Understanding the Bucket Approach to Retirement Planning
When it comes to preparing for retirement, the bucket approach is an effective strategy that can help you manage your funds wisely. This method divides your retirement savings into different buckets, each designed to meet specific needs based on time horizons and risk levels. By using this approach, you can navigate market volatility, ensure you have cash available for immediate needs, and still aim for long-term growth.
What is the Bucket Approach?
The bucket approach to retirement investing involves creating three distinct buckets:
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Short-Term Bucket: This bucket is for your immediate expenses and liquidity needs, covering the first few years of retirement. It typically includes cash, term deposits, and high-interest savings accounts. The risk level here is low, providing stability and ensuring you won’t have to sell volatile assets during market downturns.
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Medium-Term Bucket: Designed for expenses that will arise in the next few years, this bucket aims to generate moderate growth while still being relatively safe. It usually holds bonds, conservative ETFs, and dividend-paying shares. The risk level is moderate, offering some capital appreciation while minimising potential losses.
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Long-Term Bucket: This bucket is focused on growth and is intended to sustain your retirement over decades. It includes equities, real estate investment trusts (REITs), and growth-focused managed funds. The risk level here is high, as it aims to outpace inflation and grow your retirement wealth significantly.
Benefits of the Bucket Approach
The bucket strategy offers numerous advantages:
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Reduces Sequence of Return Risk: This means you’re less likely to suffer losses if the market dips soon after retirement, as your short-term needs are funded from stable assets.
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Ensures Liquidity: You have cash readily available for immediate needs, allowing you to avoid selling investments at a loss during market downturns.
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Balances Growth and Stability: The approach helps maintain long-term capital growth while preserving funds for near-term expenses.
Implementing the Bucket Strategy
To effectively implement the bucket strategy, follow these steps:
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Determine Your Retirement Expenses: Estimate your annual living costs along with any unexpected expenses you may encounter.
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Allocate Assets Accordingly: Divide your investments based on your time horizon and risk tolerance.
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Rebalance Periodically: Refill your short-term and medium-term buckets by selling assets from your long-term investments, particularly when markets are performing well.
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Adjust for Inflation: Ensure your portfolio maintains its purchasing power by gradually shifting funds as needed.
Examples to Illustrate the Bucket Approach
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Defining Your Defined Benefit Fund: For those with a defined benefit fund, your retirement income is determined by factors like salary and length of service, rather than market performance. This means less risk for you and a consistent income stream, allowing you to confidently allocate funds in your buckets without worrying about market fluctuations.
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Retirement Planning and Superannuation Advice: You may think retirement is far off or that saving enough seems impossible. However, our local retirement specialists have successfully helped clients retire early while maintaining their desired lifestyle. They create tailored bucket strategies that help ensure you have adequate funds throughout retirement.
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Your Complete Guide to Combining Super: If youve held various jobs, you might have multiple superannuation funds. While diversification sounds appealing, managing several funds can be cumbersome. ActOn Wealth offers strategic superannuation advice to combine these funds effectively, ensuring your bucket approach is streamlined and efficient.
Final Thoughts
The bucket approach provides a structured and disciplined method for managing withdrawals, market fluctuations, and ensuring long-term financial security. By implementing a well-diversified and risk-adjusted portfolio, you can enjoy peace of mind throughout your retirement years.
If youre looking for personalised financial advice, contact ActOn Wealth today. Our experts can help you develop a tailored bucket strategy that meets your unique retirement needs. Don’t leave your future to chance—let’s work together to secure your financial well-being.
