Building a "Safe Money" Bucket for the Next Five Years

The short version: Work out what you will actually spend over the next five years, subtract guaranteed income, and hold the remainder somewhere it cannot fall in value. It buys you the ability to leave the rest of your savings alone through a bad stretch.

What this solves

The most damaging thing that can happen early in retirement is being forced to sell investments during a downturn to cover ordinary living costs.

It is damaging because the money taken out at a low point is not there to recover when things improve. The withdrawal and the downturn compound each other. We cover the mechanism in sequence-of-returns risk.

A safe money bucket removes the forcing. If the next several years of spending is already sitting somewhere that does not fall, a bad market year becomes something you read about rather than something you have to respond to.

Building it, step by step

Step one: work out annual spending

Not a guess. Go through twelve months of statements and total what actually left the account.

Separate essential from discretionary if you like, though for this purpose the total is what matters, because you intend to keep living your life rather than only paying bills.

Step two: subtract guaranteed income

Social Security, any pension, and any annuity income already in payment. Use the amounts that actually arrive after deductions.

Step three: multiply the gap

Whatever your savings need to provide each year, multiply by the number of years you want covered. Five is a reasonable default.

That figure is the size of the bucket. For many households it is smaller than they expected, because guaranteed income covers more of the base than they had counted.

Step four: place it where it cannot fall

This is where the structure matters.

Year one, and your emergency reserve. A savings or money market account. Instant access matters more than rate here.

Years two and three. Shorter certificates of deposit, or the near rungs of a ladder.

Years four and five. Longer CDs, which generally pay more for the commitment.

Laddered so that a portion matures each year and refills the front of the bucket. We set out how in CD laddering, and compare the account types in money market accounts vs savings accounts vs CDs.

Step five: keep it insured

At an FDIC insured bank the balances are protected up to the applicable limits. For larger buckets, spread across institutions or ownership categories so all of it stays covered. See keeping deposits under the FDIC limit.

Refilling it

Once a year, look at the bucket and top it back up from the rest of your savings.

The useful part is that this is a decision rather than an obligation. In a year when markets have done well, refilling is easy. In a poor year, you can choose to wait, because you still have several years covered.

That optionality is the entire benefit. You are never selling into a downturn because you have no alternative.

Why this changes how retirement feels

The households we work with who have done this describe the same shift. Market news becomes less personal. A poor quarter is interesting rather than alarming.

That is not a small thing. A great deal of poor financial decision making comes from acting under stress, and the most reliable way to avoid acting under stress is to arrange things so that you do not have to act at all.

It also tends to make people more willing to spend on the things they retired for, because the near term is visibly covered.

What it does not do

It does not protect purchasing power over long periods. Money in conservative accounts can grow more slowly than costs rise, which is a genuine consideration across a long retirement and one reason the bucket is a portion of a plan rather than the whole of it. We look at that in inflation and your retirement.

It does not remove the need to think about the longer term. It buys time and calm, which is what makes thinking about the longer term possible.

And it does not need to be perfect. A roughly right bucket, built this year, is worth considerably more than an exact one built eventually.

Getting started

You can model how a sum grows across a few years with our savings growth calculator, which helps in sizing the later rungs.

Common objections, answered

"That is a lot of money earning less than it could." True, and it is the price of the option not to sell at a bad moment. Whether that price is worth paying depends on how close you are to needing the money. Early in retirement, most people conclude it is.

"I would rather keep it all invested and just be disciplined." Discipline is easier to maintain when it is not being tested. The bucket exists so that discipline is not required at the worst possible time.

"Five years of spending seems excessive." Then use three. The structure matters more than the number, and a smaller bucket that actually exists beats a perfect one that stays theoretical.

If you would like help working out your own number and arranging the layers, schedule a free consultation. Current terms and rates are available on request, and there is nothing to prepare beyond a year of statements if you have them handy.

This article is for general education and is not financial, tax, or legal advice. Please speak with a licensed professional about your situation.