The journey of wealth management is as unique as every individual. At Everalls Wealth Management, we know our clientele—busy professionals, thriving business owners, and high net worth individuals—each has their distinct set of financial planning needs. One strategy that stands out for its flexibility and potential is the “bucket investment strategy.” Let’s delve into what it is and how it can be moulded to fit various retirement plans.
What is the Bucket Investment Strategy for retirees?
A bucket strategy is a retirement income planning approach that divides a retiree’s investment portfolio into distinct “buckets” or segments, each with a specific purpose and time horizon. In the context of Australian Superannuation and Pension environments, a typical bucket strategy consists of three main buckets:
Short-Term Bucket:
This bucket contains cash or cash equivalents, like cash management accounts and term deposits. It’s to cover things like your living expenses for the next couple of years. It’s low-risk, ensuring that the money is there when you need it. The goal of this bucket is to ensure that if there is any volatility in the stock market, your living expenses are covered without needing to sell any investments so you can ride out any dips without needing to sell when prices are down and crystallising losses.
Mid-Term Bucket:
Here, you might have more diversified investments like bonds or balanced mutual funds. These are aimed at generating income over a medium-term horizon, say 3 to 7 years. The income from this bucket is then used to top up the Short-term bucket from time to time. This bucket helps bridge the gap between short-term expenses and long-term growth assets.
Long-Term Bucket:
This is for high growth assets you don’t expect to tap into for at least seven years or more. It might include stocks, property, and other higher-risk, higher-return investments. Income and profits from sales of these investments will be used to top up the Short & Medium-Term buckets. This bucket aims to provide potential capital growth and returns that outpace inflation, making it suitable for goals beyond seven years.
How Can the Bucket Strategy Be Used Depending on Retirement Plans?
The purpose of each bucket in a bucket strategy is to align your investments with the timing of your expected expenses in retirement. By segregating your assets into these buckets, you aim to minimise the risk of having to sell investments at unfavourable times (e.g., during a market downturn) to cover your immediate needs. This approach provides peace of mind and a systematic way to manage retirement income while balancing the goals of capital preservation, income generation, and growth over time.
When constructing a bucket strategy within the Australian Superannuation and Pension environment, it’s essential to consider factors like your risk tolerance, longevity expectations, and overall financial goals. Regular reviews and adjustments are also crucial to ensure that your portfolio remains aligned with your changing needs throughout retirement.
Alternative Bucket Strategies:
For the Busy Professional:
- Short-Term: Beyond holidays and unexpected opportunities, this can act as an emergency fund. Should you decide on a career pivot or deciding to leave the corporate world behind to start a business, having cash on hand provides a safety net.
- Mid-Term: Like many of your peers, you might be considering furthering your education, be it an MBA or another advanced degree. This bucket can finance that without dipping into long-term savings. Additionally, if early retirement is a goal, this bucket can bridge the income gap until your superannuation kicks in.
- Long-Term: Investments here should be focused on capital growth, ensuring that your savings outpace inflation and can support a longer life expectancy.
For the Business Owner:
- Short-Term: Business is unpredictable. This bucket provides a buffer against economic downturns or unexpected business expenses, ensuring continuity.
- Mid-Term: Maybe there’s a new product line you want to launch or a potential collaboration on the horizon. This bucket can fund those medium-term ventures. If there’s a consideration to sell the business and retire, this can also serve as a living fund while succession plans are finalised.
- Long-Term: As a business owner, this bucket might include more than just traditional investments. Diversifying into passive income streams, like real estate or other businesses, ensures you have a continued income post-retirement.
For High Net Worth Individuals:
- Short-Term: This isn’t just for luxury purchases. It’s also about immediate philanthropic efforts or funding entrepreneurial ventures for family members.
- Mid-Term: Here, focus might shift to larger legacy projects. Perhaps establishing a foundation, funding significant community projects, or setting up trusts for younger family members.
- Long-Term: Wealth preservation is paramount. The focus here would be on investments that not only grow wealth but protect against volatility, ensuring generational wealth transfer.
Why Consider the Bucket Investment Strategy?
Flexibility: Life’s only constant is change. The bucket strategy inherently accommodates fluctuations in personal circumstances, financial markets, or retirement objectives.
Risk Management: It’s a natural guard against impulsive decisions. When markets are volatile, knowing you have a short-term bucket can prevent rash decisions, like prematurely selling long-term assets at a loss. Over time, as one bucket depletes, funds can be realigned from the others, allowing the higher risk buckets to recover and grow.
Simplicity: The clear demarcation of funds and goals removes the paralysis that can come with vast investment choices. It’s a tangible way to map out your financial journey, making adjustments less daunting.
Emotional Peace: Retirement planning can evoke strong emotions, especially during market downturns. By using a bucket strategy, you can derive comfort knowing that immediate needs are addressed, reducing anxiety.
Inflation Protection: With a long-term bucket focused on growth-oriented investments, retirees can ensure their savings grow, providing a hedge against the eroding effects of inflation.
Legacy Planning: Especially pertinent for high net worth individuals, the bucket strategy provides a clear framework for estate and legacy planning, ensuring that wealth transition is systematic and aligned with personal wishes.
The bucket investment strategy is both an art and a science, intertwining financial acumen with personal objectives. At Everalls Wealth Management, we believe that it’s not just about the destination (retirement) but ensuring the journey is equally enriching. If this approach resonates with you, speak with the team today, let’s start the process of building a better future for you and the people you care about.
