At every stage in your life investing money can come with a level of stress – but at no time do the stakes feel high than in retirement – when you need that investment to supply your lifestyle.
One strategy we at Lime Financial Planning employ quite often with our retiree clients to manage this stress is called ‘bucketing’.
Instead of the conventional ‘Balanced’ or ‘Moderate’ approach your super may employ, this strategy breaks up your money into 3 ‘buckets’ which are all invested with different goals in mind. You can then clearly distinguish what parts of your money are for what task, reducing the stress.
Bucket 1 – Immediate and Short term,
The aim of this bucket is to put aside the funds you need in the short term, so that market movements don’t affect your living standards. The amount you put in this bucket really depends on your requirements and how much money you have, however ideally you would want at 5 years of your pension payments ready to go.
These funds should be held in cash, term deposits or low risk assets which gives you certainty the money will be there.
Although the returns on these assets are much lower, having 5 years of income guaranteed allows you to think more long term with the other two buckets of your portfolio, balancing out the returns.
We also saw during the GFC, investors who employed this strategy didn’t have to sell any assets at a loss over the 5 years, meaning they survived the period which much more money – and weren’t as worried about being able to put food on the table.
Bucket 2 – Income Orientated
This bucket would aim to have a diversified portfolio of assets (like shares, bonds and property) that tend to produce more income than growth. The income from this bucket should be used to ‘top up’ the Short-term bucket to keep it your cash flow secure.
Bucket 3 – Growth Orientated
This bucket has a long term 10+ year timeframe. Remember, retirement is not a short event – in fact for most people retiring at age 65, retirement is another 30 years! It is important your money lasts that long, and having money invested for growth ensures it will last.
With all three buckets you can achieve the following
Piece of mind that you can enjoy your retirement without worrying about markets.
Make smart, longer term, strategic decisions.
Make your money last longer, so you can enjoy retirement for longer.
It can save you selling investments at the wrong time, mitigating losses.
If you or someone you know is nearing retirement or is retired – and wants to discuss the Bucket Strategy in more detail, please contact me at Nathan@limefinancial.com.au
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