The 6-5-4 Retirement Bucket Strategy
One of the most common questions we hear from pre-retirees is:
“How do I turn my retirement savings into reliable income?”
At Paradigm Wealth Partners, we use a simple but comprehensive method called the 6-5-4 Retirement Bucket Strategy to help retirees feel confident and prepared for their financial future.
What Is It?
The name says it all. This strategy breaks your retirement money into three distinct “buckets” each with a specific job. It’s easy to understand, highly visual and built to weather market cycles.
6 – Six Months of Emergency Savings
This is your liquidity bucket, your first line of defense. It’s a cash reserve (about six months’ worth of expenses) that stays liquid for unexpected needs like:
- Medical bills
- Home or auto repairs
- Travel for a family emergency
If your monthly needs are around $5,000, this bucket should hold about $30,000 in cash or cash equivalents. It stays safe and liquid.
5 – Five Years of Income Stability
This is your income buffer. I also like to refer to this as your Warchest. Five years’ worth (or 60 months) of essential livings expenses. It’s typically invested in conservative, fixed-income investments, such as:
- Short- term bonds
- Fixed-income mutual funds or ETFs
- CD or Bond Ladders
If you need $5,000 a month, that’s $300,000+ earmarked for stability. This bucket reduces the need to withdraw from your growth portfolio when markets are volatile.
4 – For Growth
This is your long-term growth engine. Once the first two buckets are funded, the remaining retirement assets are invested in diversified, market-based portfolios with growth potential including:
- Stocks
- Equity ETFS or mutual funds
- Alternatives, depending on the plan
Since retirement can last 30+ years, this bucket helps outpace inflation and supports your lifestyle in the later phases of retirement.
Why the 6-5-4 Retirement Bucket Strategy Works
This strategy is:
- Simple – Easy to understand and communicate
- Flexible – Can be adjusted as needs or markets change
- Emotionally stabilizing – Helps clients avoid panic-selling
When markets are up, we might replenish the 5-year bucket early. When markets are down, we hold off. Either way, we stick to the plan with no emotional decisions, just thoughtful adjustments.
Want to Dive Deeper?
We walk through this strategy in more depth on our YouTube channel. Watch the full explanation of the 6-5-4 strategy and see examples of how it works in real client scenarios.
If you have questions, feel free to schedule a meeting with me to discuss more in detail.
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FAQs
- What happens if I need more than six months’ worth of emergency savings?
That’s okay. The 6-month recommendation is a baseline. If you anticipate higher short-term expenses or prefer extra security, you can increase the size of your emergency fund. The goal is to keep enough liquid cash on hand to avoid tapping into investments during urgent situations.
- Why set aside five years of income in conservative investments?
This buffer gives you confidence during market downturns. If stocks are down, you can draw income from this stable bucket without selling growth assets at a loss. It’s a strategy to protect your lifestyle and preserve long-term growth potential
- What types of investments go into the growth (4) bucket?
Growth investments typically include diversified stock portfolios, mutual funds, ETFs, or even alternatives depending on your risk tolerance and financial goals. These assets are designed to outpace inflation and provide capital appreciation over the long term.
- How often should I rebalance the buckets?
We review and rebalance the buckets annually—or more often if there’s a major life or market event. The flexibility of this strategy allows us to refill the 5-year bucket during good markets and ride out the storms when needed.
- Is the 6-5-4 strategy right for everyone?
No single strategy fits every person. While 6-5-4 works well for many retirees, we tailor each plan based on individual cash flow needs, risk tolerance, and goals. It’s a framework, not a formula.
Important information:
Past performance is no guarantee of future results. Investing involves risk, including the potential loss of principal. This content is for informational purposes only and should not be considered personalized financial advice.
The opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Investing in mutual funds and ETFs involves risk, including possible loss of principal. Fund value will fluctuate with market conditions, and it may not achieve its investment objective.