How do you find the sweet spot between using your retirement savings to enjoy a comfortable standard of living and investing so you won’t run out of money in the future? It’s a big question for many retirees. According to new research from Colonial First State (CFS)*, two-thirds of retirees (69%) are concerned about running out of money in retirement. A total of 41% said they sometimes felt so concerned about running out of money that it affected how they used their retirement savings and their current standard of living. A further 28% said this fear affected them significantly. Just one in three said they never worried about it. Given this, it’s worth understanding the ‘bucket strategy’ for managing savings in retirement.
This strategy was conceived as a way for retirees to balance spending with the need to preserve capital and invest in growing their future retirement savings to last the distance.
How much you put into each bucket and how you invest those buckets will depend on your retirement savings level, desired lifestyle, risk appetite, and any other income you may have. It’s worth getting financial advice to ensure this approach is right for you.
What is the bucket strategy?
Simply put, the bucket strategy involves investing your money in different investments designed to deliver short-term, medium-term, and long-term returns.
- Short-term bucket: This is money you think you’ll need to access in the next one to three years. Consider keeping it in cash, such as high-yield savings accounts or term deposits with staggered maturity dates.
This is money to live on and an emergency fund for unexpected expenses, such as when your washing machine stops working, or your car breaks down.
There should be enough to get you through a market downturn if needed. You don’t need to cash in higher growth investments and turn paper losses into real ones or sell units in your pension investment option when they may have experienced a short-term drop in value.
Factor in any other income, such as the Age Pension if you receive it, or any work income, and set aside money to cover the rest.
- Medium-term bucket: Consider holding money you may need in the next four to six years in income-producing, relatively ‘safe’ assets like high-quality bonds, fixed-income investments, low-risk dividend-paying stocks, or a balanced pension investment option.
This bucket is designed to help your retirement savings keep pace with inflation. If you hold too much cash, your retirement savings won’t grow quickly.
- Long-term bucket: This is the money you want to invest to grow over the long term. It can be kept in higher growth investment types often seen as higher risk, such as a growth pension investment option or growth shares.
This should be money you won’t need to touch for seven to ten years, which gives it time to grow despite any short-term market volatility. More than half your retirement savings may be generated from earnings on your pension investment option after you retire, so it’s worth putting aside a good amount in your long-term bucket.
How does it work?
The bucket strategy balances the need to preserve capital in retirement by investing some of your savings in low-risk cash options.
This enables retirees to access income when needed without dipping into higher-growth investments, which will grow retirement savings over the long term. This can, therefore, provide peace of mind about spending while also helping retirement savings last longer.
It can be particularly beneficial during market volatility, such as a market downturn, to prevent the need to sell higher-risk investments at an inopportune time.
Investing all your retirement savings in conservative investment options or cash that may not keep pace with inflation may be low-risk, but it will not provide you with the best long-term retirement outcomes.
As the funds in Bucket 1 are used, consider topping them up from Bucket 2 or even Bucket 3, depending on market conditions, your investments, and their performance.
As mentioned, your situation will determine how much you put into each bucket and how you invest in those buckets. If you want to understand if this approach will work for you, please speak with to the team at Everalls Wealth Management today. This strategy may require more active management of your retirement savings than some people may be comfortable with. However, the bucket strategy offers diversification by incorporating different investment types and time frames. It can be useful for helping you decide how much to spend and how much to invest in the long term.
* Financial literacy and retirement study conducted between July and September 2024. Respondents included 834 retiree respondents.
^ Calculations by CFS. Projection starts at age 25 (with a salary of $100,000), retirement at age 65 and super lasts until age 92. Superannuation earnings, tax on profits, investment and administration fees, and yearly indexation of contributions and income stream payments are based on the default assumptions used in ASIC’s Moneysmart calculator, available at moneysmart.gov.au as of August 2024.
Source: CFS
