Experts Say Bucket Strategy Safeguards Retirees’ Portfolios During Market Downturns

• In the initial stages of your retirement, "sequence of return risk" might adversely affect your investment portfolio if you start withdrawing funds during a downturn in the markets.
• A potential approach, known as the bucketing strategy, segments your investment portfolio according to when you anticipate needing the funds for expenditures. This method includes setting aside a portion dedicated solely to covering immediate costs.
• Experts advise that when the stock market declines, you should utilize the cash bucket for covering daily expenses so as to safeguard your retirement savings.

After a volatile month For the stock market, numerous retirees are keen on discovering methods to protect their nest egg from future dips.

Despite the stock market rally on Monday, there's lingering uncertainty As investors analyze tariffs and other economic policies from President Donald Trump By midafternoon on Tuesday, there wasn’t much movement in the markets.

Nobody can forecast market movements, however, retirees can adopt protective tactics according to specialists.

A method referred to as the bucketing strategy splits up your investment portfolio depending on when you plan to use the funds, as stated by Amy Arnott, who works as a portfolio strategist atMorningstar Research Services.

More from Personal Finance:

How investors can prepare their portfolios for an economic downturn

The modification of the inherited IRA rules set for 2025 might result in a 25% tax penalty.

There is a 'risk area' for those who have retired when the stock market declines.

Here’s what retirees should understand regarding market fluctuations and how they can employ the bucket strategy.

Shield against 'sequence of returns risk'

Movements downward in the stock market can be most harmful to portfolios During the initial five years of retirement, often referred to as the "risk period" by Arnott, things can be particularly precarious.

If you withdraw money when asset values have fallen, there are fewer funds available to capture growth when the market rebounds, she said.

The occurrence of ill-timed pullouts coupled with declines in the stock market is referred to as " sequence of returns risk ", and it might increase your likelihood of not running out of retirement funds, according to Arnott.

Negative returns cause more damage than later in retirement, suggests a 2024 report from Fidelity Investments.

If you refrain from touching your retirement savings during a downturn in the market, "you stand a much greater chance of recovery," noted David Peterson, who leads advanced wealth solutions at Fidelity.

The 'cash bucket' can protect your investment portfolio.

Judy Brown, a certified financial planner, mentioned that the bucketing method helps clients stay calm during market fluctuations and provides an opportunity to talk about their objectives. Additionally holding certification as a public accountant, she operates out of C&H Group located in the Washington, D.C., and Baltimore regions.

The bucket approach segments a portfolio into three categories for short-, mid-, and long-term expenses, necessitating yearly adjustments to keep the plan efficient and suited to evolving monetary requirements.

Typically, the first bucket Should ideally be "very accessible," similar to cash, and should cover one to two years of living costs once you deduct stable annual income sources, including Social Security or annuity payouts, suggests Christine Benz, who leads personal finance and retirement planning atMorningstar.

"Since your expenses come directly from your cash reserve, you won’t have to be overly concerned with withdrawing funds during times of market decline," explained Arnott.

The second bucket, spanning the following five years of expenditures, might consist of short- to intermediate-term bonds or bond funds. Additionally, income distributions from this bucket can help refill what’s spent from the cash reserve, as per her statement.

Following that, your investment strategy for the third bucket shifts towards a long-term focus aimed at growth, predominantly through stocks, adjusted according to your risk tolerance and objectives.