Don’t Let a Bad Start in Retirement Blow Up Your Nest Egg

Retirement planning isn’t just about making money — it’s also about protecting the money you’ve already made. The 'bucket strategy' can help with that.

A piggy bank sits under security spotlights.
(Image credit: Getty Images)

Remember when it seemed as though preparing for retirement success was as easy as sitting back and watching the money multiply in your 401(k), Roth IRA or brokerage accounts?

Of course you do. It was just a few short years ago when a record-setting bull market (2009 to 2020) made pretty much everyone look like an investing genius.

And then we all got a little reminder, in early 2020, that it really isn’t that easy, because the market has these cycles, and they’re pretty much unpredictable. Although the market recovered quickly after that first big COVID-related drop, it’s been a roller coaster ride ever since.

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This ongoing market volatility should serve as a cautionary tale to all savers that retirement planning isn’t just about making money — it’s also about protecting the money you’ve already made. And it’s an especially important message for those who are just a few years into their retirement or just a few years away from it. How the stock market performs — and the order in which negative and positive returns occur — can have a substantial effect on the longevity of your nest egg as you begin taking portfolio withdrawals.

If negative returns occur first, for example, and you need to sell some of your holdings for income, two things could happen. First, you may have to sell more shares at a lower price to get the amount of money you require. And then you’ll have fewer shares available to take advantage of positive returns in future years.

If you’re depending on your portfolio for a substantial portion of your retirement income, and you can’t adjust your withdrawal amount, you could end up taking out more in those first bad years than any later good years can make up for. And your portfolio could be depleted much sooner than you planned.

This is known as sequence of returns risk.

Unfortunately, it can be difficult to prepare for this particular retirement risk because it’s largely based on chance. After all, when people choose a retirement date, they have no idea what’s going to happen in the U.S. and world markets in the years ahead.

Some, for instance, got lucky by retiring in 2010 or 2011 — not long after that record-setting bull market began. But those who retired a decade before that were stung again and again — first by a bursting dotcom bubble, then 9/11 and then the Great Recession of 2008.

How can you improve your luck?

Sorry — we’re not handing out crystal balls or tarot cards or even Magic 8 Balls today. But there are strategies you can employ to help shield your portfolio from bad retirement timing.

One of those strategies is to divide your assets into three separate investing “buckets”: a cash/emergency bucket, a protected income bucket and a growth bucket. Here’s a look at how that breaks down.

Cash/emergency bucket: It can be a good idea to keep enough in this bucket to cover at least six months’ worth of living expenses. That way, if something unexpected comes up in your personal life, or the market takes a dip, you won’t feel forced to sell stocks to get the money you need in retirement — and you can still keep your budget under control.

The cash in this bucket (which you can stash in a high-yield savings account or money market account and still earn a decent amount of interest) can help you cover expensive home and car repair bills, medical bills and other surprise expenses that can pop up in retirement.

Protected income bucket: This is the bucket you’ll withdraw from in the first decade or so of retirement, so you’ll want to fill it with investments that are known to provide dependable income. It will also be your biggest bucket, although the percentage of your portfolio you devote to protected income may depend on how much you’ll receive in Social Security benefits and any pensions you might have.

One of my top go-tos for this bucket is uncapped, no-fee, fixed-index annuities, which can be used in retirement portfolios as alternatives to problematic bonds. These annuities have no initial or annual fees, they protect your principal against losses, they may increase your return compared to bonds, and they can help with portfolio diversification.

Growth bucket: This is the portion of your portfolio you’ll use to continue growing money for the future (at least 10 to 15 years into retirement). It will help your nest egg keep pace with inflation, and you can tap it to refill your protected income bucket as you spend it down.

The assets you choose for your growth bucket will depend on your age and tolerance for risk, and they could include anything from equities and commodities to investment real estate and private equity/hedge funds. If you don’t mind — or if you actually enjoy — the market roller coaster, and you have the extra money to play with, you may even choose to set aside a small percentage within this bucket for especially risky or speculative investments.

You can move to a bucket strategy at any time before or after your retirement. But it’s usually a good idea to start transitioning from an accumulation-focused portfolio to one that prioritizes preservation at least five years out. This will give you time to do some proactive planning with an experienced financial adviser. And you won’t have to worry about delaying your retirement or going back to work, even if there’s some serious market drama just before or after you stop working.

Kim Franke-Folstad contributed to this article.

Appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Aaron Cirksena
Founder, CEO, MDRN Capital

Aaron Cirksena is the founder and CEO of MDRN Capital, a fully digital retirement planning and investment advisory firm. He is passionate about helping clients design and implement efficient and successful financial strategies. Aaron earned a bachelor’s degree in economics from the University of Maryland College Park and has more than a decade of experience as a financial adviser.