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.


Rob Bourne has been involved in the financial services industry for over 35 years. As a practising financial adviser he focuses on the need for practical and down to earth financial education. The aim is to educate people through financial education so they can take control of their own financial future. Visit Rob's website here for more information on business opportunities, investing and financial education or the complete guide to superannuation a...

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