Three frameworks to combine
Successful retirement income plans integrate multiple strategies to provide steady cash flow while preserving wealth.
🪣 Bucket Strategy
- • Bucket 1: Cash (1-2 years)
- • Bucket 2: Bonds (3-7 years)
- • Bucket 3: Stocks (long-term)
🛡️ Guardrails
- • Start ~3.5-4.0% withdrawal
- • Adjust ±10-20% based on performance
- • Protect against sequence risk
🎯 Tax-Smart Sequencing
- • Optimize withdrawal order
- • Manage tax brackets
- • Coordinate with pensions
The bucket system
Bucket 1: Cash & Short-Term (1-2 Years)
Purpose
Immediate spending needs, market volatility buffer
Holdings
High-yield savings, money market, short-term CDs/GICs
Target amount
12-24 months of expenses
Bucket 2: Conservative Growth (3-7 Years)
Purpose
Medium-term stability, refill cash bucket
Holdings
Bond funds, bond ladder, balanced funds, dividend stocks
Target amount
5-7 years of expenses
Bucket 3: Growth (Long-Term)
Purpose
Wealth preservation, inflation protection, legacy
Holdings
Broad stock index funds, international equity, growth assets
Target amount
Remainder of portfolio (typically 50-70%)
Dynamic withdrawal guardrails
How Guardrails Work
Step 1: Set initial withdrawal rate
Start with 3.5-4.0% of portfolio value
Step 2: Define guardrails
If portfolio drops 10% below target → reduce spending 10%
If portfolio rises 20% above target → increase spending 10%
Step 3: Review annually
Adjust next year's spending based on portfolio performance
| Portfolio Value | vs Target | Action | New Spending |
|---|---|---|---|
| $900,000 | -10% from $1M target | Reduce spending 10% | $36,000 (from $40,000) |
| $1,000,000 | At target | No change | $40,000 |
| $1,200,000 | +20% above target | Increase spending 10% | $44,000 |
Tax-efficient withdrawal sequencing
🇺🇸 United States Strategy
1. Fill lower tax brackets from taxable accounts
Capital gains and qualified dividends at preferential rates
2. Traditional 401(k)/IRA to stay in bracket
Fill remaining space in 12%, 22% brackets
3. Use Roth for bracket management
Tax-free withdrawals to avoid IRMAA cliffs, higher brackets
4. Coordinate with Social Security
Manage income to minimize SS taxation
🇨🇦 Canada Strategy
1. Non-registered accounts first
Capital gains at 50% inclusion rate
2. RRSP/RRIF withdrawals to manage brackets
Balance with OAS clawback threshold
3. TFSA last for tax-free growth
Preserve for late retirement, estate planning
4. Consider pension splitting
Split eligible pension income with spouse
Implementation process
Calculate annual "paycheque"
Determine after-tax spending needs, translate to gross withdrawals
Fill buckets from appropriate sources
Replenish cash from bonds/dividends, bonds from stocks after good years
Optimize tax management
Roth conversions in low-income years, tax-loss harvesting
Integrate pension timing
Coordinate CPP/SS start dates to reduce portfolio strain
Review and adjust annually
Update spending based on portfolio performance and life changes
Sample withdrawal plan
Example: $1M Portfolio, $40K Annual Need
Portfolio Allocation
- • Bucket 1 (Cash): $80,000 (2 years expenses)
- • Bucket 2 (Bonds): $220,000 (5.5 years expenses)
- • Bucket 3 (Stocks): $700,000 (growth engine)
Monthly Process
- • Withdraw $3,333 from cash bucket
- • Collect dividends/interest to replenish cash
- • Quarterly: Rebalance and refill buckets as needed
Annual Review
If portfolio grows to $1.1M → Increase spending to $42K
If portfolio falls to $900K → Reduce spending to $36K
Special considerations
Required Minimum Distributions
US: Traditional 401(k)/IRA RMDs start at 73
Canada: RRSP converts to RRIF, mandates minimum withdrawals
Plan withdrawal strategy around RMD requirements
Consider Roth conversions before RMDs begin
Healthcare Costs
Plan for increasing medical expenses with age
Long-term care costs can be substantial
Consider separate healthcare bucket or insurance
HSA withdrawals for medical expenses are tax-free
⚠️ Common Withdrawal Mistakes
- • Fixed 4% forever: Ignoring market performance and portfolio value changes
- • No spending flexibility: Unable to reduce expenses during bear markets
- • Poor tax planning: Missing opportunities for Roth conversions, tax-loss harvesting
- • Sequence of returns neglect: Not protecting against poor early returns
- • Pension timing errors: Taking SS/CPP too early or late for situation
💡 Pro Tips
- • Automate the system: Set up automatic transfers between buckets
- • Plan for inflation: Review spending needs annually for cost increases
- • Keep it flexible: Adjust guardrails and buckets as life changes
- • Monitor tax efficiency: Annual tax planning can save thousands
Frequently Asked Questions
Should I use fixed 4% or flexible guardrails?
Flexible guardrails improve portfolio durability by adjusting spending based on performance. Fixed percentages work if you have significant spending flexibility or other income sources.
How much cash is enough in Bucket 1?
12-24 months of expenses is common. More conservative retirees may hold 3 years. The key is avoiding stock sales during market downturns while not holding excessive cash long-term.
What about annuities for guaranteed income?
Annuities can provide a longevity floor, but compare costs versus delaying CPP/Social Security. Immediate annuities might make sense for a portion of your portfolio if you value guaranteed income.
How do I coordinate this with my pension?
Integrate pension payments into your withdrawal plan. Delay pensions to increase monthly payments and reduce portfolio withdrawal pressure. Use the bucket strategy to bridge until pension payments begin.