Given the interest in our last post on How Super Works: What You Need to Know About Superannuation, we’re adding another layer of practical advice for managing your super once you retire. Since many people assume they’ll simply withdraw their super and live off it in a bank account until it’s gone, it’s crucial to understand that this approach misses out on strategic options. With the bucket strategy, you can guarantee your funds last longer by balancing stability with growth.
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Understanding Accumulation and Pension Phases
As you approach retirement, your superannuation transitions from the accumulation phase—where it grows through contributions and investments—to the pension phase. In the pension phase, your super can be converted into an account-based pension, which offers tax-free investment earnings and pension payments for individuals aged 60 and over. This tax advantage ensures that more of your super supports your lifestyle in a tax-efficient manner. (Australian Taxation Office)
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Using the Bucket Strategy for Superannuation
The bucket strategy offers a way to make your super last by dividing it into three distinct “buckets,” each designed to meet different financial needs over time. As a result, this approach provides stability for short-term expenses, while also allowing for growth in the long term to keep up with inflation and market changes.
Breaking Down the Buckets
Bucket 1: Short-Term Stability (Years 1-3)
This bucket is specifically intended for your immediate income needs and is invested in low-risk, stable assets so that you have funds available regardless of market performance.
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- Investment Focus: Defensive assets, like term deposits, bonds, and cash.
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- Purpose: To give steady income and prevent the need to withdraw from growth-oriented investments during market downturns.
Bucket 2: Mid-Term Income (Years 4-7/10)
The second bucket covers mid-term expenses, providing a balance of stability and growth to meet needs beyond the short term.
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- Investment Focus: Moderate-risk, income-generating assets like dividend-paying shares.
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- Purpose: To support expenses in the mid-term while topping up Bucket 1 as necessary.
Bucket 3: Long-Term Growth (Beyond Year 10)
This bucket focuses on higher-growth investments intended to keep your super possible over the long haul.
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- Investment Focus: Growth assets like shares, with a longer time horizon to maximise returns.
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- Purpose: To replenish Bucket 2, ensuring funds last throughout retirement and keeping up with inflation.
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Example Models of the Bucket Strategy
To illustrate the flexibility of the Bucket Strategy, here are three models based on different risk profiles and income needs.
Example 1: Conservative Approach
For retirees who prioritise stability, this approach has a larger allocation in defensive assets.
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- Bucket 1 (Years 1-3): 40% in low-risk assets to cover immediate expenses
- Bucket 2 (Years 4-10): 35% in income-generating assets for balanced growth
- Bucket 3 (Long-Term Growth): 25% in conservative growth assets to limit exposure to market volatility
Example 2: Balanced Approach
This approach balances security and growth, ideal for retirees seeking moderate risk.
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- Bucket 1 (Years 1-3): 30% in cash and bonds for first security
- Bucket 2 (Years 4-10): 40% in diversified income assets to preserve growth
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- Bucket 3 (Long-Term Growth): 30% in growth assets for sustained gains
Example 3: Growth-Focused Approach
For retirees comfortable with higher risk, this model is designed for significant long-term growth.
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- Bucket 1 (Years 1-3): 20% in defensive assets for immediate income
- Bucket 2 (Years 4-10): 30% in balanced assets for mid-term needs
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- Bucket 3 (Long-Term Growth): 50% in growth assets to maximise potential long-term gains
Why the Bucket Strategy Works
The Bucket Strategy is an effective approach to managing retirement funds, particularly in the context of superannuation. By dividing assets into distinct “buckets” based on time horizons and risk profiles, retirees can achieve a balance between immediate income needs and long-term growth.
1. Minimise Market Risk
Allocating a part of your superannuation to low-risk investments, like cash or short-term bonds, ensures that funds are available for immediate expenses. This strategy protects against market volatility, reducing the need to sell growth assets during downturns. According to the Australian Taxation Office (ATO), superannuation funds in the retirement phase can gain from tax exemptions on investment earnings, enhancing the effectiveness of low-risk allocations.
2. Allow Growth
Investing in higher-growth assets, like equities, within the long-term bucket allows your superannuation to appreciate over time, helping to combat inflation and sustain your retirement lifestyle. The ATO notes that while investment earnings in the accumulation phase are taxed at 15%, they become tax-free in the retirement phase, depending on certain caps.
3. Adapt to Changes
Regularly rebalancing your buckets in response to market conditions or personal circumstances ensures that your investment strategy remains aligned with your financial goals. The ATO emphasizes the importance of planning for retirement by checking your super, estimating income needs, and considering how to increase your super.
For comprehensive guidance on superannuation regulations and tax benefits, refer to the ATO’s resources on super and planning for retirement.
FAQs
1. What is the Bucket Strategy in retirement planning?
The Bucket Strategy is a retirement planning approach that divides your superannuation or retirement savings into three “buckets” designated for short-, mid-, and long-term needs. This strategy helps manage market risk while ensuring stable income and long-term growth.
2. How does the Bucket Strategy help my superannuation last longer?
By allocating your super into three buckets with different risk profiles, you can guarantee steady income for immediate needs, moderate growth for mid-term expenses, and long-term growth for future needs. This approach lets you avoid withdrawing from growth-oriented investments during market downturns, which helps preserve your super.
3. What investments go into each bucket?
Bucket 1 (Short-Term): Defensive assets like term deposits, bonds, and cash to guarantee stable income
Bucket 2 (Mid-Term): Moderate-risk assets like dividend-paying shares for balanced growth and income
Bucket 3 (Long-Term): Growth assets like shares aimed at long-term appreciation.By allocating your super into three buckets with different risk profiles, you can guarantee steady income for immediate needs, moderate growth for mid-term expenses, and long-term growth for future needs. This approach lets you avoid withdrawing from growth-oriented investments during market downturns, which helps preserve your super.
4. What’s the difference between accumulation and pension phases in super?
In the accumulation phase, your super grows through contributions and investments. Once you reach preservation age and retire, you enter the pension phase, where your super can be rolled into an account-based pension. This transition reduces the tax rate from 15% to 0%, offering a tax-free income stream in retirement.
5. Is the Bucket Strategy suitable for everyone?
The Bucket Strategy is flexible enough to suit various risk preferences, but it’s always best to consult a financial adviser. An adviser can help tailor the bucket allocations based on your financial goals, risk tolerance, and retirement timeline.
6. How often should I rebalance my buckets?
Rebalancing your investment portfolio is essential to keep your desired risk level and investment strategy in retirement. The frequency of rebalancing depends on various factors, including market conditions, personal risk tolerance, and life changes. Common rebalancing strategies include time-based, threshold-based, or a combination of both. (Covenant Wealth Advisors)
For more information on making informed superannuation decisions, check out ASIC’s Moneysmart Super Guide, which offers tools and resources for Australian superannuation management.
Conclusion: Take Control of Your Retirement with Three Kings
Superannuation is a cornerstone of financial security in retirement.
Implementing the Bucket Strategy ensures your superannuation supports both immediate and long-term needs, offering peace of mind and the freedom to enjoy your retirement years.
At Three Kings Wealth Management, we specialise in tailoring retirement plans that align with your unique goals. Our skill in the Bucket Strategy can help you optimise your superannuation for a sustainable and fulfilling retirement.
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