One of the biggest challenges in retirement is making sure that your money lasts as long as you do. While investing for growth is essential, retirees also need a strategy to handle market downturns without jeopardizing their long-term financial security.
That’s where the bucket strategy comes in. Instead of withdrawing from the same account regardless of market conditions, this approach divides your retirement savings into two distinct buckets—each with a specific purpose.
How the Bucket Strategy Works
Rather than segmenting your savings by time frames (short-term vs. long-term), this strategy is built around when and why you withdraw from each bucket.
The Market-Based Bucket (Primary Source in Strong Markets)
- Purpose: This bucket is your primary source of retirement income under normal market conditions.
- Investment Type: A well-diversified portfolio of stocks, ETFs, mutual funds, and other growth-oriented investments.
- Why It Matters: By keeping this bucket invested, your assets can continue growing and outpacing inflation. When the market is stable or growing (bull markets), you withdraw from this bucket to fund your living expenses.
The Stability Bucket (Backup in Market Declines)
- Purpose: This bucket is your safety net, designed to provide income when the market experiences significant downturns.
- Investment Type: Conservative investments such as cash, money market funds, short-term bonds, etc.
- Why It Matters: This bucket ensures you have 3-5 years of living expenses in stable, liquid assets. If the stock market drops significantly (bear market), you temporarily switch to withdrawing from this bucket instead of selling stocks at a loss. This gives your investments time to recover while still maintaining your income stream.
Why This Strategy Works
- Reduces the Risk of Selling at a Loss – One of the biggest mistakes retirees make is selling stocks in a downturn to cover expenses. This strategy prevents that by allowing you to rely on the Stability Bucket during bear markets.
- Balances Growth and Security – You still participate in long-term market growth while having a cushion for rough economic periods.
- Gives Your Investments Time to Recover – By avoiding panic-selling, your Market-Based Bucket can rebound with the market, helping to sustain your retirement for decades.
When to Use Each Bucket
- Bull Markets (Strong or Stable Economy) → Withdraw from the Market-Based Bucket.
- Bear Markets (Significant Market Declines) → Withdraw from the Stability Bucket.
By adjusting where you withdraw funds based on market conditions, you create a sustainable strategy that helps preserve your retirement savings.
