One of the most important risks retirees face isn’t simply how much their portfolios earn on average, but when those returns show up. This is known as the sequence of returns risk. If a retiree experiences poor investment returns in the early years of retirement while simultaneously withdrawing from their portfolio, the combination can drain savings at an accelerated pace. Even if markets recover later, the portfolio may not bounce back enough to sustain a lifetime of withdrawals.
What is Time Segmentation?
Time segmentation (also known as a “bucketing” approach) is a retirement income strategy that organizes a portfolio into different segments, or “buckets,” based on when the money will be needed. Instead of treating all assets as a single pool, retirees assign less volatile investments to cover near-term spending needs and riskier, growth-oriented investments to fund spending much further into the future.
How Time Segmentation Addresses Sequence Risk
The logic is straightforward: if you know you’ll need to spend money in the next few years, you don’t want those funds tied up in volatile assets like stocks. By holding several years of income in cash or short-term bonds, retirees can ride out downturns without selling stocks at the worst possible time. This helps manage the impact of market volatility early in retirement, when portfolios are most vulnerable to sequence risk.
That said, it’s essential to recognize that segmentation doesn’t eliminate sequence risk. Eventually, stocks or bond funds must be sold to extend the ladder. If markets haven’t recovered, losses can still matter. For this reason, many advocates recommend using individual bonds or TIPS held to maturity to provide predictable cash flows in the near-term buckets, rather than bond funds that fluctuate in price.
How It Works in Practice
A typical time segmentation plan might look like this:
- Bucket 1 (Years 1–5): Cash, CDs, or short-term bonds to cover immediate expenses.
- Bucket 2 (Years 6–10): Intermediate-term bonds or bond ladders to bridge the middle years.
- Bucket 3 (Year 11 and beyond): Stocks and other growth assets designed to replenish earlier buckets over time.
For example, consider a retiree with a $1,000,000 portfolio who plans to spend $40,000 per year. They might set aside $200,000 (five years of expenses) in Bucket 1 using cash and short-term bonds. Another $200,000 goes into Bucket 2, invested in intermediate-term bonds. The remaining $600,000 sits in Bucket 3, invested in stocks and other growth assets. If the market falls in the early years of retirement, the retiree can continue to draw from Bucket 1 without touching stocks. By the time those near-term reserves run low, markets have more time to recover, and gains from Bucket 3 can be used to refill the other buckets.
Practical Considerations
Time segmentation’s biggest value may be psychological. Many retirees find comfort in knowing their near-term spending is insulated from market swings. This peace of mind can make it easier to stay invested in stocks for long-term growth, which is critical for sustaining income over decades. However, the strategy can also lead to fluctuating equity exposure as buckets are spent down and refilled, which may feel riskier to some retirees. It also requires discipline to maintain, since the approach only works if retirees stick with it through downturns.
While time segmentation provides protection and clarity, it comes with trade-offs. Large allocations to cash and bonds may limit long-term growth potential, and managing multiple buckets requires careful monitoring and disciplined rebalancing. Most importantly, while time segmentation helps manage market volatility, it does not address longevity risk, which is the possibility of outliving one’s assets.
Time segmentation is just one way to manage sequence risk and it tends to resonate most with retirees who are comfortable spending from a diversified portfolio over time. If you’re not sure whether this approach fits your retirement income style, the RISA® can help clarify your preferences. And if you want to learn how to put these types of strategies into action, our Spending from an Investment Portfolio in Retirement Workshop walks you through the practical steps of managing risk, building flexibility, and sustaining your retirement paycheck.
Strategies like time segmentation aren’t a silver bullet, but they can be a valuable way to manage sequence of returns risk in early retirement. By separating near-term spending from long-term growth, retirees gain both financial resilience and psychological comfort. When evaluating ways to manage sequence risk, it’s important to weigh the trade-offs, personal comfort with risk, and the flexibility needed for your overall retirement plan.
Want to learn more? Listen to Ep. 196 of the Retire With Style Podcast.
