How do you find the sweet spot between using your retirement savings to enjoy a comfortable standard of living, and investing so you won’t run out of money in the future? It’s a big question for many retirees.

Two in three retirees (69%) are concerned about running out of money in retirement, according to new research from Colonial First State (CFS)*.

A total of 41% said they sometimes felt so concerned about running out of money that it affected how they used their retirement savings and their current standard of living. A further 28% said this fear affected them significantly. Just one in three said they never worried about it.

With that in mind, it’s worth understanding what’s known as the ‘bucket strategy’ for how to manage your savings in retirement.

This strategy was conceived as a way for retirees to balance spending with the need to preserve capital and invest to grow your future retirement savings to last the distance.

How much you put into each bucket, and how you invest those buckets will depend on your level of retirement savings, the lifestyle you want in retirement, your risk appetite and any other income you may have. It’s worth getting financial advice to ensure this approach is right for you.

What is the bucket strategy?

Simply put, the bucket strategy involves keeping your money in different investment types designed to deliver short term, medium term and long term returns.

• Short term bucket: This is money you think you’ll need to access in the next one to three years. Consider keeping it in cash, such as high yield savings accounts or term deposits with staggered maturity dates.

This is money to live on and perhaps an emergency fund for those unexpected expenses, such as when your washing machine stops working or your car conks out.

There should be enough to get you through a market downturn if needed, so you don’t need to cash in higher growth investments and turn paper losses into real ones or sell units in your pension investment option when they may have experienced a short term drop in value.

Factor in any other income, such as the Age Pension if you receive it, or any work income, and set aside money to cover the rest.

• Medium term bucket: Consider holding money you may need in the next four to six years in income producing, relatively ‘safe’ assets like high quality bonds, fixed income investments, low risk, dividend paying stocks or a balanced pension investment option.

This bucket is designed to help your retirement savings keep pace with inflation. If you hold too much in cash, your retirement savings won’t grow very quickly.

• Long term bucket: This is the money you want to invest to grow over the long term. It can be kept in higher growth investment types that are often seen as higher risk, such as a growth pension investment option or growth shares.

This should be money you won’t need to touch for seven to 10 years, which gives it time to grow irrespective of any short term market volatility that may occur.

More than half your retirement savings may be generated from earnings on your pension investment option after you have retired^, so it’s worth quarantining a good amount in your long term bucket.

How does it work?

The bucket strategy is intended to balance the need to preserve your capital in retirement by putting some of your savings into low risk cash options.

This enables retirees to access income when you need it without dipping into higher growth investments that will grow your retirement savings over the long term and can therefore provide peace of mind about spending while also helping your retirement savings last longer.

It can be particularly beneficial in times of market volatility, such as if there is a market downturn, to prevent you having to sell higher risk investments at an inopportune time.

Keeping all your retirement savings in conservative investment options or cash that may not keep pace with inflation may be low risk but it won’t provide you with the best retirement outcomes over the long term.

As the funds in bucket 1 are used, consider topping it up from bucket 2, or even bucket 3, depending on market conditions, what you’re invested in, and how your investments are performing.

As mentioned, how much you put into each bucket, and how you invest those buckets will differ depending on your individual situation. It’s worth getting financial advice to ensure this approach is right for you.

And this strategy may require more active management of your retirement savings than some people may be comfortable with.

But the bucket strategy offers built in diversification by incorporating different investment types and time frames and can be useful for helping you decide how much to spend and how much to invest for the long term.

 

* Financial literacy and retirement study conducted between July and September 2024. Respondents included 834 retiree respondents.

^ Calculations by CFS. Projection starts at age 25 (with salary of $100,000), retirement at age 65 and super lasts until age 92.  Superannuation earnings, tax on earnings, investment and administration fees, and yearly indexation of contributions and income stream payments, are based on the default assumptions used in ASIC’s Moneysmart calculator, available at moneysmart.gov.au as at August 2024.

Source: CFS