Helping to Make a Bear Market Bearable

Perhaps no group is at greater risk during a bear market than those entering retirement. As stock prices plunge, near retirees may have to sell securities for a steep loss in order to pay bills, draining savings faster than expected.

But if you're near retirement or newly retired, you can help reduce the effects of a bear market with the "bucket system." This system divides your portfolio among three buckets based on when you'll need the money. Here's how it works:

• Bucket One holds the cash needed in the next one to two years (three if you're conservative) for living expenses that won't be covered by a fixed annuity, pension, or Social Security. This money can be parked in conservative investment options such as bank CDs and money market accounts, a money market fund, or stable value fund.
• Bucket Two is for funds you'll need in three to 10 years and often invested in income-generating assets such as short- or intermediate-term bond funds.
• And Bucket Three holds money you won't need until the distant future, so you may be able to invest it more aggressively in stock funds or alternative investments.

You'll need to replenish your cash bucket occasionally and can do so by moving money from one of the other buckets whose investments have done well.

Buckets can help provide peace of mind, knowing that you'll have a plan for covering your expenses for the next couple of years — regardless of the financial market's near-term ups and downs.