Understanding the Bucket Strategy in Retirement

Retirement is your time to enjoy the freedom you've earned—whether that means travel, family, hobbies, or simply peace of mind. But one question often looms large: how do you make your super last?

The bucket strategy is one approach used to manage retirement income. While not suitable for everyone, it can help reduce the need to sell growth assets during market downturns—preserving your capital and providing greater income certainty.

This article explains how the bucket strategy works in general terms and outlines some important considerations if you're thinking about whether it’s right for you.

Important Note: This article is general in nature and does not consider your personal objectives, financial situation or needs. You should seek personal financial advice before making decisions about your super or retirement strategy.

What Is the Bucket Strategy?

The "bucket strategy" is a time-segmentation approach. It involves structuring your retirement assets across short-, medium-, and long-term investment options, often referred to as "buckets":

• Short-term (Cash bucket): Holds 1–2 years’ worth of income in cash or similar liquid assets to meet regular spending needs.

• Medium-term (Fixed income bucket): Contains 3–5 years of income in lower-risk investments, such as term deposits or bond funds, to provide stability and modest growth.

• Long-term (Growth bucket): Invested in assets like shares or property, designed to provide higher returns over a longer time horizon.

By keeping short-term income separate from long-term growth investments, you can reduce the need to sell volatile assets during market downturns. This may reduce sequencing risk—the risk that the timing of withdrawals will negatively impact your overall returns.

Can You Implement This Strategy with Your Super Fund?

Whether you can apply a bucket strategy depends on your super fund or retirement income stream provider. Some account-based pensions, especially those offered by industry super funds, may automatically draw income proportionately across all investment options. This can undermine a bucket approach if growth assets are sold at inopportune times.

More flexible structures, such as wrap platforms or self-managed superannuation funds (SMSFs), may allow you to specify where pension payments come from—enabling a more structured approach. Before acting, it’s important to review your fund’s features and consider whether the strategy aligns with your needs.

Tip: Check your fund’s Product Disclosure Statement (PDS) or speak with a licensed financial adviser to understand your drawdown options.

How Much Should Be Held in Cash?

There’s no one-size-fits-all answer, but a common approach is to hold 3–5 years’ worth of income across your short-term (cash) and medium-term (fixed income) buckets.

For example, if you anticipate spending $60,000 per year:

• Hold around $120,000 in cash (2 years),

• And $180,000 in fixed income (3 years),

• With the balance in long-term growth assets.

Some retirees also hold emergency funds outside super—typically 6 to 12 months of expenses in a personal savings account—though this depends on personal preferences and liquidity needs.

If you are still working and preparing for retirement, one approach is to direct new super contributions into a conservative or cash option to begin building your short-term buffer without triggering capital gains.

Rebalancing: Keeping the Buckets Full

Over time, the cash bucket is drawn down to meet living expenses. Rebalancing means replenishing it—ideally by selling growth assets during favourable market conditions.

If markets are down, you may defer rebalancing and continue drawing from the fixed income bucket. This helps avoid crystallising losses and gives time for growth assets to potentially recover.

Depending on your fund, interest and dividends may flow automatically into the cash bucket. This tends to be more feasible with wrap accounts or SMSFs, and less so with industry funds.

Note: Your rebalancing approach should consider your risk tolerance, liquidity needs, and the structure of your account. Annual reviews with a financial adviser can help ensure your strategy remains appropriate.

Centrelink Considerations

If you receive Age Pension or other income streams (like rent or annuities), the drawdown from your super may be lower.

For instance, if your retirement spending is $60,000 per year and the Age Pension provides $40,000, you only need to fund the $20,000 shortfall from your super. Your cash and fixed interest buckets, in this case, might only need to hold $100,000 (5 years of shortfall), not the full $300,000.

Be aware: changes to your super drawdown may affect your Age Pension entitlements. Always assess the Centrelink implications of any change to your income strategy.

A Different Way to View Risk

Traditionally, asset allocation is discussed in percentages—like 60/40 or 80/20 portfolios. The bucket strategy reframes this in terms of time. Rather than focusing purely on percentages, you segment your investments based on when you need the money.

This time-based approach may help some retirees feel more confident about staying invested for the long term. However, it's not appropriate for everyone, especially those with lower balances or limited cash flow flexibility.

Remember: investing always carries risks. Past performance is not a reliable indicator of future returns.

Product Matters: One Size Doesn’t Fit All

Not all super or pension products support the bucket strategy. Key considerations include:

• Flexibility of withdrawals: Can you choose which investment option your pension income is drawn from?

• Income allocation rules: Are income payments directed into your chosen bucket?

• Transaction features: Can you easily switch or rebalance within the fund?

• Fees and complexity: More flexible platforms may offer better bucket control but often come with higher fees and additional responsibilities.

SMSFs offer the most control, but also require trustees to meet legal obligations, including having an investment strategy, complying with the Sole Purpose Test, and documenting decisions.

Final Thoughts

The bucket strategy is not about maximising returns—it’s about managing risk, time, and income to support your lifestyle in retirement.

It can offer structure, discipline, and peace of mind, especially during market volatility. However, like any strategy, it requires ongoing management and may not suit all fund types or personal circumstances.

Before acting, seek personal financial advice from a licensed adviser who can assess whether this strategy is appropriate for you and help ensure it aligns with your goals, superannuation rules, and Centrelink implications.

Disclaimer

This article is general in nature and has been prepared without taking into account your objectives, financial situation or needs. Superannuation rules, tax laws and product features may change over time. Before acting on this information, you should consider its appropriateness in relation to your own circumstances, consult your super fund’s PDS, and seek personal financial advice from a qualified adviser.