FYR020: A Bucket-Based Approach to Navigating Market Uncertainty

When it comes to withdrawing from your portfolio, timing is everything. During your working and saving years, the average annual return over time is what matters most since you’re not actively withdrawing funds. However, as you approach retirement and begin drawing from your portfolio, the sequence of returns—the order in which market gains or losses occur—takes on much greater importance. Poor returns experienced early in retirement can significantly impact the longevity of your savings.

At Vector Wealth, we use a bucket-based approach to planning and investing. This strategy segments your investments into different “buckets” based on your time horizons and financial goals. By aligning withdrawals with specific investment buckets, this method helps mitigate the risks of a poor sequence of returns.

How It Works: A Practical Example

Imagine a recently retired 65-year-old couple with a $3 million portfolio. They plan to withdraw $120,000 per year for living expenses. Using our bucket-based approach, we would set aside three years’ worth of income needs—$360,000—into very conservative investments. This first bucket serves as a buffer for their immediate withdrawal needs.

Now, let’s examine two potential market scenarios: one good and one less favorable.

Scenario One: A Positive Market Sequence

In the first scenario, the stock market rises for two consecutive years. During this time, the withdrawals occur, and the first bucket begins to be spent down. As markets moved higher, we rebalanced the portfolio and “reloaded” the first bucket to maintain the three-year buffer for future withdrawals.

Scenario Two: A Negative Market Sequence

In a less favorable scenario, markets decline during the couple’s first few years of retirement. Withdrawals still occur, and the conservative bucket is drawn down. However, since markets are down, we delay reloading this bucket, giving the longer-term investments time to recover. By not selling stocks during a market downturn to fund withdrawals, we avoid locking in losses. Once markets recover, we resume rebalancing and reestablishing the three-year buffer.

The Benefits of a Bucket-Based Approach

Why do we use this strategy?

1. Market Unpredictability – Stock markets are volatile in the short term, and no one can predict their movements. A bucket-based approach helps you plan for uncertainty.
2. Peace of Mind – Withdrawal needs are thoughtfully planned and matched to specific investments, providing clarity and confidence.
3. Limit Emotional Decisions – Having a structured plan in place helps prevent making emotionally charged decisions.

By aligning your withdrawal strategy with a bucket-based approach, you can maintain your lifestyle while safeguarding your portfolio against the risks of a poor sequence of returns.

To learn more about the sequence of returns and other financial planning topics, visit us at vectorwealth.com.

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