Why a Single Withdrawal Rate Isn’t Enough and What to Do Instead

One of the most common questions we hear from people approaching or living in retirement is deceptively simple: “How much can I safely withdraw each year?” Simple question. Complicated answer.

Markets move. Life happens. Spending is rarely flat. And retirement can easily last 25 to 30 years, sometimes longer. The challenge is not just choosing a withdrawal rate. The real work is making sure the income you need in the near term is insulated from the investments meant to fund the long term. That is where a strategy known as bucketing comes in.

Let’s start with withdrawal rates, then talk about how bucketing helps, and finally walk through what happens when (not if) markets fall hard.

Withdrawal Rates Are a Starting Point, Not a Promise

You have probably heard of the “4% rule.” The idea is that if you withdraw roughly 4% of your portfolio each year adjusted for inflation, your money has a reasonable chance of lasting through retirement. This concept came from historical studies of market returns and spending patterns.

Used properly, a withdrawal rate is a planning tool. Used improperly, it becomes a false sense of security. Why? Because no one actually retires into an average market. Returns are uneven. Inflation spikes. Spending changes. Taxes change. And sequence of returns risk matters a lot. That last one is a fancy way of saying that bad markets early in retirement can do more damage than bad markets later.

So rather than obsess over a single percentage, we focus on structure. Specifically, how your income needs are sourced from your portfolio over time.

The Problem With Selling From One Big Pot

If all your retirement assets are invested the same way and you are pulling income from that single pool, you are exposed to bad timing. When markets are down, you are forced to sell more shares to generate the same income. Those shares are gone forever. When markets recover, you have fewer dollars participating.

This is something I really want you to hear and absorb: the goal in retirement is not to always maximize returns. The goal is to reliably fund spending while giving long-term assets enough time to recover from inevitable downturns. Bucketing helps solve that.

Bucketing: Matching Time Horizon to Risk

Bucketing means organizing your portfolio based on when the money will be needed, not just how it is invested. Think of it as aligning your investments with your spending timeline.

A simple framework looks like this:

Bucket 1: Years 0 to 2
This bucket holds the next one to two years of required income. It is invested conservatively. Cash, money markets, short-term bonds. The goal here is stability, not growth. This money is there to pay the bills regardless of what markets are doing.

Bucket 2: Years 3 to 5
This bucket supports income a few years out. It can take modest risk but still leans conservative to moderate-conservative. Short to intermediate bonds, conservative allocation strategies. Enough growth to outpace inflation, but not so much volatility that a market drop derails the plan.

Bucket 3: Years 6 to 10
Now we can lean more into growth. This bucket is invested moderately, often with a balanced mix of stocks and bonds. It has time to ride out market cycles and replenish earlier buckets over time.

Bucket 4: Years 10 and Beyond
This is long-term money. It can be invested moderate-aggressively to aggressively, depending on risk tolerance and overall plan. These assets are not being touched anytime soon, which gives them the best chance to recover after downturns and drive long-term portfolio growth.

The key benefit of bucketing is psychological and mathematical. You know your near-term income is covered, and you’re not forced to sell growth assets at the worst possible time.

A 20% Market Drop: What Actually Happens?

Let’s put numbers to this.

Assume a $1,000,000 portfolio with a 4% withdrawal rate. That means $40,000 per year in portfolio withdrawals. Now assume markets drop 20% in a short period.

Without bucketing and assuming that portfolio is completely exposed to the markets, that portfolio drops to $800,000. The same $40,000 withdrawal is now a 5% withdrawal rate on the reduced balance. That may not sound dramatic, but compounding works both ways. Higher withdrawals from a lower base increase the risk of long-term shortfall.

Now let’s look at the same portfolio with a bucketed structure.

If you have two years of income, say $80,000, sitting in Bucket 1, that money is largely unaffected by the market drop. Your income for the next two years is already funded. You are not selling stocks after a 20% decline. You are buying time.

Meanwhile, Buckets 3 and 4 may be down, but they are not being touched. History tells us that markets recover, although the timing is unpredictable. Time is the critical ingredient, and bucketing gives it to you.

What to Consider After a Market Drop

A significant market decline is not the moment for knee-jerk decisions but instead, an intentional review. Here are several factors we look at after a drop of this magnitude:

Time to Rebalance
Rebalancing is not automatic after every decline. It depends on where the drop occurred and how buckets are structured. Sometimes the right move is patience. Other times, selectively rebalancing into depressed assets makes sense. This is where discipline matters.

Spending Flexibility
Can discretionary spending be temporarily reduced? Even small adjustments can materially improve long-term outcomes after a major decline. Flexibility is an underappreciated risk management tool.

Income Sources Beyond the Portfolio
Social Security, pensions, annuities, rental income. These all reduce pressure on the portfolio. After a market drop, understanding how much of your income is truly market-dependent is critical.

Tax Strategy
Down markets can create opportunities. Roth conversions, tax-loss harvesting, and strategic withdrawals from different account types may improve after-tax outcomes over time.

Replenishment Plan
Buckets are not static. As Bucket 1 is spent down, it needs to be refilled. The plan for doing that, and the timing, should be revisited after major market moves.

The Big Picture

Retirement planning is not about predicting markets. Anyone who claims they can do that is selling something. It is about building a structure that can withstand uncertainty.

A well-designed bucketed strategy helps separate income stability from market volatility. It allows you to spend with confidence, even when headlines are loud and portfolios are temporarily smaller. And it gives long-term investments the breathing room they need to do what they have always done over time.

Withdrawal rates matter. Portfolio design matters more. When those two work together, retirement becomes less about reacting and more about living your life.

And that, frankly, is the point.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.