The Three Buckets That Keep a Down Market From Ruining Your Retirement

Imagine you retired the same week the market dropped 20%. Your paycheck has stopped. Now you have to sell investments to buy groceries, at exactly the moment those investments are worth the least.

That fear keeps a lot of new retirees up at night. And it is a reasonable fear. But there is a simple way to take most of the sting out of it.

It is called the bucket strategy, and Christine Benz at Morningstar has spent years explaining it to ordinary investors. The idea is to divide your money into three buckets based on when you will actually spend it.

The first bucket holds one to two years of spending money in cash: a high-yield savings account, a money market fund, short-term CDs. This is what you live on. Because it is in cash, a bad market cannot touch it.

The second bucket holds the next five to eight years in high-quality bonds. Steadier than stocks, and it refills the cash bucket as you spend it down.

The third bucket is your long-term money, a diversified mix of stock index funds. This is your inflation fighter, and it has years, not days, to recover from any downturn.

Here is why it works. When stocks fall, you do not sell them. You spend from bucket one and let bucket three heal. You are never forced to sell low just to eat.

None of this requires predicting the market. It just requires deciding, ahead of time, which dollars are for this year and which dollars are for a decade from now. You can read Benz’s own explanation at Morningstar (https://www.morningstar.com).

Your trusted advisor can help you set the right size for each bucket based on your actual spending, and build the plan to refill them over time. 

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