Do you have a vacation fund? A pizza party jar at work or home? A bank account reserved for a new house?
People set aside money for certain goals or expenses, sometimes even dedicating a specific bank account or credit card for them. This mental bucketing tendency is a quick way our brain scans to see if we have the resources we need.
When it comes to retirement planning, we should lean into this bucketing tendency. The bucketing approach, or time-segmentation planning, is where you set aside money into different investments for different time periods in retirement. Oftentimes there are three buckets of money designated for three different time periods during retirement.
Bucket one contains your safest assets, like cash.
This bucket is what you’ll use for the near term, or next year. It’s safe and provides certainty for expected expenses.