Published: 03 Apr 2020
The current volatile market conditions as a result of the global COVID-19 (Coronavirus) situation have caused concerns for all investors, and particularly those who are retired or are nearing retirement.
Retirees and those nearing retirement are concerned about their financial security and whether they will have enough money in retirement given the impact of current global market falls on their investments.
Portfolio construction is never been more important than when you’ve retired, because you’ll want to ensure that your investments last as long as you do.
Your funds need to provide you with a retirement cash flow for 25 years or more, so a mix of investments — covering short-term, medium-term and long-term periods — can help to maximise opportunities and managing market volatility
In retirement it may be helpful to consider an approach where you set aside money for different needs, i.e. money you need in the short term (say for living expenses) you allocate to lower risk investments, money that you may want in three plus years, and also some investments which offer a slightly higher risk/reward profile. Picture this as a series of buckets – with each bucket having a particular purpose to meet your financial needs. This is often referred to as a bucket strategy.
A bucket strategy is a way of managing your income in retirement to help make the most of your super investment.
Even for people approaching retirement it's not too early to think about doing some pre-bucketing work. You don't want to start reorganising your asset allocation on day one of retirement.
Right now is a great example of where the bucket strategy can work for you. Having a reserve (bucket) of cash during the current market volatility means you are not drawing down from the growth assets when they have dropped and crystallised short term losses.
How does a bucket strategy work?
Immediate vs future needs
A bucket strategy means allocating the amount you need to live on in the immediate future in one ‘bucket’, with the remainder invested in medium-to long-term investments.
As an example, someone has $500,000 in super and they want to draw $30,000 a year from their super income stream. They might invest $60,000 to $90,000 in cash to cover their expenses for two or three years and invest the rest in other investments that may have a higher element of risk and return or volatility.
A clear advantage of the bucket strategy is that you’re not forced to sell a longer-term asset, such as property or shares, when the market is low just because you need cash to cover immediate living expenses.
Peace of mind portfolio construction
A bucket strategy can provide peace of mind when the markets become volatile.
You don’t need to panic when markets fall because they have their cash account for living expenses set up and that means they have more time to ride out a volatile market.
Providing they have enough cash, they can afford to wait for a reasonable recovery before selling another portion of their investments.
However, it’s not a set-and-forget strategy and investors should keep in touch with their financial adviser to monitor their portfolio construction so that nasty shocks can be avoided or minimised.
When is the right time to top up or create my buckets?
Of course, you need to top up your buckets over time. This is where the value of an adviser or expert can keep an eye on things, understand what expenses you have coming up and determine how and when to do this.
Importantly, if you are concerned about the current situation and you have cash reserves outside super, you have the option to reduce your pension payments for this year and next. The benefit is that you are preserving what you have in super. This works for no bucket strategies as well.
Buckets aren’t for everyone
There are some investors who may not be suited to using a bucket strategy. It’s not a one size fits all and can sometimes just not be right for everyone.
Those with a very conservative portfolio may also see less benefit from a bucket strategy,
It may not be a strategy for younger retirees as having too much in cash may mean they don’t get the return they require, particularly in these times of historically low interest rates.
What is important is to balance the need for helping you meet your everyday income needs, your lifestyle expenses and purchases as well as ensuring that your hard-earning money lasts as long as possible.
In considering these matters, think about whether your circumstances have changed and whether you require additional cash flow any time soon.
If you’re approaching retirement, please speak to one of our experts about how best to manage your income and what strategies will help manage your cash flow needs and help your savings last as long as possible.
If you don’t have a financial adviser, it might be a good idea to speak with one of our financial advisers provided through ESI Financial Services*. Depending on your needs, this may be at no cost to you. To arrange an appointment for a phone consultation, visit our website.
* Energy Super has appointed ESI Financial Services Pty Ltd (ESIFS) (ABN 93 101 428 782) (AFSL 224952), a wholly owned entity of Energy Super, to provide financial advisory services tomembers.
This article was prepared in March 2020 by Electricity Supply Industry Superannuation (Qld) Ltd (ABN 30 069 634 439) (AFSL 336567), the Trustee and Issuer of Energy Super (ABN 33 761 363 685), and may contain general financial advice which does not take into account your personal objectives, situations or needs. Before making a decision about Energy Super consider your financial requirements and read the Product Disclosure Statement, available at www.energysuper.com.au or by calling 1300 436 374.