Strategic Retirement Portfolio Allocation for Non-Budgeting Retirees: The Annuity-Bucket Solution

Retirement income planning often emphasizes budgeting as a critical tool to avoid outliving savings. But what if retirees could secure stable withdrawals without rigid tracking? A growing body of research suggests that combining annuities with a bucket strategy achieves this goal by structuring portfolios to inherently manage risk, liquidity, and growth—eliminating the need for constant budgeting.

The Bucket Strategy: A Framework for Sustainable Withdrawals

The bucket strategy divides retirement assets into three time-based buckets, each tailored to distinct investment objectives and risk tolerances:

1. Bucket 1 (0–4 years): Holds cash, short-term bonds, and annuities to cover immediate expenses. Immediate fixed annuities (SPIAs) or qualified longevity annuity contracts (QLACs) provide a guaranteed income stream, shielding retirees from market volatility.
2. Bucket 2 (5–10 years): Contains intermediate-term bonds and CDs to replenish Bucket 1 during market upswings. Deferred income annuities (DIAs) can also be placed here to fund future withdrawals.
3. Bucket 3 (11+ years): Invests in stocks and riskier assets for long-term growth. While annuities are less common here, variable annuities with guaranteed minimum withdrawal benefits (GMWB) can anchor legacy goals.

This structure ensures retirees never need to sell growth assets during downturns, reducing sequence-of-returns risk—a major threat to portfolios relying solely on the "4% rule."

Annuities as the Foundation of Liquidity

Recent studies highlight annuities' role in reducing reliance on budgeting by automating income. A 2023 Goldman Sachs analysis found that retirees using a blended strategy—combining annuities with Social Security, pensions, and systematic withdrawals—reported a 60% higher satisfaction rate than those relying on budgeting alone. Annuities eliminate guesswork by guaranteeing a baseline income, freeing retirees to focus on non-essential spending without fear of depleting savings.

For example, a retiree with $1 million might allocate $300,000 to Bucket 1, purchasing an immediate annuity yielding 5.2% (per 2023 TSP rates) to cover near-term needs. The remaining $700,000 is split between bonds and stocks in Buckets 2 and 3, allowing growth while maintaining flexibility.

The Case for Annuity Laddering

Market volatility and interest rate fluctuations necessitate diversification within annuities. Laddering—purchasing multiple annuities with staggered payout dates—maximizes returns while mitigating risk. For instance, dividing a $400,000 portfolio into four $100,000 annuities over four years allows retirees to benefit from fluctuating rates. If rates rise, later purchases earn higher yields; if they fall, existing contracts lock in prior rates.

A 2025 study by Warshawsky and Pang found that retirees with $250,000+ in savings who used laddered annuities alongside systematic withdrawals achieved 20% higher lifetime income than those relying on stocks alone. The strategy also reduced the risk of outliving assets by 35%, according to the research.

Navigating Challenges and Risks

While annuities enhance sustainability, they are not without pitfalls. High fees, surrender charges, and insurer solvency risks demand careful selection. Advisors recommend:
- Prioritizing insurers with AA+ or higher ratings (per AM Best).
- Avoiding complex riders that erode returns.
- Using fixed annuities for liquidity and variable annuities selectively for growth.

For example, a retiree might pair a low-cost FIA (fixed-index annuity) with a Vanguard Balanced Index Fund (VBIAX) in Bucket 2, balancing stability and growth.

The Bottom Line: A Structural Approach to Freedom

The bucket-annuity strategy works because it automates spending, shielding retirees from the emotional and logistical burden of constant budgeting. By guaranteeing income and isolating growth assets, it transforms retirement planning from a reactive process into a self-sustaining system.

Investment Advice:
1. Start with Bucket 1: Allocate 2–4 years of expenses to annuities and cash. Use annuity calculators to estimate payouts based on age and health.
2. Ladder Annuities: Use tools like the IRS Life Expectancy Table to align payouts with lifespan probabilities.
3. Diversify Growth Assets: Allocate 40–60% of Bucket 3 to low-cost index funds (e.g., SPY or IVV) to capture market returns.

For retirees seeking to enjoy their golden years without spreadsheets, the annuity-bucket strategy is a blueprint for freedom—one that turns assets into income streams without the chains of budgeting.

In an era of rising interest rates and market uncertainty, structuring a portfolio to work for you—not against you—is the ultimate retirement hack.