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Using the “three-bucket approach”

When creating a retirement plan, it’s important to try to mitigate certain retirement-related risks while still providing for your lifestyle needs and wants. There are several strategies available to do this.

One such strategy is known as the ‘three-bucket approach’, which involves developing an investment portfolio with three buckets for the short-, medium- and long-term. The goal of these buckets is to balance the relationship between risk versus return, connecting each one to a specific time frame and cash flow requirements while still applying the principles of diversification and risk profiling.

Risk profiling considerations include:

  1. Your financial situation, goals and objectives
  2. The desire to match investment values with personal values
  3. The expected investment performance, time and tolerance/capacity for risk, and
  4. An understanding of investment fundamentals (such as risk/return, asset classes and diversification).

For example, you might break down the three buckets and time frames this way:

  • A short-term bucket with cash investment assets to fund your short-term lifestyle needs and wants, including expected lump sum withdrawals and income requirements over 1-3 years;
  • A medium-term bucket with other income-orientated investment assets such as fixed interest, to help provide an additional 1-3 years of income requirements; and
  • A long-term bucket with remaining assets, held with more risk-associated, growth-orientated investment assets such as property and shares in line with your risk profile for longer-term growth.

When following this method, one option is to replenish the short- and medium-term buckets over time through investment income and redemption of assets from the long-term bucket. This may occur:

  • Each year, when you review your financial situation, goals and objectives;
  • At the end of the 2- to 6-year period, or earlier if your short- and medium-term buckets are depleted sooner; or
  • Tactically, such as when the long-term bucket returns exceed certain benchmarks, or it appears overvalued.

The logic of the three-bucket approach is that regardless of the short-term performance of your investment portfolio, your expected lump sum withdrawals and income can continue without the forced sale – in possibly unfavourable conditions – of your more risk-associated, growth-orientated assets.

The three-bucket strategy may or may not be appropriate for you. A qualified financial planner can help you create a plan that’s based on your current financial situation, goals and objectives.

If you need assistance in preparing for retirement, contact our financial planning experts at Accru Midsec today.

 

Disclaimer: The information contained in this article is based on information believed to be accurate and reliable at the time of publication. To the extent permissible by law, neither we nor any of our related entities, employees, or directors gives any representation or warranty as to the reliability, accuracy or completeness of the information; or accepts any responsibility for any person acting, or refraining from acting, on the basis of information contained in this blog. This information is of a general nature only. It is not intended as personal advice and does not take into account the particular investment objectives, financial situation and needs of a particular investor. Before making an investment decision you should speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives, financial situation and needs.