Hey {{first_name | Mixtape Reader}},
Last Friday we talked about sequence-of-returns risk. The idea that the order of your returns matters as much as the returns themselves, especially in the years right around retirement.
Today we are going practical. If you are 10 to 15 years from retirement, here is a framework for structuring your portfolio so that a bad market at the wrong time does not derail the whole plan.
🎵 Vol. 2, Track 4: The Three-Bucket Strategy
The three-bucket approach is one of the most widely recommended portfolio frameworks for pre-retirees and early retirees. It is not complicated. It is not flashy. It works because it gives you a structured answer to the question: where does my income come from when the market drops?
Here is how it works.
Bucket 1: The Now Bucket (Cash and Short-Term Bonds)
This is money you will need in the next one to three years. It sits in high-yield savings accounts, money market funds, or short-term Treasury bills. It earns modest returns. That is fine. Its job is not to grow. Its job is to be there when everything else is down.
For most planners, this bucket holds one to three years of living expenses. If you plan to spend $60,000 per year in retirement, this bucket holds $60,000 to $180,000.
When the market drops, you draw from this bucket instead of selling stocks at depressed prices. Your equity portfolio gets time to recover. You do not lock in permanent losses.
Bucket 2: The Soon Bucket (Bonds and Income-Producing Assets)
This is money you will need in three to seven years. It sits in intermediate-term bonds, bond ladders, and possibly some dividend-paying stocks or REITs. It generates income and has a moderate growth profile.
When Bucket 1 runs low, you replenish it from Bucket 2. If the market is down, you can let your equities sit and draw from this intermediate layer instead.
This bucket also serves as a buffer. If you have a five-year bond ladder with maturities every year, you always have something coming due that you can move into Bucket 1 without selling anything at a loss.
Bucket 3: The Later Bucket (Growth Assets)
This is money you will not touch for seven or more years. It sits in broad equity index funds, growth-oriented funds, and potentially some alternative investments. Its job is to grow and outpace inflation over the long run.
You do not touch this bucket for spending in a down market. You let it ride. When the market recovers and your equities are up, you rebalance by selling some of the gains and refilling Buckets 1 and 2.
This is where the compounding magic happens. Over a 20 to 30 year retirement, this bucket drives most of your portfolio growth.
Why this works for Gen X specifically
If you are in your late 40s or 50s, you are in the critical window where sequence risk starts to matter. A market crash at 55 does not hurt as much as one at 62, but it still matters because you have fewer years to recover before you need the money.
The bucket strategy gives you a plan before you need one. You do not have to make emotional decisions in a crisis because you already know where your income comes from. That is worth a lot when the S&P 500 drops 25 percent and your neighbor is panic-selling.
How to start if you are not retired yet
You do not need to be retired to use this framework. If you are 10 to 15 years out:
Start building Bucket 1 now. Move one to two years of expected retirement expenses into cash or money market funds. This becomes your "do not touch" emergency reserve.
Structure your bond allocation as Bucket 2. Instead of holding a generic bond fund, consider building a simple ladder with maturities spread across the next three to seven years.
Keep your equity allocation focused in Bucket 3. Do not overlap. Let the growth assets grow.
Rebalance once a year. Sell what is up. Refill what is low.
The buckets are not separate accounts. They are a mental and structural overlay on your existing portfolio. You can implement them inside a single IRA or across multiple accounts.
Wednesday we are tackling the conversation that nobody wants to have but every Gen X household needs to: long-term care insurance. What it costs, what it actually covers, and why the clock is ticking on your ability to get it at a reasonable price.
The Mixtape Millionaire Team
Mixtape Millionaire is for informational purposes only and does not constitute financial advice. Always consult a qualified financial professional before making investment decisions.