3-Bucket System for $5,000 Monthly Income: A Financial Strategy for Early Retirees

The S&P 500 has outperformed most investment strategies and funds over the last 12-15 years. This article proposes a 3-bucket system for early retirees aiming for a $5,000 monthly income. The system involves investing in a mix of low-cost index funds, dividend-paying stocks, and a portion of the portfolio dedicated to generating passive income. This approach aims to provide a sustainable and stable income stream for early retirees.

Early retirees aiming for a stable and sustainable income stream face unique challenges. The S&P 500 has consistently outperformed many investment strategies over the past 12-15 years, providing a solid foundation for retirement planning. To achieve a $5,000 monthly income, a strategic 3-bucket system can be employed, combining low-cost index funds, dividend-paying stocks, and passive income-generating investments.

Bucket 1: Low-Cost Index Funds
The first bucket should consist of low-cost index funds, which track broad market indexes. These funds aim to replicate the performance of their respective indexes minus expenses. According to Morningstar, index funds are popular due to their low cost and historical outperformance over active funds [2].

For early retirees, a mix of US and international stock index funds can provide diversification and growth. Some of the top-rated low-cost index funds include Vanguard's Total Stock Market ETF (VTI) and Vanguard Total International Stock ETF (VXUS) [2]. These funds track broad market indexes, providing exposure to a wide range of stocks.

Bucket 2: Dividend-Paying Stocks
The second bucket focuses on dividend-paying stocks. Dividends offer a steady income stream, which is crucial for early retirees seeking a consistent monthly income. According to Emmanuel Vzylc, dividend-paying stocks are an essential component of a retirement portfolio, especially for those nearing retirement [1].

Investing in dividend-paying stocks can be done through dividend-focused index funds or individual stocks. Some options include Vanguard Dividend Appreciation ETF (VIG) and Vanguard High Dividend Yield ETF (VYM) [2]. These funds track indexes of dividend-paying stocks, providing a diversified income stream.

Bucket 3: Passive Income Generating Investments
The third bucket should be dedicated to generating passive income. This can include bonds, real estate investment trusts (REITs), or other income-generating assets. Bonds provide a steady stream of interest payments, while REITs offer dividends based on the income generated by the properties they own.

For example, Vanguard Total Bond Market ETF (BND) can be a good option for generating passive income through bonds. Additionally, Vanguard Real Estate ETF (VNQ) provides exposure to real estate through REITs [2].

Implementation and Adjustments
To implement this 3-bucket system, early retirees should allocate their portfolio based on their risk tolerance, income needs, and future aspirations. Regular reviews and adjustments are essential to maintain the balance between growth and income.

Conclusion
The 3-bucket system offers a strategic approach for early retirees seeking a $5,000 monthly income. By combining low-cost index funds, dividend-paying stocks, and passive income-generating investments, early retirees can achieve a sustainable and stable income stream. This system leverages the historical outperformance of the S&P 500 and provides a diversified approach to retirement planning.

References
[1] Vzylc, E. (2025). How to structure your retirement investing strategy as you approach your 50s and beyond. LinkedIn. Retrieved from https://www.linkedin.com/pulse/how-structure-your-retirement-investing-strategy-age-emmanuel-vzylc
[2] Morningstar. (2025). Best Index Funds. Retrieved from https://www.morningstar.com/funds/best-index-funds