The bucket strategy divides retirement savings into three categories: cash for near-term expenses, bonds or fixed-income assets for medium-term needs, and stocks for long-term growth. This approach is meant to help retirees avoid panic selling during market downturns.
The mistake many retirees make is selling stocks to refill their cash bucket when the market has fallen. Selling during a correction locks in losses and reduces your portfolio's ability to recover. This early loss is especially damaging in retirement because sequence-of-returns risk means any losses you incur early in retirement limit your future growth potential.
To avoid this trap, retirees should establish clear rules for when and where to refill buckets. One guardrail is to trim the portfolio slightly after it has rallied by 5% or 10%, building cash reserves before a market correction arrives.
Rather than relying solely on selling stocks, retirees can use dividends, interest, Social Security, and cash from maturing bonds or certificates of deposit to cover living expenses. Fixed-income assets provide a buffer that lets you weather volatility without forced stock sales. This approach does not mean you are timing the market. It gives you flexibility while allowing long-term investments time to recover.
If you hold money in tax-deferred retirement accounts, you may eventually face required minimum distributions. Withdrawing gradually from these accounts before reaching RMD age can reduce your tax burden. A financial planner or tax professional can help you decide the best strategy for your situation.