The Bucket Strategy Mistake That Makes Retirees Sell at the Worst Time
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The bucket strategy allows retirees to split their wealth into multiple categories. Cash covers immediate expenses, fixed-income assets offer some low-risk returns and equities allow you to grow your portfolio so your money lasts deep into retirement.
However, some investors get anxious when implementing the bucket strategy during market downturns, especially when their cash bucket is running low. That can trigger panic selling if you aren’t careful.
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What the bucket strategy is supposed to do
The bucket strategy divides money into separate categories based on how soon you will need it. The exact percentage of your investment portfolio you’ll keep in each bucket will depend on your specific risk tolerance, goals and time horizon, but here’s a general guideline. A cash bucket can cover near-term spending, such as living expenses for the next one to two years of retirement. The second bucket may include fixed-income assets, such as bonds that mature in the next three to five years. Then, you can invest in stocks to generate potentially higher returns for the long term.
This approach lets investors hold their stocks during market uncertainty and makes them less susceptible to trading based on emotions. It gives retirees the flexibility to wait for their assets to recover from market corrections.
The stocks mistake to avoid
You can sell stocks to replenish your cash reserves, but selling them during a correction is a mistake that can drain your nest egg if done too often. Selling when the market is down locks in losses and reduces your portfolio’s ability to recover. The sequence-of-returns risk reflects this scenario, since any losses you incur early in your retirement limit future growth.
The bucket strategy works best when retirees have rules on when to refill buckets and where to refill them from. Those guardrail may include pruning their portfolio slightly after it has rallied by 5% or 10%. That way, they are already building their cash buffer before the market corrects.
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How retirees can avoid selling at the worst time
You don’t have to rely solely on selling equities to refill your cash bucket. Using other sources like dividends, interest and Social Security to replenish your cash position and cover living expenses will make you less dependent on selling assets to keep up with living expenses.
Retirees can also use cash from recently matured bonds and certificates of deposit (CDs) to cover living expenses instead of rushing to sell stocks. Fixed-income assets offer an additional cash buffer that can steer you through market volatility.
These adjustments do not mean you are timing the market. It gives you the ability to embrace a flexible withdrawal plan while giving long-term investments enough time to shine for your portfolio.
This decision-making can get complicated if you have a lot of money stored in tax-deferred retirement plans. That’s because you may eventually have to take out required minimum distributions (RMDs). Gradually withdrawing from these accounts before reaching your RMD age can minimize the tax hit on future years.
You may want to speak with a financial planner or a tax professional before finalizing your strategy. The key is to have a large enough cash buffer where you can stay calm during market volatility and avoid selling long-term investments during corrections.