Retirees shield savings from market volatility with bucket strategy

[UNITED STATES] After a volatile month for the stock market, many retirees are eager to find ways to protect their nest egg from future dips. Despite the stock market rally on Monday, there is lingering uncertainty as investors digest tariffs and other economic policy from President Donald Trump. The market was little changed by mid-afternoon Tuesday.

Market volatility has been exacerbated by geopolitical tensions and shifting interest rate expectations, adding another layer of complexity for retirees navigating their financial plans. The Federal Reserve’s recent signals about potential rate cuts—or hikes—have left many investors cautious, particularly those relying on fixed-income investments. No one can forecast market moves, but retirees can deploy defensive techniques, experts say.

One alternative, known as the bucketing technique, splits your portfolio based on your schedule for spending the money, according to Amy Arnott, a portfolio strategist with Morningstar Research Services.

The bucketing approach isn’t new, but its popularity has surged in recent years as retirees seek structured ways to mitigate risk. Financial advisors report increased interest in the strategy, especially among those who experienced significant portfolio losses during the 2008 financial crisis or the 2020 pandemic-driven downturn.

Here’s what retirees need to know about market volatility and how to use the bucket approach.

Stock market declines can be particularly damaging to portfolios during the first five years of retirement, which Arnott refers to as the "danger zone."If you withdraw money when asset values fall, there will be fewer funds available to capture growth when the market recovers, she explained.

Recent research from the Center for Retirement Research at Boston College supports this, showing that retirees who experience poor returns early in retirement may need to reduce spending by as much as 20% to avoid depleting their savings prematurely. This underscores the importance of having a buffer, such as a cash reserve, to avoid selling investments at a loss.

The pattern of poorly timed withdrawals combined with stock market losses is known as "sequence of returns risk," and it increases your odds of outliving retirement resources, according to Arnott. Negative returns are more damaging to portfolios early in retirement than later, according to a Fidelity Investments analysis from 2024.

However, if you do not withdraw your money during a market downturn, "you're clearly going to change the dynamics, and you have a better chance of recovering," according to David Peterson, head of advanced wealth solutions at Fidelity.

Judy Brown, a licensed financial planner, stated that the bucketing strategy keeps customers "in their seats during market volatility" and allows them to discuss goals. Brown, who is also a certified public accountant, works for C&H Group in Washington, D.C. and Baltimore.

Brown notes that behavioral finance plays a key role in retirement planning. “When markets drop, emotions run high, and people often make impulsive decisions,” she says. “The bucket strategy provides a psychological safety net, helping retirees stick to their plan instead of reacting to short-term fluctuations.”

The bucket strategy separates a portfolio into expenditure goals for the short, medium, and long term, which must be maintained year after year to guarantee the plan remains effective and linked with changing financial needs.

Christine Benz, Morningstar's director of personal finance and retirement planning, recommends that the first bucket be "highly liquid," like cash, and comprise one to two years of living expenditures after deducting assured yearly income, such as Social Security or pension payments.

“If you’re always spending from a cash bucket, then you don’t have to worry as much about making withdrawals when the market is down,” Arnott said.

The second bucket, which covers the next five years of spending, could be in short- to intermediate-term bonds or bond funds, and income distributions can replenish spending from the cash bucket, she said. After that, you’re investing long-term in the third bucket, focused on growth with primarily stock allocations, depending on risk tolerance and goals.