A cash bucket for retirees nearing the paycheck years

A cash bucket for retirees: two years can cover 26 months

Size a cash bucket for retirees around two years of portfolio withdrawals, meaning annual spending less Social Security and any pension. A retiree drawing $40K annually from a $1M portfolio would hold $80K in cash, money market funds, short Treasuries, or a CD ladder.

Guardrails change the calculation. If a market drop calls for a 10 percent trim, a $40K withdrawal falls to $36K. After taking $40K in the first year and $36K in the second, $4K remains. At the trimmed pace of $3K a month, that is about five more weeks, so an $80K bucket covers roughly 25 months. A fixed paycheck does not get that extra runway.

Before Tolleson Wealth Management refills a client's bucket, we check whether the spending trim is still in effect. We refill from the bond side or from gains, and do not sell stocks below their starting value simply to restore cash. That refill condition belongs in the client's playbook.

For someone 10 to 15 years from retirement, the bucket is a line in the playbook, not a separate account waiting to be funded. At 52, money still has time to compound. Tolleson Wealth Management would normally build the reserve during the final three to five working years, when retirement spending is close enough to estimate.

One year: the lowest growth drag

One year of cash, or $40K for a $1M portfolio drawing $40K annually, gives up about $1,200 annually when cash trails a balanced mix by 3 percent. That is about $12,000 over ten years before compounding. It can fit when a pension or annuity already covers essential bills, but a slump lasting beyond 12 months leaves little room to wait before selling investments.

Three years: comfort with a $3,600 annual price

Three years of cash is $120K in this example. At a 3 percent gap, it costs about $3,600 annually in forgone growth, or $36,000 over ten years before growth. It can fit a retiree who will not trim spending or who has a known roof or car expense within three years. For a guardrail spender, that third year mostly buys comfort, and comfort has a price worth naming.

How did Glenn and Monique's two-year bucket hold up through a 15 percent drop?

Glenn and Monique's $84K bucket covered two planned years of portfolio draws through a 15 percent investment drop because their Social Security paid part of the household budget and the second-year draw was trimmed. The reserve did not erase their loss; it gave their invested holdings time before any shares had to be sold.

For illustration, Glenn and Monique are 66 and 64, a few years into retirement and both collecting Social Security. Their two 401(k)s, IRA, and brokerage account total $1.4M. They want $90K annually, and their combined Social Security is $4,000 monthly, or $48K annually. The portfolio must supply $90K minus $48K, which equals $42K annually. Two years of that draw is $42K times two, or $84K, not $180K.

Their starting balance is $84K in cash and $1.316M invested. In year one, the invested side falls 15 percent. The arithmetic is $1.316M times 15 percent, or a $197,400 decline, leaving $1,118,600 invested. Glenn and Monique draw $42K from cash, sell no investments, and finish the year with $42K in the bucket.

In year two, their guardrail calls for a 10 percent spending trim. The portfolio draw drops from $42K to $37,800, calculated as $42K minus $4,200. They take that amount from cash, leaving $4,200. In year three, after the invested side is back above its starting value, they sell $79,800 and restore the bucket to $84K. That sale equals the $37,800 second-year draw plus the $42K needed for the next year.

The cost is real. Their second $42K year of cash gives up about $1,260 annually at a 3 percent gap. But without the reserve, they would have sold $42K of stock after the first drop, shares worth about $49,400 before the decline. The invested side can fall below what was put into it; a cash bucket delays selling, but it cannot prevent losses.

Can I hold less cash when income is steadier?

One year can be enough when essential spending is covered by pension income, a portfolio draw is near 2 percent, or a large balance makes the withdrawal small relative to assets. A married couple also needs to test the survivor's budget. After one spouse dies, the smaller of the two Social Security payments stops, and the portfolio draw can rise.

A $600K portfolio drawing $36K annually needs $72K for two years, which is 12 percent of the portfolio. A $3M portfolio drawing $60K is a 2 percent draw, and one year is often enough. Retiring at 60 means the bridge before Social Security can require a larger reserve; retiring at 70 after claiming a larger benefit can shrink it. Find your row, then compare the reason against your own spending.

Quick test: subtract Social Security and pensions from annual spending. If you are willing to cut back after a down year, double what is left. A household spending $90K with $48K of Social Security needs $42K from investments, so two years is $84K, not $180K.

From age 52 to 73, when should cash move?

Cash should usually move into the bucket during the final three to five working years, not a decade early and not after a market drop. The dates that matter begin with catch-up years and end with required minimum distributions, so an older playbook built around an earlier RMD age may hold cash too soon.

At 50, the IRS allows an $8,000 catch-up contribution in a 401(k) or 403(b), plus a $1,100 IRA catch-up for 2026. At 59½, penalty-free withdrawals generally begin. Ages 60 through 63 have a higher $11,250 workplace-plan catch-up under the 2026 IRS limit. If prior-year FICA wages exceeded $150,000, the IRS requires catch-up contributions to go to Roth.

Social Security can start at 62. Medicare begins at 65. Full retirement age is 67 for people born in 1960 or later, while waiting until 70 produces the largest monthly benefit. RMDs start at 73, or 75 for people born in 1960 or later. A bucket intended to absorb early RMD cash may be able to wait longer than a plan made when RMDs began at 70½ or 72.

Moving $80K to cash at 52, 12 years before retirement, gives up about $2,400 annually at a 3 percent gap, or $28,800 before compounding. Waiting until the month after a crash can mean selling depressed stock to build the reserve. Selling stock first also makes little sense when catch-up savings and bond funds can do the job.

Holding three or more years in cash and never setting a refill rule often travel together. On a $1M portfolio, the extra $80K costs about $2,400 annually, or $24,000 over ten years before compounding. Then the unrefilled cash runs out. Raising $40K after a 20 percent drop requires parting with stock that was worth $50K before the fall, for a combined cost near $34,000. A cash bucket only buys time; if you draw more than the portfolio can bear, extra cash will not fix that.

Which statements show the real withdrawal gap?

Twelve months of spending records, benefit estimates, account statements, and interest forms show how much cash a household actually needs. Tolleson Wealth Management begins with what your checking account and credit cards say you spent. We then set that against Social Security, pension income, and the cash already sitting inside investment accounts.

Pull 12 months of bank and card statements for actual spending. Your my Social Security account at ssa.gov shows benefit estimates at 62, 67, and 70. Each 401(k) or 403(b) statement, or its plan website, shows stable value and money market choices. Check the brokerage statement's sweep line and last year's Form 1099-INT to see what current cash earns.

Ask the people who control the accounts four direct questions:

• Ask the plan administrator: “Does the stable value fund have a 90-day equity wash or transfer limit?”
• Ask the custodian: “Can a withdrawal come from one fund only, or is it pro rata?”
• Ask the CPA: “Would moving the bucket into Treasury bills lower my state tax?”
• Ask the advisor: “What exact condition triggers a refill, and from which holdings?”

Your last 12 months of spending: where Tolleson Wealth Management starts

The first thing Tolleson Wealth Management looks at is what you actually spent in the past 12 months against what Social Security and any pension will pay, because that gap sets the bucket. Then we check sweep balances, stable value funds, and CDs before suggesting a new purchase, and write the refill condition into your playbook.

A “pro rata only” answer from a workplace plan deserves attention. It means every withdrawal sells a little of every holding, including stock, which weakens the purpose of a cash bucket unless the reserve sits elsewhere. Retirement income planning, Social Security claiming, Roth conversion strategy, and Medicare IRMAA planning can all affect the annual draw, so the bucket should be revisited when one of those decisions changes.