How to manage retirement income during a market downturn

In short: A retirement bucket strategy divides your money by when you’ll need it. Keep one to two years of essential spending in cash or cash-like accounts, invest the next several years more conservatively, and leave long-term money invested for growth. This can reduce the need to sell investments during a market downturn.

Markets rise and fall. If you’re retired or close to it, a downturn can feel personal because your savings may need to fund your spending right now. The good news is that a clear income plan can help you stay steady even when markets are volatile.

This guide walks you through the retirement bucket strategy, how it strengthens your position during a downturn and how much cash to keep on hand. Along the way, you'll find clear answers to the questions retirees ask most.

What is a retirement bucket strategy?

A retirement bucket strategy divides your savings into separate accounts, or buckets, based on when you'll need the money. Each bucket carries a different level of risk and access.

The idea is straightforward. You keep near-term spending money safe and liquid, so a market downturn doesn’t force you to sell long-term investments at a loss. Your money has time to recover while you draw income from steadier sources.

Most retirement bucket strategies use three buckets:

• Immediate needs: Cash and cash alternatives for the next one to two years
• Short-term savings: Lower-risk investments for years three through 10
• Long-term growth: Investments positioned to grow for year 11 and beyond

Key takeaway: A bucket strategy spreads your money across time horizons, so short-term market swings don't threaten the income you rely on today.

Why do market downturns matter more in retirement?

In retirement, market losses can hurt more because you may need to sell investments while prices are down. That can lock in losses and leave less money to recover later. This is called sequence of returns risk, and it matters most in your early retirement years. Two retirees with the same savings can have very different outcomes depending on when market downturns happen.

The concern over having enough retirement savings is real. According to the 2025 U.S. Bank Wealth Report, 66% of Americans say not having enough money for retirement is their biggest financial stressor. With 61% expecting retirement to last 15 years or longer, their savings may need to last longer than previous generations expected.

How does the retirement bucket strategy work?

The retirement bucket strategy separates your money into three buckets based on time horizon. Bucket 1 holds near-term spending in cash. Bucket 2 holds lower-risk investments for the next several years. Bucket 3 stays invested for long-term growth. The goal is to protect today’s income while giving long-term assets time to recover and grow.

Bucket 1: Immediate needs

Bucket 1 covers essential living costs like groceries, utilities and housing. Keep enough in cash reserves or cash alternatives to cover 100% of essential expenses for one to two years.

Consider your predictable income first: Social Security, pensions and required minimum distributions (RMDs). This way, you won't need to sell investments that may have dropped in value.

 Bucket 2: Short-term savings

Bucket 2 roughly covers essential spending in years three through 10. It can also fund non-essential or unexpected costs during bucket one, such as a new car, or an unexpected home repair.

Use relatively low-risk options here, such as certificates of deposit (CDs), money market accounts and short-term fixed-income investments. The goal is steady growth that keeps pace with inflation without much risk.

Bucket 3: Long-term growth

Bucket 3 handles year 11 and beyond. Since you won't touch it for a while, you can invest it for growth and let it ride through market ups and downs. Long-term goals live here too, like legacy planning for loved ones or preparing for long-term care.

A sample allocation scenario

Picture a retiree with $600,000 in savings and $40,000 in annual essential expenses, not covered by Social Security.

Here's one way the buckets might look:

• Bucket 1 (immediate): $80,000 in cash and cash alternatives, roughly two years of expenses
• Bucket 2 (short-term): $170,000 in CDs, money market accounts and short-term bonds
• Bucket 3 (long-term): $350,000 in a diversified, growth-focused portfolio

When markets fall, this retiree draws from Bucket 1 and leaves Bucket 3 untouched. The long-term investments get time to recover. When markets rise, gains from Bucket 3 refill the earlier buckets.

This example is for illustration only. Your ideal mix depends on your spending, income sources, time horizon and comfort with risk. A financial professional can help you build a strategy around your numbers.

What income sources should retirees use first?

A strong retirement income strategy uses several sources in a deliberate order. This diversification helps you meet near-term needs, keep cash for emergencies and avoid early withdrawals from growth accounts.

Here's a sensible order to draw from:

1. Retirement resources: Social Security, pensions, annuities and RMDs from accounts like 401(k)s and IRAs.
2. Earnings and income: Dividends, bond interest, capital gains and any part-time or rental income.
3. Asset and investment drawdown: Withdrawals from investments, annuities, cash-value life insurance and real estate.
4. Legacy assets: What you set aside for loved ones or charities, often with tax planning in mind.

Key takeaway: Drawing income in the right order helps your savings last and keeps your growth investments working longer.

What are the pros and cons of a bucket strategy?

Pros of a bucket strategy

• Reduces the need to sell long-term investments during market downturns
• Makes near-term spending easier to plan
• Can reduce stress during volatile markets

Cons of a bucket strategy

• Holding more cash can reduce long-term growth
• Too much cash can lose purchasing power to inflation
• Buckets need periodic review and rebalancing

Who is a bucket strategy best for?

A bucket strategy fits retirees who want a clear, structured way to see their near-term income set aside. It tends to suit those who value emotional comfort during volatile markets and prefer a visible plan over a single blended portfolio. If setting aside near-term spending in more conservative investments helps you stay invested through market volatility, this approach may be a good fit.

When a bucket strategy may not fit

A bucket strategy may not fit if most of your essential expenses are already covered by guaranteed income like Social Security and a pension. In that case, you may not need a large cash buffer. It can also feel like extra work if you'd rather hold one diversified portfolio and rebalance on a set schedule. The right choice depends on your guaranteed income, withdrawal needs, tax situation and comfort with market risk.

What mistakes should retirees avoid with a bucket strategy?

• Keeping too little cash. A thin Bucket 1 can force you to sell investments at the worst time.
• Forgetting to refill. Refill the near-term buckets when markets perform well.
• Ignoring inflation. Too much idle cash can quietly erode your buying power.
• Going it alone when unsure. Tax rules, RMDs and timing can get complex. Guidance from a financial professional can help.

Frequently asked questions

Is the bucket strategy good during a recession?

Yes, a bucket strategy can be helpful during a recession because it lets you draw from cash or lower-risk assets instead of selling growth investments after prices fall. That structure can help preserve long-term assets and reduce stress.

How much cash should retirees keep on hand?

Most guidance points to one to two years of essential expenses in cash or cash alternatives. This covers your needs through a typical downturn. Adjust the amount based on your other income, like Social Security and pensions, and your comfort level.

How often should you refill the retirement buckets?

Many retirees review their buckets at least annually and after major market moves. A common approach is to refill the near-term bucket when markets are up or when the cash bucket falls below your target level. The best timing depends on your withdrawal needs, tax situation and overall investment plan.

What are the disadvantages of a bucket strategy?

The main drawbacks are lower potential growth and more upkeep. Holding extra cash and low-risk assets can reduce returns over time, and inflation can erode buying power. The strategy also needs periodic review so earlier buckets can be refilled without disrupting long-term goals.

A bucket strategy is just one approach—read about other retirement withdrawal strategies.

Your next step toward a secure retirement

You've worked hard to build your savings. Now the goal is making that money work for you, year after year, no matter what the market does. A retirement bucket strategy gives you a clear framework: keep near-term income safe, let long-term investments grow and be conscientious about where retirement dollars come from.

Ready for a retirement strategy built around your life? Connect with a U.S. Bank wealth specialist for a no obligation conversation about your retirement income plan and next steps.