Modern Three-Bucket Retirement Strategies: Using Annuities to Address Sequence, Longevity, and Liquidity Risks

Introduction

Many Americans are deeply concerned about the possibility of outliving their retirement savings (longevity risk), especially as unpredictable market swings and rising healthcare costs add to their uncertainty. Recent public opinion research from the National Institute on Retirement Security (NIRS) shows that a significant portion of Americans believe the country faces a retirement crisis and are worried about their long-term financial security. In response to these concerns, the three-bucket framework offers a flexible approach for drawing down retirement assets, and incorporating annuities within these buckets can provide guaranteed income and protect against longevity risk.

Why a bucket approach?

The bucket approach to retirement planning offers several key benefits: it helps reduce sequence-of-returns risk by segmenting assets according to when they will be needed, aligns investments with specific time horizons and cash-flow requirements, and makes it easier for retirees to distinguish between funds set aside for liquidity versus those intended for long-term growth. According to the National Council on Aging, the bucket strategy divides retirement savings into separate “buckets” for immediate, short-term, and long-term needs, providing both stability and growth potential while helping retirees avoid selling growth assets during market downturns. This framework is especially relevant today, as many Americans are worried about the sustainability of Social Security and their ability to fund potentially lengthy retirements, fueling greater interest in guaranteed income solutions such as annuities.

The classic three buckets: definition & mechanics

The three-bucket retirement strategy organizes assets according to different time horizons and financial needs, making retirement planning more adaptable and simpler. Bucket A is dedicated to short-term needs, covering living expenses for the next one to three years, including emergencies and immediate withdrawals; it typically consists of cash, high-yield savings accounts, short-term CDs, T-bills, or very short bond funds. Bucket B serves as an intermediate buffer, with the goal of replenishing Bucket A over the following three to ten years; it generally contains moderate-risk investments such as laddered bonds, short-to-intermediate bond funds, or conservative balanced funds. Finally, Bucket C is focused on long-term growth and longevity, sustaining retirement for decades through assets like equities, real estate, TIPS, and other investments geared toward capital appreciation. This framework is meant to remain practical and flexible, emphasizing thoughtful planning rather than strict allocation rules.

Variations of the three-bucket approach (practical alternatives)

Several variations exist within the three-bucket retirement income strategy to address different client needs and preferences. The bucket plus glidepath approach involves moving assets from long-term (Bucket C) to intermediate (Bucket B) and then to short-term (Bucket A) on a predetermined schedule or according to specific rules, aiming to reduce investment risk as the withdrawal period approaches. Some advisors opt for a laddered bonds or CDs bucket rather than holding cash alone, aligning bond or CD maturities with planned withdrawals for greater yield and predictable cash flow. Dynamic or tactical bucket strategies tie refill decisions to market signals or valuations, though these should be used cautiously due to their complexity and reliance on accurate market timing. The income-first bucket emphasizes using guaranteed income sources, like annuities or pensions, to cover a portion of living expenses, which can reduce the size of the cash bucket required. Finally, hybrid buckets may incorporate a longevity annuity within Bucket C, offering additional protection for those particularly concerned about outliving their assets. Each variation has its own advantages and drawbacks, and suitability will depend on risk tolerance, need for liquidity, and desire for income stability versus growth.  Because personal finance is just that – personal. 

Where annuities fit into the buckets

Annuities can serve multiple roles within the bucket strategy for retirement income planning. As replacements for Bucket A (immediate income), single-premium immediate annuities (SPIAs) offer guaranteed monthly income to cover a portion of essential expenses, mitigating sequence risk for that income and simplifying budgeting, though they come with drawbacks such as illiquidity, loss of capital control, and potential adverse tax implications for heirs. 

For Bucket B (intermediate guaranteed laddering), fixed deferred annuities —such as multi-year guaranteed annuities (MYGAs)—can function similarly to laddered certificates of deposit, often providing higher guaranteed yields, especially in higher interest rate environments. These annuities offer predictable replenishment but are subject to surrender periods and greater product complexity. 

In Bucket C (longevity protection), deferred income annuities (DIAs) or Qualifying Longevity Annuity Contracts (QLACs) are designed to begin payments at advanced ages (e.g., age 80), acting as insurance against outliving assets by efficiently converting capital into lifetime income for late-life years, though they require careful coordination with Social Security, Medicare, and tax planning due to delayed liquidity. Fixed indexed annuities (FIAs) and variable annuities may be used in Bucket C for growth with downside protection or in Bucket B to add upside potential through caps or participation rates. When utilizing these, it is important to evaluate fees, rider options, withdrawal guarantees, and insurer credit quality. Many clients benefit from hybrid approaches, such as partial annuitization to cover essential spending (with Social Security and annuity income combined), while maintaining liquidity and discretionary spending potential in other buckets for legacy or flexible goals.

Practical implementation checklist (step-by-step)

To implement an effective annuity strategy as part of your retirement plan, keep in mind these key steps:

• Assess the difference between essential and discretionary spending.
• Establish the target amount of guaranteed income needed to cover essential expenses.
• Determine which bucket(s) the annuity will address—such as immediate income, longevity protection, or as part of a laddered approach.
• Prioritize annuity carriers with strong credit quality.
• Prioritize products that offer:Transparent benefit illustrationsClear fee structuresStraightforward surrender termsWell-defined rider costs

Coordinate your annuity decision with other retirement factors, including:

• Social Security claiming strategies
• Available pension benefits
• Medicare coverage
• Required minimum distributions (RMDs)
• Model cash flows under various market scenarios, such as experiencing a bear market early or late in retirement.
• Document clear rules for when to replenish Bucket A from Bucket B, versus drawing from Bucket C.
• Consider the tax implications of your annuity by determining whether it is held in a qualified or non-qualified account, since tax treatment of payouts differs between IRA-funded and after-tax annuities.

Conclusion

The three-bucket strategy offers a flexible and relatively simple framework for retirement planning, where annuities are not a requirement but can serve as valuable tools within certain buckets—especially for covering essential expenses and addressing longevity risk later in life. A balanced approach often combines partial annuitization for guaranteed income, maintaining liquid reserves for flexibility, and allocating growth assets to help preserve legacy and guard against inflation. Ultimately, it’s important to match the right product to your specific needs: use guaranteed income solutions for expenses you can’t afford to risk, while keeping liquid assets available for both adaptability and legacy goals.