Time Segmentation, a Smart Way to Invest Retirement Money

A Smart Way to Allocate Retirement Money

Couple planning for retirement
Time segmentation may be an approach you want to consider for retirement planning. Photo: Pascal Broze

Time segmentation is a strategy you can use to invest for retirement. It involves a process of matching your investments up with the point in time when you will need to withdraw them in order to meet your retirement income needs. Since each asset you invest in will mature by its own rate, you can stagger the maturity dates to align with a schedule you create.

If you have plans to retire one day, this method can help you choose a range of assets that will mature at different times, and provide payouts to fund your cost of living at all stages, for the duration of your retirement.

How Does Time Segmentation Work?

To best explain how time segmentation works, let's look at an example of this method in action.

Assume Harold and Sally are both age 60. They plan to retire when they reach 65. They want to ensure that their first ten years of retirement income are secure. If they use a time segmented approach, they might buy CDs, bonds, fixed annuities, or a mix of these things, in amounts designed to mature and be available in the year they would need them.

Suppose Harold and Sally know from ages 65–70 they will need to withdraw $50,000 a year to cover their living expenses. They find a series of CDs and bonds earning 2% to 4% to mature in the years they need the money. This is referred to as a laddered bond or laddered CD strategy. It would work as follows:

  • CD 1 paying 2% - matures at Harold’s age 65
  • CD 2 paying 2.5% - matures at Harold’s age 66
  • Bond 1 paying 3% - matures at Harold’s age 67
  • Bond 2 paying 3.5% - matures at Harold’s age 68
  • Bond 3 paying 3.75% - matures at Harold age 69
  • 10 year fixed annuity paying 4% - matures at Harold’s age 70
  • Bond 4 paying 4% - matures at Harold’s age 71
  • Bond 5 paying 4.1% - matures at Harold’s age 72
  • Bond 6 paying 4.15% - matures at Harold’s age 73
  • Bond 7 paying 4.2% - matures at Harold’s age 74

Using the schedule above, the couple would have to invest certain amounts of money into each asset in order to produce the full amount of $50,000 (with interest factored in). At the current time, when they are 60, this looks as follows:

  • CD 1 paying 2% - $45,286
  • CD 2 paying 2.5% - $43,114
  • Bond 1 paying 3% - $40,654
  • Bond 2 paying 3.5% - $37,970
  • Bond 3 paying 3.75% - $35,898
  • 10 year fixed annuity paying 4% - $34,601
  • Bond 4 paying 4% - $32,479
  • Bond 5 paying 4.1% - $30,871
  • Bond 6 paying 4.15% - $29,471
  • Bond 7 paying 4.2% - $28,107

Total needed: $358,451

Let’s assume Harry and Sally have an IRA, a 401(k) and other savings and investment accounts totaling $600,000. After using some of their savings to cover the time segments above (which line up with their first ten years of their retirement) that leaves them with $241,549 left. This portion of their savings and investments would not be needed for 15 years. If they invest it all in equities (preferably in the form of stock index funds), and if we assume an 8% rate of return, it would grow to $766,234.


Index funds, such as the S&P 500, have historically produced rates of return averaging 8%-12%, though this could be higher or lower in any given year.

I call this the growth portion of their portfolio. In years where the growth portion does well, they would sell some of their equities and extend their time segment. By doing this over and over again, they can always look forward seven to ten years knowing they have safe investments that will mature to meet their expenses going forward. They have the flexibility to sell growth in good years and give it time to recover when it has a bad year.

Notes About These Calculations

In these calculations, I am assuming all interest could be reinvested at the stated rate, which in reality is often not possible.

Also, I am not accounting for inflation. In the real world, Harry and Sally would need more than $50,000 in five years to buy the same amount of goods and services that $50,000 would buy today. I could inflate the $50,000 needed each year by 3% for the number of years until it was needed, and then discount it back by the return on the respective investment to be used. You would need to do the math based on your own personal needs and assumptions about inflation.

If Harry and Sally decide to delay the start of their Social Security until age 70, the income needs from their investments may not be exactly $50,000 each year. They may need more early on, and then less once their maximum amount of Social Security begins. They can use a retirement income plan timeline to chart this out and line up their investments to their needs.

Benefits of Time Segmentation

When you use a time segmented approach, you do not need to worry about what the stock market did today, or even what it does this year. The growth portion of your investment portfolio won’t be needed for 15 years.

Time segmentation is quite different from the standard approach of asset allocation in which you withdraw funds by a preset system. A traditional asset allocation approach specifies the exact percent of your funds that should be in cash, bonds, and stocks based on how much annual volatility you are willing to handle. Then you set up what is referred to as a systematic withdrawal plan to sell so much of each asset class each year (or each month) to meet your retirement income needs. 


With a time-segmented approach, annual volatility is irrelevant to your retirement income goals.

Learn More About Time Segmentation

In my article, "Is Reliable Retirement Income Worth 10 Minutes of Your Time," I provide another example of time segmentation and a link to a short video that does a great job of explaining the concept.

A concept much like time segmentation is that of using different buckets of money. I cover this method in the book Buckets of Money. As a concept, I agree with the ideas in the book, but I don’t necessarily agree with the investments they suggest you use to fill up each bucket.

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  1. Macrotrends. "S&P 500 Historical Annual Returns."

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