In constructing the bucket strategy portfolio, Benz assumes it is for a married couple with a 20-year hands-off time frame, moderate risk tolerance, $1 million in total portfolio assets, 5% withdrawal rate per year, desire to spend all of their nest egg and assets held in a tax-sheltered account.

The three bucket breakdowns include:

  • The first bucket for 1-2 years will consist of 10% cash allocations, such as certificates of deposit, checking, saving accounts and money market accounts, like the PIMCO Enhanced Short Maturity Fund (NYSEArca: MINT). This liquidity component will help retirees have enough cash on hand for one or two years.
  • The second bucket, with a target date of 3 to 12 years, aims to provide income, stability and inflation protection while accruing modest capital growth. Benz suggests allocations like Vanguard Short-Term Bond ETF (NYSEArca: BSV) 7.5%, PowerShares Senior Loan Portfolio (NYSEArca: BKLN) 7.5%, PIMCO Total Return ETF (NYSEArca: BOND) 15%, iShares Barclays TIPS Bond (NYSEArca: TIP) 7.5% and Vanguard Dividend Appreciation (NYSEArca: VIG) 12.5%. The bucket provides a solid mix of income generating assets with protection against rising interest rates and some exposure to quality company names.
  • The third bucket, which covers 13-20 years, will be the main growth engine of the overall investment portfolio, focusing on equities and aggressive fixed-income exposure. This segment includes Vanguard Dividend Appreciation (NYSEArca: VIG) 10%, Vanguard Total Stock Market Index (NYSEArca: VTI) 10%, Vanguard FTSE All-World ex-U.S. ETF (NYSEArca: VEU) 10%, PowerShares DB Commodity Index Tracking (NYSEArca: DBC) 5%, SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) 2.5% and WisdomTree Emerging Markets Local Debt (NYSEArca: ELD) 2.5%.

The investor will have to shift assets from buckets 3 to 2 and 2 to 1, creating a more cash heavy portfolio to meet income needs.

For more information on investing toward retirement, visit our retirement category.

Max Chen contributed to this article.