A couple of weeks ago, we discussed separating retirement assets into two buckets: Live On Assets (the money you’ll spend during retirement) and Leave On Assets (the money intended for your children and grandchildren). While this two-bucket approach is a meaningful improvement over treating all your savings as one large pool, it’s still missing an important piece for many people — especially those who are recently retired or nearing retirement.
That missing piece is how to protect against Sequence of Returns Risk during the early years of retirement.
What Is Sequence of Returns Risk?
Sequence of Returns Risk refers to the danger of experiencing poor market returns in the first few years of retirement, particularly while you’re also withdrawing money from your portfolio.
Even if you and your neighbor earn the exact same average return over 30 years, one of you could run out of money while the other leaves millions to their heirs. The difference often comes down to when the market declines occur. A significant downturn in the early years of retirement can force you to sell more shares at lower prices, permanently damaging your portfolio and making recovery much more difficult.
This is why most failed retirement plans in Monte Carlo simulations are driven by poor returns early in retirement, not later on.
Introducing the 3-Bucket Approach
To better manage this risk, I recommend moving from a two-bucket system to a three-bucket approach:
- Bucket 1: Early Retirement Income Bucket
This is your short-term bucket, designed to cover your spending needs for the first 3 to 5 years of retirement. The goal is to protect against sequence of returns risk by keeping this money in more conservative investments (such as cash or short-term bonds). By having several years of spending set aside, you reduce the need to sell investments during a market downturn.
- Bucket 2: Longer-Term Live On Bucket
This bucket holds the rest of the money you plan to spend throughout retirement after the first 3–5 years. Because this money has a longer time horizon, it can be invested more aggressively than Bucket 1 while still supporting your lifestyle.
- Bucket 3: Leave On Bucket
This remains the money you intend to pass on to your children and grandchildren. With a much longer time horizon, this bucket can be managed with a growth-oriented strategy.
By creating this Early Retirement Income Bucket, you build a buffer that helps shield the rest of your portfolio from early market volatility.
How This Fits Into Your Overall Plan
This three-bucket structure works especially well alongside other strategies we’ve discussed. If you fall into a primarily Live On focused profile on the Smart Retirement Strategy Quiz, you’ll likely want to focus on properly funding and managing Buckets 1 and 2. If you’re more Leave On focused, Bucket 3 becomes a higher priority, and strategies from the Smart Tax Shield Legacy Playbook can be particularly relevant.
For those in the window between retirement and the start of Required Minimum Distributions (RMDs), the Roth IRA Conversion Playbook can help determine how to best fund these three buckets in a tax-efficient way.
Final Thoughts
Adding an Early Retirement Income Bucket doesn’t need to be overly complicated, but it does require intentional planning. Instead of viewing your retirement savings as one large pool, you’re now organizing it into three distinct time horizons: short-term protection, medium-to-long-term spending, and legacy.
This approach helps reduce the impact of sequence of returns risk and allows you to apply the right investment and tax strategies to the right money.
If you’d like help building a three-bucket structure into your own retirement plan, I’m currently offering to create a Smart Retirement Model at no cost or obligation while time slots are available. You can also take the free Smart Retirement Strategy Quiz on my website to better understand which of the 18 profiles best matches your situation.
For more insights on retirement planning, tax strategy, and legacy planning, subscribe to my podcast A Smarter Way to Retire and follow my YouTube channel [@LeonardiFamilyWealthcare](https://www.youtube.com/@LeonardiFamilyWealthcare).
There really is a smarter way to retire — and sometimes that means adding one more bucket to the plan.