Planning your financial situation ahead of time is the wisest way to go about your life. There is no doubt that everyone wants their retirement period to be as relaxing and enjoyable as possible. In this article, discover the little-known three-bucket approach to your retirement plan – and make wise decisions for your time off work.
First things first:
- You certainly don’t want to be constantly worrying about financial issues or how to make ends meet.
- During your retirement, you preferably want to rely on multiple sources of income. The more, the better.
- Of course, you will have your age pension and social security entitlements.
But your financial advisor can suggest other solutions that can help you with your wealth management.
One of these solutions is the three-bucket approach. Let’s take a look at the benefits of choosing this approach to plan your retirement investments.
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The three-bucket approach
This financial approach implies dividing your assets into three different buckets (short-term, medium and long-term). These ‘buckets’ will help you keep a balance between risk and return.
How do you segment your investments?
You can choose between two or more buckets, depending on your plan and investments. Usually, the buckets look like this:
- The CASH bucket includes your cash investments and will supply your short-term retirement lifestyle for the next year to two years.
- The STABLE bucket includes other income providing investments and will cover for an extra one to two years of retirement income.
- The GROWTH bucket will include the remaining income and will supply the risky investments, such as: property or shares.
Once you’ve segmented your asset, you will have to refill the first two buckets (cash and stable) with enough funds to cover for the next two to four years. This will keep you financially safe for a couple of years in case of lump sum withdrawals and regular pension payments.
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How often do you need to refill the buckets?
Of course, the period of time between these refills varies for everyone. But as a general rule, keep these three things in mind:
- At the end of your two to four year period, or even quickly if they get consumed sooner;
- Every year when you review your financial situation;
- Whenever the growth budget surpasses a certain reference point or when it seems overvalued.
How and why it works?
The reason why this approach works is because it provides financial safety over a long period of time while taking into account both the regular and unexpected expenses.
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In other words, the withdrawals and regular pension payments can be covered by the cash and stable bucket, reducing the need for risky financial moves.
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There are a lot of strategies and methods to help you prepare for retirement. This three-bucket approach allows you to organise your assets in advance with no risks involved, just careful planning.
When taking into account the three bucket approach for your retirement plan, your financial advisor will help you establish the recommended level of investment risk for you based on your short, medium and long-term financial goals.
It’s important to find the best financial advice before you make any decisions about your wealth and retirement investing. The professionals at Shuriken Wealth can help you with that. Give them a call!