Given the significant market volatility this week and the increased prospect of a recession, financial advisors are likely fielding calls from worried clients — particularly those who hoped to retire in 2025.
With these clients in the “retirement red zone,” they are exposed to outsize sequence of returns risks that can derail even well-laid retirement income strategies. To shield them from short-term market fluctuations, many advisors have helped their clients implement bucket strategies and related risk-management techniques.
The idea behind these strategies is to ensure that clients don’t need to draw from portions of their portfolio that have taken big market losses. Instead, they can meet their spending needs from a “liquidity bucket” containing one to three years’ worth of spendable wealth. This leaves the mid- and long-term buckets invested in the market and poised for recovery.
While buckets are a proven strategy, each fresh bout of volatility raises the question: Is it too late to embrace the strategy once markets have started to go haywire? What are pre-retirees to do if they feel like their portfolio is too risky?
In a series of written commentaries shared with ThinkAdvisor by members of the XY Planning Network and the Financial Planning Association, advisors broadly agreed that moving to a bucket strategy remains viable in 2025 — if not perfectly timed. They also explained how they are working to calm their clients to avoid making major moves while markets are down.
Late Is Better Than Never
"It is certainly not too late" to start bucketing for retirement income planning, according to Erin Hadary, a partner and certified financial planner at Moneta. “When news headlines are bad, it is important to not let emotions drive all your financial decisions. Creating a customized income plan for portfolio withdrawals is crucial.”
Whether building a bucket strategy during tranquil or worrying times, it’s important to approach each client’s situation based on their annual spending needs, the resources they have set aside or inherited, their risk tolerance, their age and their history of longevity.
“I start by determining how much money should be isolated from a market downturn by looking at historical downturns,” Hadary noted. “For some clients, a year’s worth of income needs is the right amount, while others may want three years of cash flow isolated from the stock market in a bond ladder of high-quality U.S. corporate or municipal bonds, depending on their age and tax bracket.”
Some clients have pension or annuity income arrangements in place, while others need to discuss whether these fit into their financial plan. Other factors include required minimum distributions from pre-tax retirement accounts, as well as shaping the plan according to asset location across after-tax brokerage accounts, pre-tax retirement accounts and Roth IRA accounts.
“Bottom line, it is never too late to start planning for your retirement income strategy and gaining more peace of mind and confidence customized to your personal needs,” Hadary said. “Retirement income planning preparation is a process and not a transaction where you buy a product and never look at your income plan in the context of your bigger picture.”
Not All Doom and Gloom
Scooter Thomas, a CFP and financial advisor with Savant Wealth Management, agreed that “it's never too late to start with a bucketed investment strategy.”
“The essence of this approach is to maintain enough liquidity to enjoy the things you want to do without worrying about market returns on the money you might need,” Thomas said. “While it might be more challenging to start now … it’s not all doom and gloom.”
For clients with a well-diversified portfolio, their investment bucket could reflect positive international returns. Realizing some of these gains for redeployment into a safer bucket could make a lot of sense even as other portfolio portions are down.
“The bucketing strategy is designed to be less sensitive to market fluctuations, which is its main advantage,” Thomas added. “However, starting at a market low can be a tougher pill to swallow. Remember, the key is to ensure you have the right guidance and a diversified approach to weather any market conditions.”
Melissa Caro, CFP and founder of My Retirement Network, agreed.
“It’s not too late to implement a bucket strategy, even in a volatile market,” Caro said. “Reallocating a portion of your portfolio to secure a few years of spending in safe assets can help reduce the risk of selling at a market low.”
Sequence of returns risk is a major concern for recent and soon-to-be retirees, Caro noted, as drawing from a declining portfolio early in retirement can accelerate asset depletion. Ideally, clients will have the bucket of one to three years of spending held in money market accounts or short-term bonds to cover essential expenses.
If they don’t, a home equity line of credit can serve as a potential backup. Once the market bounces back, Caro said, Treasury Inflation-Protected Securities are worth considering for inflation-adjusted income, and annuities can provide stability so long as clients understand the terms.
“Finally, delaying Social Security, if possible, can provide higher guaranteed income later, helping offset portfolio drawdowns,” she said.
Find the Positive
Regardless of whether this is a good time to begin a bucket strategy, said Ashley Folkes, CFP and wealth management advisor at Farther, helping clients see the bright side of volatility is important in helping them stay the course.
“Whenever the market takes a hit, it’s the same story,” Folkes said. “Unpredictable, uncontrollable events along with super uncertain times cause pain. On a balance sheet, yes, but more so emotionally.”
So, when the market drops, he tends to hear the same question: “What should I do now?”
“I tell people to come in so we can look at their plan,” Folkes said. “We check how much risk they're comfortable with, because that can change when things feel shaky. We talk about their worries and remind them that retirement is a long game, not just a few years. This will pass.”
Taking money out during a downturn can be especially damaging, Folkes notes, so any given client might need to access a little less this year to keep the long-term plan on track. At the same time, he tries to help clients find opportunities, such as using losses to lower taxes or buying investments at lower prices.
“We talk about sticking to a budget and keep putting money into retirement accounts bit by bit,” he concluded. “Most importantly, I tell them not to panic. Selling too much when the market is down is a mistake.”
Word of Warning
Breaking somewhat with her colleagues was Crystal McKeon, CFP and chief compliance officer at TSA Wealth Management. McKeon warned that this is not an ideal time to start bucketing. Instead, she advocates riding out the storm and accepting that markets are doing what they normally do during periods of uncertainty.
“Ideally, the best time to reallocate your portfolio is not after a large correction, and the best time to make sure your portfolio has an appropriate risk level for you is before a dramatic drop in the stock market,” McKeon said. “If you are not someone who can handle watching big drops in your accounts, then you may want to rethink a large stock allocation.”
Big down days are often followed by big up days, so clients who feel exposed right now may consider “hanging on for a little while to see what happens.”
“These last few days could also be a long-term decline, so you need to be prepared for that potential scenario as well,” McKeon said. “The truth about stocks is they will go up and they will go down, so if you are invested in them you need to make sure you have the comfort level with the fluctuations.”
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