Should You Spend Bond Funds Before Stocks in Retirement?
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When retirement arrives, the focus shifts from saving to spending. The main question most retirees face is not just how much to withdraw, but which assets to tap first. A common dilemma is whether to use bond funds before stock funds. The short answer is: not necessarily. A more effective approach is through a structured withdrawal plan that balances stability and long-term growth.
The “bucket” strategy is the most recommended approach, wherein you withdraw from your safest assets first — cash and then bonds — while giving your stocks time to grow and recover from market swings. This approach ensures a steady income while protecting your portfolio’s growth potential.
Here’s Why Withdrawal Order Matters
Your savings do not just need to last for a few years; they may need to cover expenses for two or three decades. Choosing a withdrawal strategy is not just about convenience; it directly affects how long your money will last and how much you may owe in taxes. Without a plan, retirees risk selling investments at the wrong time, paying more in taxes than necessary, or depleting their funds earlier than expected.
The Bucket Approach to Withdrawals
The bucket strategy divides your retirement savings into three parts. The first is cash, usually enough to cover one to three years of living expenses. The second is bonds or bond funds, which hold enough funds to cover three to five years of expenses. The third is stocks, which serve as the engine for long-term growth.
When expenses arise, you first draw from your cash bucket. Once that has been depleted, you refill it with money from your bond bucket. Stocks are left untouched for as long as possible, giving them time to rebound from market downturns and outpace inflation. This sequence ensures that you are not forced to sell shares when the market is down, which may lock in losses.
Other strategies to consider
The bucket strategy may be one of the most widely discussed approaches to retirement withdrawals, but it is not the only option available. Retirees can choose from several different methods, depending on their priorities, such as predictable income, minimizing taxes or preserving principal for as long as possible.
One of the oldest and most referenced approaches is the “4% rule.” It suggests that retirees withdraw 4% of their savings in the first year of retirement, and then increase that amount each year to account for inflation. The goal is to make the portfolio last for about 30 years. While straightforward, the rule has limitations. It does not adjust for changing market conditions or individual circumstances, which is why many experts now recommend treating it as a flexible guideline rather than a strict formula.
Another option is fixed-amount withdrawals. Here, retirees set up systematic withdrawals on a monthly, quarterly or yearly schedule. The benefit is a predictable cash flow, which can make budgeting easier. However, the downside is that the withdrawals remain the same regardless of how investments perform. In weak markets, this approach risks depleting savings faster than expected.
A tax-conscious strategy can also extend retirement dollars. Many people withdraw from taxable accounts first, then from certain accounts that are tax-deferred like- 401(k)s or IRAs, and finally from tax-free Roth accounts. This sequence may help reduce taxes while allowing more money to be invested for growth. That said, the optimal order often changes as income levels and tax brackets shift year to year.
Finally, some retirees choose to withdraw only the income their investments generate, such as interest, dividends and rental income, while leaving the principal untouched. This can preserve wealth, but income streams vary with market conditions, making it less reliable as a sole strategy.
Building Your Personalized Plan
No single strategy works for everyone. The right withdrawal plan depends on your savings mix, lifestyle, risk tolerance and tax situation. Many retirees find that blending approaches, such as using the bucket strategy as a foundation while layering in tax-efficient withdrawals, offers the best balance of security and flexibility.
What matters most is that you think ahead. Retirement is not the time to improvise. By mapping out how you will spend from cash, bonds and stocks, you can give yourself the best chance of enjoying financial stability, while letting your portfolio grow enough to last through retirement.