Investors are often preoccupied with maximising their returns and growing their wealth, but they may not give enough thought to a critical aspect of their financial planning: retirement savings. Retirement planning is an essential component of wealth management, and it requires a comprehensive strategy that accounts for market volatility, inflation, and other factors that can erode one's savings over time. One retirement strategy that has been gaining popularity among financial experts is the bucketing strategy, which involves segmenting your retirement savings into different buckets based on time horizon and investment goals.
The bucketing strategy involves dividing your retirement savings into three or more buckets that correspond to different time horizons and investment goals. The first bucket is the short-term or cash bucket, which is intended to cover your living expenses for the next two to three years. This bucket should be invested in low-risk, liquid, and easily accessible assets such as cash, savings accounts, or short-term bonds. The second bucket is the medium-term or income bucket, which is intended to cover your living expenses for the next five to ten years. This bucket should be invested in moderate-risk assets such as dividend-paying stocks, bonds, and mutual funds that provide an income stream but also have some growth potential. The third bucket is the long-term or growth bucket, which is intended to cover your living expenses for the next ten or more years. This bucket should be invested in high-risk, high-growth assets such as stocks, mutual funds, and ETFs that have the potential for high returns but also come with higher volatility and risk.
The bucketing strategy provides several benefits, such as reducing the risk of market downturns, providing a steady income stream, and allowing for flexibility and adaptability in retirement planning. By having different buckets that correspond to different time horizons and investment goals, you can protect your short-term cash needs while still aiming for long-term growth and wealth preservation. This strategy also helps you avoid the common mistake of relying on a single asset class or investment vehicle to fund your retirement, which can expose you to significant risk and volatility.
However, the bucketing strategy may not be appropriate for all investors and may require certain assumptions and projections that may not be accurate. For example, the strategy assumes that you have a reliable and predictable income source that can cover your living expenses, which may not be the case for some who have large but unpredictable income streams such as from rental properties or business ventures. The strategy also assumes that your expenses will remain relatively stable over time and that you can accurately predict your future cash flow needs, which may not be realistic for everyone.
If you are interested in implementing a bucketing strategy for your retirement savings, it is essential to consult with a Financial Adviser who can help you evaluate your options and develop a customised plan that fits your specific needs and circumstances.
We'd love to help. Reach out.
Kylie Harding is an Investment Adviser who believes in free access to information about building financial literacy at every stage in life has the potential to empower women and inspire economies.
Contact Kylie today on [email protected] or 02 9998 4206.
