You did the math. You have $1 Million saved. You plan to withdraw 4% ($40,000) per year.
History says the stock market returns 7-10% on average. You should be safe forever, right?
Not necessarily.
If the market crashes 20% the year after you retire, your portfolio might never recover, even if the market eventually bounces back.
This mathematical nightmare is called Sequence of Returns Risk.
Disclaimer: Investing involves risk. Past performance does not guarantee future results. This strategy illustrates general retirement planning concepts. Consult a fiduciary financial advisor.
Retiring into a Bear Market?
1. The "Average" Trap (The Math of Ruin)
Why does the order of returns matter? Because you are withdrawing money.
📉 The "Unlucky Retiree" Scenario
Both investors have $1 Million and withdraw $50,000/year. Both earn an average return of 6% over 30 years.
- Investor A (Lucky): Market goes UP early in retirement.
Result: Dies with $2.5 Million left to heirs. - Investor B (Unlucky): Market crashes -15% in Year 1 and Year 2.
Result: Runs out of money in Year 15.
The Lesson: When you sell shares at a low price to pay bills, you dig a hole so deep that the remaining money can't climb out.
2. The Solution: The "Bucket Strategy" (2025 Edition)
You cannot control the market, but you can control where you pull cash from.
Instead of keeping all your money in one big pile, divide it into three time-based "Buckets."
🪣 Bucket 1: The "Safe" Zone (Years 1-2)
- Goal: Immediate living expenses.
- Asset: High-Yield Savings (HYSA) & Money Market Funds.
- Amount: 2 years of expenses (e.g., $100,000).
- 2025 Strategy: With interest rates potentially dropping, keep this liquid but be ready for yields to fluctuate. It is your "Sleep Well at Night" money.
🪣 Bucket 2: The "Middle" Ground (Years 3-7)
- Goal: Income stability & Inflation protection.
- Asset: CD Ladders, Treasury Bonds, and Investment-Grade Corporate Bonds.
- Amount: 5 years of expenses.
- Why: This refills Bucket 1. By "laddering" bonds (buying bonds that mature in 2026, 2027, 2028...), you lock in guaranteed income regardless of what the stock market does.
🪣 Bucket 3: The "Growth" Engine (Years 8+)
- Goal: Long-term growth to beat inflation.
- Asset: Stocks (S&P 500, Total Market ETFs).
- Amount: The rest of your portfolio.
- Why: You won't touch this money for at least 7 years. This gives it plenty of time to recover from any Bear Market or Recession.
3. How to Operate the Buckets (The Waterfall)
It acts like a waterfall system.
- Spend from Bucket 1 to pay your monthly bills.
- Refill Bucket 1 using dividends and interest payments from Bucket 2.
- Refill Bucket 2 by selling stocks from Bucket 3 only when the market is UP.
Crucial Rule: If the stock market crashes (Bucket 3 drops), DO NOT SELL Bucket 3.
Instead, simply spend down Bucket 1 and Bucket 2. You have 7 years of safety buffer. Wait for the market to recover before touching Bucket 3 again.
4. Psychology Wins
The biggest benefit of the Bucket Strategy isn't just math; it's Peace of Mind.
When the news screams "Recession Imminent," you don't panic sell. You look at Bucket 1 and say:
"I have 2 years of cash in the bank. I'm fine."
Don't Gamble with Your Golden Years
Retirement is not about maximizing returns; it's about ensuring you never run out of money.
Sequence of Returns Risk is the silent killer of retirement plans. The Bucket Strategy is your shield.
Action Plan:
- Calculate your annual "Gap" (Expenses minus Social Security).
- Set aside 2 years of that gap in a High-Yield Savings Account immediately.
- Build a "Bond Ladder" for years 3-7 to lock in current yields before rates drop further.
Helpful Resources:
Charles Schwab: Understanding Sequence of Returns Risk
Morningstar: The Bucket Investor's Guide
0 Comments