Putting Your Nest Egg in Three Buckets

“You can’t time the market” is an old maxim, but you also might say, “You can’t always time retirement.” Only 46% of current retirees say they retired when planned, while 48% retired earlier than expected.(1)


Taken together, these two uncertainty factors suggest that it would be wise to prepare for the possibility that you might retire during a market downturn. You’re fortunate if you retire during a market upswing.

Sequence Risk

The risk of experiencing poor investment performance at the wrong time is called sequence risk or sequence-of-returns risk. All investments are subject to market fluctuation, risk, and loss of principal — and you can expect the market to rise and fall throughout your retirement. However, market losses on the front end of retirement could have an outsize effect on the income you might receive from your portfolio.

If you’re forced to sell investments during a downswing, you may reduce your portfolio’s potential to benefit when the market turns upward. Those who retired around the time of the Great Recession faced this situation. The market ultimately came back strong, but it took more than five years to reach the pre-recession high.(2)

Dividing Your Portfolio

One strategy that may help address sequence risk is to divide your retirement portfolio into three different “buckets” that provide current income, regardless of market conditions, and growth potential to fund future income. The starting point for this approach is to determine the annual income you need from your portfolio, after other sources such as Social Security or a pension.

As with any withdrawal method, it’s important to be realistic. Although this method differs from the well-known “4% rule,” an annual income around 4% of your original portfolio value might be a reasonable starting point, with adjustments based on changing needs, inflation, and market returns.

Bucket #1: Now (1 to 3 years of income).

This bucket holds stable liquid assets such as cash and cash alternatives that could provide income for one to three years. Having sufficient cash reserves might enable you to avoid selling growth-oriented investments during a down market, which would lock in losses and may reduce the income from your portfolio over your lifetime.

In the current low interest-rate environment, these assets will generate little or no return, so you are trading potential growth for stability. You might further divide this bucket between cash to cover one year of expenses and relatively stable low-yield assets, such as short-term bonds, that may offer a small return and can be sold to cover an additional year or two of expenses.

Bucket #2: Soon (5 or more years of income). 

This bucket — equivalent to five or more years of your needed income — holds mostly fixed-income securities such as intermediate- and longer-term bonds or annuities that have moderate growth potential with low or moderate volatility. It might also include some lower-risk, income-producing equities.

The income from this bucket can flow directly into the Now Bucket to keep it replenished as the cash is used for living expenses. If necessary during a down market, some of the securities in this bucket could be sold to replenish the Now Bucket. These securities could then be replaced with funds from Later Bucket when the market rises again.

Bucket #3: Later (future income). 

This bucket is the growth engine of the portfolio and holds stocks and other investments that are typically more volatile but have higher long-term growth potential. Income from these assets can flow directly to the Now Bucket, but the most important role of the Later Bucket is to generate investment gains to replenish both of the other buckets. In a typical 60/40 asset allocation, you might put 60% of your portfolio in this bucket and 40% spread between the other two buckets. Your actual percentages will depend on your risk tolerance, time frame, and personal situation.

Preparing in Advance

With the bucket strategy, it’s important to start shifting assets before you retire, at least by establishing a cash cushion in your Now Bucket. The appropriate time to do this depends on your situation and the market environment. Moving too large a percentage of your investments into cash far in advance may not be wise, but waiting too long could expose you to the same sequence-of-returns risk you are trying to avoid.


There is no guarantee that putting your nest egg in three buckets will be more successful in the long term than other methods of drawing down your retirement savings. But it may help you better visualize your portfolio structure and feel more confident about your ability to fund retirement expenses during a volatile market.

Asset allocation does not guarantee a profit or protect against investment loss. The principal value of cash alternatives may be subject to market fluctuations, liquidity issues, and credit risk. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

1) Employee Benefit Research Institute, 2020
2) Yahoo! Finance, S&P 500 index for the period from 10/1/2007 to 4/30/2013

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Financial Services of America and Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc.