Do you recall the time when preparing for retirement seemed effortless, as you watched your money grow in your 401(k), Roth IRA, or brokerage accounts? It wasn’t long ago that the remarkable bull market from 2009 to 2020 made everyone feel like investing geniuses.

However, the events of early 2020 served as a reminder that retirement planning isn’t as simple as it appears. The market’s unpredictable cycles became evident. While the market swiftly recovered after the initial COVID-related drop, it has since been a roller coaster ride of volatility.

This ongoing market instability should caution savers that retirement planning is not just about making money; it’s equally crucial to protect the money you’ve already accumulated. This message is particularly significant for those who have recently entered retirement or are close to it. The performance of the stock market and the sequence in which negative and positive returns occur can significantly impact the longevity of your nest egg when you begin withdrawing from your portfolio.

For instance, if negative returns occur first and you need to sell some of your holdings for income, two things may happen. First, you might have to sell more shares at a lower price to meet your financial needs. Second, you will have fewer shares available to benefit from future positive returns. If a substantial portion of your retirement income relies on your portfolio and you cannot adjust your withdrawal amount, you may end up withdrawing more during those initial bad years than the subsequent good years can make up for. As a result, your portfolio may be exhausted earlier than expected due to a phenomenon called the sequence of returns risk.

Unfortunately, preparing for this particular retirement risk is challenging because it is largely based on chance. When individuals choose a retirement date, they have no knowledge of what will happen in the U.S. and global markets in the years to come. Some retirees were fortunate to retire in 2010 or 2011, shortly after the record-setting bull market began. People who retired ten years before faced numerous challenges. A few examples of these events are the collapse of the dotcom industry, the 9/11 terrorist attacks, and the 2008 economic downturn.

So, how can you improve your odds? There are strategies you can employ to shield your portfolio from poor retirement timing. One of these strategies involves dividing your assets into three distinct investing “buckets”: a cash/emergency bucket, a protected income bucket, and a growth bucket. Let’s explore these buckets further.

1. Cash/Emergency Bucket:

It’s advisable to keep enough funds in this bucket to cover at least six months’ worth of living expenses. By doing so, you won’t be forced to sell stocks to meet unexpected personal or market-related expenses during retirement. You can also maintain control over your budget. If kept in a high-yield savings account or money market account, the cash in this bucket can still earn a reasonable amount of interest. It serves as a financial cushion for costly home and car repairs, medical bills, and other unforeseen retirement expenses.

2. Protected Income Bucket:

During the first decade of retirement, you will withdraw funds from this bucket. Therefore, it’s important to fill it with investments that provide reliable income. This bucket will likely be the largest, although the percentage of your portfolio allocated to protected income may depend on your Social Security benefits and any pensions you receive. One recommended option for this bucket is uncapped, no-fee, fixed-index annuities. These annuities serve as alternatives to potentially problematic bonds in retirement portfolios. They come with no initial or annual fees, protect your principal against losses, potentially offer higher returns than bonds, and contribute to portfolio diversification.

3. Growth Bucket:

This portion of your portfolio will continue to grow your funds for the future, typically spanning 10 to 15 years into retirement. It helps your nest egg keep up with inflation and allows you to refill your protected income bucket as you deplete it. The assets chosen for this bucket depend on your age and risk tolerance. They can include equities, commodities, investment real estate, and private equity/hedge funds. If you don’t mind or even enjoy the market’s ups and downs and have extra funds to spare, you may even allocate a small percentage within this bucket for high-risk or speculative investments.

You can transition to a bucket strategy at any point before or after retirement. However, it’s generally advisable to start shifting from an accumulation-focused portfolio to one that emphasizes preservation at least five years before retirement. This allows ample time for proactive planning with an experienced financial advisor. Consequently, even if there is significant market turmoil just before or after you retire, you won’t need to worry about delaying retirement or returning to work.