Retirement can make market losses particularly painful when savings are needed to cover everyday expenses. A strategy highlighted by The Motley Fool focuses on protecting near-term income while keeping enough money invested to counter inflation over the longer term. The central idea is to separate money needed soon from investments that have more time to recover from market downturns.
Protect essential income
The first step is calculating how much of a retirement portfolio cannot comfortably be exposed to major market swings. Retirees can compare essential monthly expenses, including housing, food, insurance and healthcare, with guaranteed income from sources such as Social Security, pensions, annuities and rental income.
Someone receiving $4,000 each month while facing $6,000 in essential expenses, for example, has a $2,000 monthly gap that investments need to cover. Holding 12 to 24 months of those expected withdrawals in cash and short-term fixed income would require a reserve of $24,000 to $48,000.
That cushion can reduce the need to sell stocks or long-term bonds after markets fall. High-yield savings accounts, Treasury bills, no-penalty certificates of deposit, cash management accounts and bond ladders are among the options suggested for holding relatively accessible funds.
Three buckets spread risk
Organising retirement investments into three buckets can provide another way to manage different time horizons. Bucket No. 1 contains the 12 to 24 months of withdrawals intended to cover immediate needs during market weakness.
Bucket No. 2 concentrates primarily on high-quality fixed-income investments alongside a smaller allocation to dividend-paying stocks. Companies cited as examples include Johnson & Johnson, Mastercard and Coca-Cola, with earnings potentially helping replenish the first bucket.
Long-term growth sits in Bucket No. 3, where stocks and more volatile bonds have additional time to ride out market fluctuations. Regular rebalancing can prevent that portion from becoming excessively concentrated in equities.
