Multiple Bucket Retirement Planning

You are presenting a hypothetical situation where there is $250,000 of available savings, the client is age 70 and he has the following objectives:
Wants $12,000 of annual income.
Wants that income adjusted for a 2% rate of inflation.
Wants to be certain he will never run out of money (income will never stop).

With the Multiple Bucket Retirement Planning approach the client would divide the $250,000 in to three amounts or buckets.


The first bucket will hold money and distribute income for a period of five years. During this period we will assume that the money in this bucket earned a 4% rate of return. The money in this and the other buckets can be invested in anything that the client prefers but that investment must earn a 4% ROR in order to make this example valid. (Some clients may want to consider placing this money in an immediate annuity with a 5 year income payout period.)
The second bucket will hold money (grow without distributions) for a period of five years and then the money in this bucket will be used to provide income for another five years (total of 10 years). Like the first bucket, the money in bucket #2 can be invested in anything but that investment must earn a 5% ROR in order for this example to be valid. (The reason we are assuming that bucket #2 will earn more interest than bucket #1 is because it will be held for a longer period of time. Ten years as opposed to five years. (Some clients may want to consider placing this money in a fixed rate deferred annuity that will allow the client to surrender without penalty or to annuitize the contract after five years.)
The third bucket will hold money (grow without distributions) for a period of ten years and then the money in this bucket will be used to provide income for another five years (total of 15 years). Like the first and second buckets, the money in bucket #3 can be invested in anything but that investment must earn a 6% ROR in order for this example to be valid. (The reason we are assuming that bucket #3 will earn more interest than bucket #1 or #2 is because it will be held for a longer period of time. Fifteen years as opposed to five years for bucket #1 or 10 years for bucket #2. (Some clients may want to consider placing this money in a deferred indexed annuity that will allow the client to surrender without penalty or to annuitize the contract after ten years.)

Based upon the objectives of the client in this hypothetical example and the rates of return that we have assumed for the three buckets, the client would need to place $53,422 of his total funds ($250,000) into bucket #1.

Based upon the objectives of the client in this hypothetical example and the rates of return that we have assumed for the three buckets, the client would need to place $46,214 of his total funds ($250,000) into bucket #2.

Based upon the objectives of the client in this hypothetical example and the rates of return that we have assumed for the three buckets, the client would need to place $150,364 of his total funds ($250,000) into bucket #3.

The amounts in the three buckets equal $250,000.

The $53,422 in bucket #1, earning a rate of return of 4% should be able to provide an annual income of $12,000 (the clients objective) if both interest and principal were used. The concept behind the Multiple Bucket Retirement Planning approach is that by the end of five years there would be no money remaining in bucket #1. All of the earnings and principal were used to provide the $12,000 of annual income.

Because a large portion of the $12,000 of income received by the client was a return of his principal, only a small percentage (the amount from earnings) is subject to income tax.

After five years there is no remaining money in bucket #1 to provide the continuation of income.

However, during this initial five years the money in bucket #2 was growing. At our assumed rate of return of 5% the $46,214 that was initially deposited into this bucket would have grown to $58,983 by the end of five years.

This $58,983 can be used to “refill” bucket #1.

With $58,983 now in bucket #1 and assuming again that this money will earn 4%, it should be able to generate an annual income of $13,249 over another five year period of time. $13,249 is the equivalent of the client’s $12,000 objective income after adjusting for a 2% rate of inflation. Again, the $13,249 income is made up of both interest and principal.


Because a greater portion of the income over the second five year period is made up of interest earnings, a greater portion will be subject to income tax. But keep in mind that any income that is made up of a return of the client’s principal is not taxable income. This means that a large percentage of the income is nontaxable.

After 5 more years (10 years from the start) there is no remaining money in bucket #1 or bucket #2.

However, during this initial ten year period the money has been growing in bucket #3. Assuming a 6% return the $150,364 that was originally deposited to this bucket has grown to $269,272 by the end of ten years. Consider that this is greater than the $250,000 that the client started with. Not only does he have more money than he started with but he received a relatively large amount of income over the ten years. Further consider that a large portion of the income received was not considered taxable income.

The client could then take some of the money in bucket #3 and use it to “refill” bucket #1 with enough money to provide an inflation adjusted income for another five year period.

The client could also take some of the money in bucket #3 and use it to “refill” bucket #2 with enough money so that it could grow for five years and then provide income for another five year period

There should be enough money so that in addition to refilling bucket #1 and bucket #2 there is still money remaining in bucket #3. In fact there should be enough money in all three buckets so that the entire process can be repeated over another 15 year period.


The client has a total of $269,272 in his three buckets. He is now age 80. And, he has the peace of mind that comes with knowing that he will have a continuation of an inflation adjusted income and that he will never run out of money.