The "Buckets" approach to managing your finances in retirement
Many individuals moving into retirement immediately adopt very defensive or conservative investment approaches - at the extreme limiting their investments to bank term deposits of varying maturities, and entirely losing their exposure to growth assets, despite the possibility of a retirement period of 20 to 30 years.
In contrast, the "buckets" approach involves segregating your short term term cash and longer term investments into different buckets - so that regardless of the short-term performance of your investment portfolio you can continue to make planned lump sum withdrawals and regular pension payments from the cash/liquid buckets without being forced to sell higher risk/growth assets at unfavourable prices.
There are many versions of the "buckets" approach and some research, together with discussion with your financial advisor, will usually be necessary to adopt an approach that suits your particular circumstances. The following provides a very general outline of the approach, purely as background.
Note that the actual allocation between buckets will vary in individual situations. It depends on many factors, including your appetite for risk, the portfolio return required, any personal views on investing, how much income you need as a percentage of your capital, and any issues arising from your other assets.
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Bucket 1All bucket approaches includes a "liquid asset" bucket - containing cash and short term bank deposits and bonds. For balanced investors we would typically recommend a minimum 2 to 3 years of living expenses - to calculate, sketch out your living expenses, adding lump sum requirements such as car replacements and holidays, and deduct stable income from external pensions. Some retirees might also include an emergency fund within Bucket 1 to address unanticipated expenses such as car repairs and specialist healthcare "gaps" that seem to have become endemic. As mentioned above, the logic of the bucket strategy is that regardless of the short-term performance of your investment pool, regular income payments can be drawn from the cash bucket without the forced sale of growth assets at unfavourable prices. |
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Bucket 2This bucket typically contains five or more years worth of living expenses, with a goal of income production and stability. Consequently, it will be dominated by high-quality fixed-income investments perhaps combined with blue chip dividend-paying equities. Balanced or conservative fund allocations are appropriate and income generated from this portion of the portfolio can be used to refill Bucket 1, as and when required. |
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Bucket 3The longest-term portion of the portfolio, the (growth) Bucket 3 holds the remaining balance of funds, invested in more risk-associated investments, such as property and equities, in accordance with your risk profile for longer term growth. |
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Bucket 4This is our own addition to the "bucket list"- should Tontine or similar investments ever become available and you want to put in place some significant "longevity insurance". |
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