocks to pay for groceries, because the next several years of withdrawals are already sitting somewhere that does not fall with them.

Sizing the buckets

Start from the gap. The first lesson found a $32,000 gap. Each bucket is measured in years of it.

Refill from gains. Stocks up? Sell some and top the cash back up to two years. Stocks down? Spend from cash, let bonds refill it, and leave the stocks alone for as long as the fall lasts, which is the reason the bond bucket holds eight years and the cash only two.

Buckets have a limit. They are a mental frame laid over a single portfolio. Underneath, $64,000 in cash, $256,000 in bonds and $480,000 in stocks is simply a portfolio with 60% in stocks, and what drives the long-run result is that overall mix. The labels matter because they make it easier to hold your nerve.

A floor of guaranteed income

Buckets manage the money you draw from savings. A floor goes further. It covers necessities with income that pays whatever the market does. A bad decade then costs only extras.

These sources build a floor.

• Social Security, delayed. Each year you wait past 62, up to 70, raises the monthly benefit for life. It also gets cost-of-living increases. The price of this floor is the benefits you skip while waiting. See the course on timing your Social Security claim and the Social Security claiming calculator.
• A pension. Offered a lump sum or monthly payments? The monthly option is floor income. A joint option keeps paying a surviving spouse, often at a reduced amount.
• An income annuity. You pay an insurer a lump sum. In return it pays you a set amount every month for the rest of your life, or for two lives if you choose a joint contract. The payment depends on your age, the options you pick and interest rates when you buy, so the only way to know what a given sum buys is to get quotes for your own age and options, and the figure you see can change as rates move from one month to the next.

Delaying Social Security needs a bridge. The years between retiring and claiming are paid from savings. That usually means a bigger bond bucket early on.

What each choice costs

An annuity gives up liquidity. The lump sum belongs to the insurer once you buy, and in most contracts you cannot get it back for an emergency or leave it to heirs. Annuitizing only part of your savings, enough to cover necessities, keeps the rest liquid. Delaying Social Security costs years of spending from savings. Buckets cost little. They only relabel what you hold, and they protect you for as long as the cash and bonds hold out. Long-term care is a separate risk. The course on long-term care covers it.

Review the plan every year

Once a year, redo the whole course in an afternoon. Update spending, and check necessities against your floor. Recalculate the gap. Divide it by the portfolio. Check that rate against your guardrails. Refill cash if the market allows it. Then run the new figures through the retirement withdrawal calculator, look at how the plan holds up if the next two years are poor ones, and write down any change you make and the reason, so that next year you can see whether it worked.

A plan checked every year can change course early, while any adjustment it needs is still small enough to make without upsetting the life it pays for.