Retirement planning is a crucial step that many Americans worry about more than death itself. According to the Allianz Center for the Future of Retirement’s 2025 Annual Retirement Study, nearly two-thirds of Americans fear running out of money in retirement. This concern is valid, as organizing your finances in retirement often proves more important than the investments you hold.
While investments are essential, having substantial assets without a cohesive plan to generate retirement income can be problematic. Stock market enthusiasts often fail to understand that the process of decumulation requires a different mindset from chasing hot new IPOs. In or near retirement, several factors come into play, including withdrawal rates, the location of assets, tax strategy, Social Security, Medicare, and other income sources such as pensions or annuities.
Retirees must juggle these considerations, rather than focusing solely on investments. Recently, experts have advocated for investing retirement money in a balanced mix of stocks, bonds, and alternative assets to create a portfolio that can withstand market cycles and support sustainable withdrawals. However, simply keeping your current portfolio and pulling income as needed in retirement may not be the best approach.
Withdrawing during a market downturn can quickly deplete your savings.
Planning for sustainable retirement income
The same average return can result in very different retirement outcomes, as early losses coupled with withdrawals can cause lasting damage that later market gains may not be able to fully reverse.
Separating spending and growth money can help mitigate this risk. One practical approach is segmenting or “bucketing” money based on the timeframe of income needs. This strategy involves dividing your retirement funds into three buckets:
Bucket 1 (Years 0-5): This ultra-conservative bucket comprises high-yield savings accounts, Treasury bills, CDs, fixed annuities, and bonds, designed to protect principal and meet short-term income needs.
Bucket 2 (Years 5-15): Invested in a balanced mix of longer-term CDs, fixed annuities, individual bonds, dividend-paying stocks, and index funds for steady growth and moderate income.
Bucket 3 (Years 15+): This long-term growth bucket is invested more aggressively in stocks, real estate, and potentially alternative assets, designed to ride out volatility. As you draw down Bucket 1, income and dividends from Bucket 2 should automatically replenish it.
If that’s insufficient, you can dip into the fixed-income side of Bucket 2, keeping stock positions intact for growth. Trimming profits from Bucket 3 every ten years is a good practice to support income needs. This bucket strategy aims to provide a stress-free retirement by aligning your portfolio with real-world income needs and timeframes.
By using this approach, you can protect your short-term spending and give your investments the runway they need to grow in the long haul.
