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How Many Buckets Do You Need for Retirement?

Guest post by: Rob Bourne

Article Overview: In retirement you need at least 2 buckets to adopt a successful investment strategy in retirement. One to meet your short term income needs and the other to meet your medium to long term growth needs.

How Many Buckets Do You Need for Retirement?

For many people about to retire it means being able to rely solely, or in part, on drawing an income from their superannuation or retirement savings.

Having the correct investment strategy in retirement is critical if your retirement savings are going to last. With average life expectancy now beyond 80 and people retiring in their 60's or earlier it means our savings nest egg has to last us longer.

The investment strategy you have in retirement should be a lot different from the investment strategy adopted pre-retirement. In pre-retirement or when you are saving for retirement you do not have a need to draw any income so your focus should be on maximising your nest egg through 'growth' style assets or investments.

The majority of pre-retirees who use superannuation as a vehicle to provide an income in retirement will have exposure to managed or mutual funds through their superannuation provider. Most will use the superannuation provider's default investment option which typically is called a 'balanced' investment option with exposure to 'growth' style assets which include shares and property. This investment option may also have exposure to non-growth style investments like cash and fixed interest. Many industry and retail superannuation funds provide this type of investment option as a diversified approach for long term investment which helps to reduce risk and volatility. Many pre-retirees will adopt a more active approach to their investments by selecting stand alone investments to give them more exposure to different assets classes which are not available through a pre-mixed default option.

Retirement, however, introduces an additional need and that is the need to draw an ongoing income from your nest egg. If all your investments are in one bucket, then every time you take something out (monthly income) you face the risk of crystallising losses on that part of the investment which is in 'growth' assets like shares and property, if those assets experienced a downturn in market value.

In retirement you need at least 2 buckets to adopt a successful investment strategy in retirement. One to meet your short term income needs and the other to meet your medium to long term growth needs.

Once you have decided on how much you want to draw as an income you should consider putting around 3 years worth of income into a low risk investment option like cash (bucket 1). The rest of your money (bucket 2) can then be invested for medium to long term growth.

Your regular pension or income payments are then drawn only from bucket 1 (cash), giving you more peace of mind and confidence that your short term income needs can be met regardless of what happens with share or property prices. The money you place in bucket 1 may not earn as much as what you have in bucket 2 but it should not fall in value either.

Once you have started your income stream you should top up your cash option (bucket 1) with some of the gains or profits you make in bucket 2. This might be every 12 months but can be any time that bucket 2 has grown in value. Your aim is to maintain as close as possible to 3 years worth of income in bucket 1 at all times. What you need to avoid is taking any money out of bucket 2 if it has fallen in value because that means you may be crystallising loses on your investment.

With a 2 bucket investment strategy in retirement you will be able to successfully meet your short term income needs and medium to long term growth needs.

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Article Tags: bucket approach for retirement, investment strategies for retirement, Investment strategy for retirement, managing your super in retirement
Referred by: http://jaykubassek.com



Related Forum Posts
The Double Close/Escrow - Hello, I was in business for many years and have decided to buy another. Retirement isn't what it was cracked up to be. BITD if I needed a piece of equipment or bought another business I just put up 20 percent and the bank did the rest. I have been reading about another way however and hope some of you can fill in some blanks for me. What I am reading about is the double closing which uses a swing loan and an asset lender to purchase the assets of a business to use as the down payment. As below: 1.You arrange a swing loan for the down payment amount from the bank and give this to the seller. Supposedly after the paperwork this transfers title of the business and its assets to you. 2. In another room you have a second closing set up with a asset lender who loans you the amount of the swing loan which you use to pay off the swing loan. Now the asset based lender owns the assets as collateral for his loan and the seller is owner -financing the remaining balance. Now , I get a double escrow close in real estate circles but there are a couple of things about this business purchase situation that I don't understand. If the seller of the business is owner financing it and has the first lien what is his motivation to allow his assets to be used for collateral to the asset lender? Does the asset lender take a second lien on the asset loan he has just made( the down payment)? Or does it truly mean that during the first closing where the seller received the down payment that the right to do whatever I wanted with the assets was truly transferred to me and I can now give the asset lender a first lien position? This seems very strange to me but I continue to read about it in numerous places and the methodology never varies. Again, its been awhile since I did all this and we were much simpler back then. However, even then it took an act of God and Congress for any first lien holder to give up that position. Even for a very large down payment. Any help you guys and gals could give me would be greatly appreciated. All the Best!


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