Struggling to figure out which retirement strategy is right for you?
If you start investing your money early, you can avoid any retirement woes.
However, the type of investments you choose will also determine whether or not you will be comfortable in retirement.
What You Need To Know About The Bucket Strategy
The bucket strategy relies on a 3-pronged approach to help you generate income before you retire and make you retirement comfortable.
Your assets will be allocated to any one of the 3 buckets based on when you want to start the liquidation process.
The objective of this approach is to create a consistent income stream to use before retirement and for the rest of your life.
It’s a great way to structure your savings holistically and handle the market challenges in today’s world as well as meet your short and long term goals effortlessly.
The 3 buckets are labelled ‘Now’, ‘Soon’ and ‘Later’.
- NOW: The 1st bucket should cover your living expenses and any large emergencies in the 1st or 2nd year of retirement. This bucket has money in the bank. It should not be overfilled because there will be fewer returns and it will not keep up with the inflation rates.
- SOON: The 2nd bucket contains money that you might need to access soon. It covers your expenses through the 3rd to the 10th year of retirement. All the assets in this bucket should be invested for conservative growth. That way, you can count on higher returns than the 1st bucket and avoid any exposure to extreme movements in the market.
- LATER: The 3rd bucket is used for the final phase of your retirement. It is designed to guarantee long-term growth and also for legacy planning. With the first 2 buckets, you can invest in higher-growth opportunities and long term options with the 3rd bucket. For any married couples, the 3rd bucket should account for any changing income or taxation needs when one of the spouses passes away.
The bucket strategy is a great way to insulate your retirement portfolio from any longevity or sequence risk.
The sequence risk refers to earning negative or lower returns very early when withdrawing your retirement assets.
The longevity risk refers to outliving your savings.
It’s a great way to simplify your retirement plan but remember, the bucket strategy isn’t completely foolproof.
There are some pros and cons to consider before you divvy your investments.
The Pros Of The Bucket Strategy
1. Predictability And Peace Of Mind
You can count on more predictability and peace of mind.
Note, that self-doubt is a very bad disease when you are saving up for your retirement. That’s because it could lead to bad decisions which could hurt your investments in the long run.
With the bucket strategy, you can protect your retirement income and boost your confidence.
That’s because of the peace and predictability that comes with it.
You can also enjoy a clear picture of your whole retirement. You should be able to see immediately which bucket will be creating the best income for each segment of your life.
2. Generating Portfolio Growth
Thanks to the bucket strategy, you can tap your assets without hurting the portfolio growth.
If you don’t have a defined plan when drawing your assets during the retirement years, it’s very easy to liquidate them at the wrong moment.
Thanks to the bucket strategy, you can tap the investments with lower yields such as bonds and leave the stocks alone.
Consequently, you can also invest your stocks for long-term periods and avoid any temptations of reacting to the short-term losses or gains.
3. Easy To Construct Buckets
As mentioned, a bucket strategy can provide overall peace of mind.
Even better, it’s very easy to construct. For instance, there is no need to panic when the markets fall because you have enough time to ride out a volatile market.
As long as you have enough cash, you can wait for a reasonable recovery period before selling any other portion of your investments.
Of course, it’s not a strategy you can set and forget immediately.
You should always keep in touch with your financial advisor. That way, they can monitor your portfolio construction and avoid or minimise any nasty shocks.
The Cons Of The Bucket Strategy
1. An Accurate Determination Of Retirement Expenses
Any estimates for your retirement expenses should be accurate.
There is no guarantee that you will hit your retirement goals with any investment allocation.
One of the reasons why the bucket strategy might fail is underestimating your retirement expenses.
For the osteotherapy experts at Flex Osteopathy, it’s easy to underestimate things like health changes in you retirement years. “As we age, our health concerns change. Things like chronic joint or back pain increasingly become an issue. If you spend too much in retirement or fail to consider the impact of your new health needs as you age, it will derail your retirement regardless of the investment allocation or strategy you have in place.”
A proper estimation of your retirement expenses is the best way forward. That’s because the bucket strategy works when your withdrawal rates are sustainable.
2. Proper Discipline
If you want to generate a set return, you need to be disciplined.
Mostly, the bucket strategy speaks about allocation and not overall performance.
You must ensure that your bucket is structured to provide the predetermined rate of return to achieve your retirement goals.
For instance, if you are a little risk-averse, you might hold on to larger amounts of cash.
It will be a huge problem because the drag of the cash bucket will ultimately dampen the overall return. Eventually, there will be portfolio sustainability issues.
3. It Doesn’t Work For Everyone
Not everyone is suited to using the bucket strategy for their investment.
It’s the perfect strategy for people using the transition to retirement option.
According to the home loan lenders Credit Capital, having enough cash flow is imperative to this strategy. “It’s not the right strategy if you’re someone who will need to withdraw money from their superannuation fund while sacrificing their salary to get cash into the fund. It also doesn’t work if you still paying off your mortgage as you get closer to retiring.”
The bucket strategy here will not be effective because the person will be buying in and out of the same market.
Basically, they are recycling and restructuring their cash flow.
If you have a very conservative portfolio, you will not enjoy a lot of benefits from the bucket strategy. If you have too much money in cash, you will not get the return you need especially with there being low-interest rates.
Wondering if this is the right strategy for your retirement plan? Chat to a Wealth Path team member today.