I read with interest on the “Bucket Theory” in respect of FIRE.
There are three buckets, positioned one above the other. The bottom bucket contains the fund one needs to fund his/her current year’s retirement.
The middle bucket contains fund that can fund five years of retirement.
The top bucket contains the rest of one’s investment portfolio.
As the year proceeds, one spends down the bottom bucket to fund his/her living expenses. In January, it’s full, and by December, it’s empty.
The middle bucket contains enough fund to fund five years of retirement, structured as the Cash Cushion. At the beginning of every year, that bucket tips over a bit and refills the bottom bucket with enough fund to fund the rest of the year.
The top buck is also known as the investment portfolio. Sometimes, it is growing with the markets, and sometimes it is shrinking as the market crashes. However, it generates its yield into the middle bucket keeping it from going empty too quickly.
Based on the above analogy, the bottom is used to fund one’s living expense. The middle bucket gets sized just right with the use of the simple formula to cover five years of living expense in the down market without being too large that it takes up too much of the portfolio.
The top bucket generates and trigger the dividends continuously down the second bucket. When the markets rise, one may sell some of its assets to replenish the middle bucket. When the markets fall, it does nothing but continue to trigger down the generated dividends.
I believe that the above action will ensure a safe withdrawal strategy.