Approaching retirement? Add this to your bucket list

By Liz Maroney, Westlawn Wealth Adviser
SMSF Specialist Advisor™
15 March 2017

For many years, the accepted consensus was that as you approached retirement, you would switch your superannuation savings from growth assets such as shares into a more conservative allocation favouring cash and fixed interest. In today’s low interest rate environment, however, with at-call interest rates hovering around the miserly 2% mark for the foreseeable future, that may no longer be feasible.

Add to this the fact that with life expectancies increasing, our super savings will need to survive longer too.

It’s time to rethink the way we invest our funds during retirement.

So, how should we structure our investments if a paltry 2% return won’t keep up with inflation and investments weighted heavily in favour of shares could be hit for six in the event of another market downturn like the GFC of 2007-09?

The bucket strategy may just be the answer.

This concept was first developed back in the early 1980s by US financial planning guru, Harold Evensky. Back then, he called this approach the not-so-catchy ‘cash-flow reserve’.

In basic terms, here’s how the bucket strategy works.

You divide your accumulated super savings into three separate portfolios (or buckets metaphorically speaking). Each bucket holds appropriate investments to meet your specific needs over a particular time period.

For example, you might hold several years of income needs in at-call cash and term deposits, enough to provide you with a regular income and to cover your living expenses. We’ll call this bucket 1.

In your second bucket, you would hold medium-term income-producing assets such as government and corporate bonds.

And in your third bucket, you would invest in a diverse range of assets to provide growth over the longer term. These could include Australian and global shares, listed property trusts, infrastructure funds, managed funds and possibly even some alternative assets such as private equity and hedge funds (depending on your risk profile).

Harold Evensky – The Dean of Financial Planning

Harold Evensky, developed th bucket strategy for retirement savingsHarold Evensky is considered one of the top fee-only financial advisers in the United States. Morningstar CEO, Don Phillips, dubbed Evensky the ‘Dean of Financial Planning’.

Well known for his personal appearances to adviser organisations, he has addressed conferences in the US, Canada, Europe, Asia, South Africa, the UK and Australia.

Evensky is the author of two books, Long Term Health Care and Wealth Management.

Often quoted in financial trade publications, newspapers, and magazines, he is also a contributor to Financial Advisor Magazine and The Asian Financial Planning Journal, a research columnist for the Journal of Financial Planning, and a member of the editorial review board of the Journal of Financial Planning.


The general idea is that you would spend from your cash bucket and then replenish the cash as you spend it with a combination of income from your second and third buckets.

Same concept, different approaches

In an interview with Matt Coffina of the Morningstar StockInvestor newsletter, Morningstar’s director of personal finance, Christine Benz, explained that there are different ways to approach the bucket strategy.

Benz recommends her clients spend from bucket 1 each year and then top up the cash as it is drawn down. The cash bucket is replenished from a combination of income from share dividends and interest on bonds.

In a good year on the sharemarket, the retiree would sell down highly appreciated parts of their share portfolio. If bonds do better than shares, the retiree would sell down bonds. If neither bonds nor shares have a good year, the retiree might allow their cash bucket to be drawn down.

This differs somewhat from Evensky’s approach as Benz explains.

 “…Evensky reinvests all of his clients’ income distributions back into the long-term portfolio and relies strictly on rebalancing to meet living expenses. He doesn’t spend his clients’ bucket 1 cash on an ongoing basis – he only taps cash in years when both the stock and bond components of the portfolio are depressed.

“If there’s a unifying theme among the various approaches, it’s that the retiree always maintains a cash bucket. Having that liquidity can help avoid the trap of selling depressed assets in a down market, improving a portfolio’s longevity.”

The common advantage of using the bucket strategy is that it can provide retirees with peace of mind, particularly through periods of market volatility. Even if that volatility persists for several years. With the cash reserves of bucket 1, retirees will be much less likely to be forced into selling shares at heavily discounted prices during any market downturn.

Is the bucket strategy right for you?

Are you approaching retirement or already retired? Now’s the time to talk to Liz Maroney about preparing your portfolio. To discuss how you could benefit from the bucket strategy, contact us today:

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Westlawn Wealth Adviser, Liz Maroney is a ...

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