Explain how buckets keep the money for the next few years apart from the money meant for long-term growth.
Ask a retired friend how her money is invested and she might say 60 in shares, 40 in bonds (an invented example). That tells you how the money is invested. It doesn't tell her how she will pay for next year.
The bucket approach sorts the same money by when it will be spent. One part pays for this year, one part covers the next few years, and one part is left to grow.
The cash bucket holds the next 1 to 3 years of withdrawals. The money sits in a savings account, fixed deposits and short T-bills, and you pay your monthly spending from it. A market fall does not affect it.
The middle bucket covers roughly the following 3 to 7 years. Typical holdings are Singapore Savings Bonds, longer T-bills, high-quality bonds or bond funds, and longer-term fixed deposits. These earn more than cash and swing less than shares. Over time the middle bucket refills the cash bucket, so you don't have to sell shares in a bad year.
The growth bucket holds everything else, mostly shares, for spending that is many years away. It is allowed to fall because you won't need it for a long time, and it has time to recover. Over decades it has to beat inflation. In good years it refills the middle bucket.
During a long fall in share prices, you spend the cash bucket first, then the middle bucket, and you avoid selling growth assets at low prices. Buckets can't prevent a forced sale in every fall. A downturn that lasts longer than both safe buckets combined will still force a sale, but buckets make that much less likely.
A common mistake is to size buckets in years of total spending. The right unit is years of withdrawals: what the portfolio must pay after guaranteed income such as CPF LIFE and part-time pay. If CPF LIFE covers half your spending, one year of withdrawals equals half a year of spending.
The bridge years before CPF LIFE starts are expensive, because the portfolio pays nearly everything. They come first in the queue, so they fill your safe buckets first.
Jasmine has a portfolio of S$1,030,000 and a drawdown map from lesson 3.4, "Map your drawdown year by year" (all her figures are invented examples). She works part-time at 60 and 61, so her portfolio withdrawals after part-time pay are about S$28,000 and S$29,300. Those two years make up her cash bucket: S$28,000 plus S$29,300 is S$57,300, or about S$57,000.
Her middle bucket covers the five years from 62 to 66. At 62 she withdraws about S$30,600. At 63 and 64 her part-time pay has stopped and her SRS draws count as portfolio withdrawals, so she takes about S$50,000 and then S$51,500. At 65 CPF LIFE starts and withdrawals fall to about S$33,700, then about S$35,300 at 66. Those five years add up to S$201,100, or about S$201,000.
Her growth bucket is the rest: S$1,030,000 minus S$57,000 minus S$201,000 leaves about S$772,000. So she has two years in cash at about S$57,000, five years in the middle at about S$201,000, and the remaining S$772,000 in growth.
Her SRS pays her from 63 to 70, so it spans more than one bucket. She holds it in funds that match the middle and growth buckets, according to when each part pays out. She already has S$80,000 in cash, which is S$23,000 more than her cash bucket needs. She moves the extra S$23,000 into the middle bucket so it isn't left idle.
Buckets organise risk but don't add return. Jasmine's overall mix is about a quarter (25%) in cash and bonds and three quarters (75%) in shares. That is the same as a portfolio that is 25% safe and 75% growth, and her expected return and risk are identical to that allocation.
What buckets change is behaviour. When you can see years of spending already held in cash, it is easier to leave your shares alone during a fall. Panic selling is one of the most expensive mistakes in retirement. Buckets also make the refill decision mechanical. Lesson 4.3, "Refill rules: when to sell growth and when to wait", sets out how it works.
Safe buckets also have a cost. Over long periods cash and bonds earn less than shares, so a large safe bucket gives up expected growth. Bigger buckets are more comfortable and also more expensive. Jasmine chose two years of cash and five years in the middle as a middle course between the two. Lesson 6.3, "The cash buffer that buys you time", in the course "Financial independence: planning the number and the path", puts a price on this trade-off.
Bucket sizes are not 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 and 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.
Resize your buckets at each yearly review. Jasmine plans to resize hers each year. At 66, two years of withdrawals will cost her about S$72,000 instead of 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. Use the amounts after CPF LIFE and part-time pay. Count forward two or three years for the cash bucket and another five or so for the middle, then add up each group in dollars. Whatever is left in your portfolio is your growth bucket. If your existing cash is more than the cash bucket needs, move the surplus into the middle bucket. Spread any SRS money across the middle and growth buckets according to when it pays out.
Write down the size of each of your buckets, in years of spending and in dollars.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).