The bucket strategy: protecting your first years without a salary
The biggest risk after you stop working isn't a low average return, it's a market crash in the first few years. The bucket strategy exists so you don't have to sell at the worst possible moment.
The problem: sequence of returns
While you're saving, a market crash is an opportunity: you buy at lower prices. When you're withdrawing, it's the opposite: to pay your bills you have to sell units exactly when they're worth less, and those units can never recover. That's why two people with the same average return over thirty years can end up in opposite places, depending on when the bad years arrive.
The first 5–10 years after you stop are the most fragile. Get through them without damage and the odds of your plan holding up rise sharply.
How the bucket strategy works
Your portfolio is split into three parts, each with a different horizon. Example with spending of €30,000 a year:
| Bucket | Horizon and contents | Example |
|---|---|---|
| 1. Cash | 1–2 years of spending: current account, deposit account, money market funds | €60,000 |
| 2. Stability | 3–7 years of spending: short and medium-term bonds | €150,000 |
| 3. Growth | 7+ years: globally diversified equities | the rest |
You live off the first bucket. In good times, gains in the equity bucket refill the other two. In a crash you leave equities alone: you use cash and bonds and give markets time to recover.
The refill rules
- A good year for equities: sell part of bucket 3 and top up buckets 1 and 2 to their targets.
- A bad year: don't sell equities. Draw from bucket 1 and, if needed, bucket 2.
- A long crisis: with 5–7 years of spending in the first two buckets, you can get through most historical downturns without selling equities at a loss.
An honest note: mathematically, the bucket strategy is very similar to a rebalanced portfolio with a bond allocation. Research, for example by Michael Kitces, shows that its real advantage is behavioural: seeing two or three years of spending safely set aside helps you not to sell everything in a panic. And in practice, that's worth a great deal.
An effective variant: more equities as the years go by
If you spend down cash and bonds first, the equity share of your portfolio rises over time. Research on the so-called rising equity glidepath suggests that starting more cautiously and increasing equities in later years can reduce the risk of failure compared with a static portfolio, precisely because it protects the early, decisive years.
The Italian bridge to your pension
If you stop before your INPS pension, buckets fit neatly with the bridge capital: the part of your savings that must cover the years until your pension has a defined horizon and can sit largely in buckets 1 and 2, perhaps in government bonds with staggered maturities. The equity bucket, meanwhile, is for the post-pension phase and can stay invested for decades.
How much cash to hold depends on how flexible your spending is, when your pension starts and how much volatility you can stomach. It's one of the choices we set out in the plan, together with your withdrawal rule.
Try the tool: Net yield calculator for BTPs and bonds. Gross and net yield to maturity, with 12.5% or 26% tax, stamp duty and fees.
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Book a free callFor information and education only. This is not investment advice or a personal recommendation. Tax and pension rules change over time: always check current requirements with official sources (INPS, Agenzia delle Entrate).