You will be able to explain how buckets separate near-term spending from long-term growth.
Ask a retired friend how her money is invested and you might get a percentage: sixty in shares, forty in bonds. Ask her how she'll pay for next year and the percentage doesn't help. The bucket approach answers the second question. It sorts the same money by when you'll spend it, so you always know which part pays for this year, which part pays for the next few, and which part is left to grow.
The first bucket holds cash for the next one to three years of withdrawals: a savings account, fixed deposits, short T-bills. It is the account your monthly spending actually comes from. Because it holds what you will spend soon, a market fall doesn't touch it.
The second, middle bucket covers roughly the following three to seven years. It holds things that earn more than cash but don't swing like shares: Singapore Savings Bonds, longer T-bills, high-quality bonds or bond funds, fixed deposits of longer terms. Its job is to refill the cash bucket over time, so you don't have to sell shares to do it in a bad year.
The third, growth bucket holds everything else, mostly shares, for spending that is many years away. It is allowed to fall, because it won't be needed for a long time and has time to recover. Its job is to grow faster than inflation over decades, and in good years it refills the middle bucket.
With this structure, you can live through a long fall in share prices by spending the cash, then the middle bucket, without selling growth assets at low prices. You can rarely avoid selling in every possible fall: a downturn that lasts longer than both safe buckets combined will still force a sale. What buckets do is make that far less likely.
The common mistake is to size buckets in years of total spending. What matters is years of what your portfolio has to pay after guaranteed income. If CPF LIFE covers half your spending, a year of withdrawals is half a year of spending.
Bridge years change this. Before CPF LIFE starts, your portfolio pays nearly everything, so those years are expensive and sit at the front of the queue.
Jasmine's portfolio withdrawals, from her drawdown map in lesson 3.4, Map your drawdown year by year, are about S$28,000 at 60 and S$29,300 at 61, after her part-time pay. Her cash bucket for two years is about S$57,000.
Her middle bucket covers the next five years, 62 to 66. Those withdrawals add up to about S$201,000: about S$30,600 at 62, then about S$50,000 at 63 and S$51,500 at 64 when her part-time pay has stopped and SRS draws count as portfolio withdrawals, and then about S$33,700 at 65 and S$35,300 at 66 once CPF LIFE starts.
Her growth bucket is the rest of her S$1,030,000, about S$772,000.
So, in round numbers: two years in cash, about S$57,000; five years in the middle, about S$201,000; and the remaining S$772,000 in growth. Her SRS account sits across the buckets: she holds its money in funds that match the middle and growth buckets, because it pays her from 63 to 70.
Jasmine already has S$80,000 in cash, more than her cash bucket needs. She moves the extra S$23,000 into the middle bucket rather than leaving it idle.
It is easy to believe buckets make you safer for free. They don't. Add up Jasmine's buckets and about a quarter of her savings is in cash and bonds, three quarters in shares. That is the same mix any investor could choose with a single percentage. Her expected return and her risk are the same as for anyone else holding a 25% safe, 75% growth portfolio.
What buckets change is behaviour. A retiree who sees two years of spending sitting in cash finds it much easier to leave shares alone during a fall, and selling in panic is one of the most expensive mistakes in retirement. Buckets also make the refill decision mechanical, which lesson 4.3, Refill rules: when to sell growth and when to wait, sets out.
They have costs. Cash and bonds earn less than shares over long periods, so a large safe bucket gives up expected growth. Financial independence: planning the number and the path, lesson 6.3, The cash buffer that buys you time, puts a price on that trade-off. Bigger buckets are more comfortable and more expensive. Jasmine chose two years and five years as a middle course.
Bucket sizes aren't fixed. In the bridge years each year of withdrawals is large, so the safe buckets need more dollars. Once CPF LIFE starts, yearly withdrawals fall, so the same number of years costs less. As you age, the growth bucket's job slowly shifts from long-term growth to paying for your eighties and nineties.
Jasmine plans to resize her buckets at every yearly review. At 66, two years of withdrawals will cost her about S$72,000 rather than S$57,000, because her part-time pay is gone, and she will rebalance from the middle bucket to match.
For the activity, take your own portfolio withdrawals by year from your drawdown map. Count forward two or three years for the cash bucket and another five or so for the middle, then add each group up in dollars.
Write the size of each bucket for your plan in years of spending and in dollars.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).