When planning for retirement, it is important to consider mitigating risk as well as providing for your desired retirement lifestyle. This is especially important now that many Australians are more concerned about protecting themselves from unfavourable economic shifts. Several strategies can be used but one popular approach to consider is the ‘three-bucket approach’ to retirement planning.
The ‘three-bucket approach’
The three-bucket approach looks at an investment portfolio with short, medium and long-term buckets. These buckets aim to leverage the relationship between risk versus return. They are pegged to specific time frames and cash flow requirements. The aim is to make your money last longer and give you the flexibility to make withdrawals for expenses such as travel. The team at APS Financial Planning use this strategy to help clients create financial balance and confidence in their retirement planning.
The short-term bucket
A short-term bucket includes cash investment assets that are used to fund lifestyle needs and wants. This includes regular income requirements or emergencies over the next 1-3 years. This bucket is not designed to provide investment returns, but rather cover short term expenses that aren’t covered by other income sources such as the pension. This bucket provides peace of mind that you can pay your short-term expenses without needing to sell any long-term investments.
The medium-term bucket
A medium-term bucket includes other conservative income orientated investment assets such as fixed-interest or a high-quality portfolio of assets such as bonds. This can assist in providing an additional 1-3 years of regular income requirements and is used to top up the short-term bucket.
The long-term bucket
The final bucket in the three-bucket approach is the long-term bucket. A long-term bucket is held with more risk. It includes growth-orientated investment assets such as property and shares. The assets in this bucket are not sold if the market declines and are held over the long-term and ride out any volatility. Essentially, this bucket will top up the medium-term bucket which will then top up the short-term bucket.
How Andrea uses the three-bucket approach
In 2019, Andrea contacted APS Financial Planning to discuss her retirement. She had been working all her life and was looking forward to spending more time with the grandkids and travelling. She was confident she had the financial resources to retire but worried about how another Global Financial Crisis (GFC) would impact her retirement plans. She had seen how previous economic downturns affected her friends and wanted to learn more about how this could be avoided.
During discussions with Andrea, it was made clear that no one can predict the next GFC or market crash, however, there are always strategies that can be used to lessen the impacts. The ‘three-bucket strategy’ was one idea to ensure that she has sufficient resources to meet her pension payments and travel plans, without putting these at risk. After discussing the details and testing the strategy, Andrea decided to implement a Three-Bucket Strategy with the support of APS Financial Planning.
Fast forward 12 months and Andrea continues to enjoy her retirement lifestyle. Despite the global pandemic, she has never been more confident in her finances. Whilst the COVID-19 has postponed her travel plans, she is enjoying the time to work in her garden and learning to love cooking again. Although some of her funds have been negatively impacted by the downturn, her bucket strategy has ensured that only her long-term bucket has been affected and this has the benefit of years to recover. Her short term needs remain covered by the defensive buckets, which are far less affected by the pandemic.
“of course I don’t like the impacts of the pandemic, but because of our careful planning I’m confident that this won’t change my retirement dreams.” – Andrea
Is the three-bucket approach right for me?
This three-bucket approach may or may not be right for you. Importantly, the team at APS Financial Planning can help you create an appropriate plan based on your financial situation, goals and objectives.