The bucket approach to retirement income for New Zealanders

At Compound Wealth we empower retirees in New Zealand to navigate their financial futures with confidence. In this blog post, we'll explore the bucket investment approach—a strategic method designed to provide a steady income stream while maintaining long-term growth potential through careful asset allocation.

Understanding the Bucket Investment Approach

The bucket investment approach divides your retirement savings into distinct "buckets" or tiers, each fulfilling a specific purpose:

1. Short-term bucket (Cash and Cash Equivalents):

   • This bucket is reserved for funds needed for immediate expenses and emergencies.

   • Investments typically include low-risk assets such as savings accounts, term deposits, or short-term bonds.

   • The goal is to provide stability and liquidity, ensuring you have readily accessible funds without exposure to market volatility.

2. Medium-term bucket (Equities, Bonds and Fixed Income):

   • The medium-term bucket focuses on generating steady income over the next 5 to 10 years.

   • Investments are primarily in bonds and other fixed-income securities with a smaller allocation to equities.

   • This bucket aims to balance income generation with capital preservation, offering a reliable income stream while protecting against inflation.

3. Long-term bucket (Equities and Growth Assets):

   • Geared towards long-term growth, this bucket includes investments in stocks, real estate, and other growth-oriented assets.

   • These investments have the potential to outpace inflation and provide substantial returns over a horizon of 10 years or more.

   • The long-term bucket aims to maximize growth opportunities while acknowledging higher short-term volatility.

Strategic Rebalancing and Withdrawals

As you progress through retirement, strategic management of your buckets becomes crucial:

• Strategic Rebalancing: Regularly review and rebalance your portfolio to maintain the desired asset allocation across buckets. Adjustments ensure your investments align with changing financial goals, risk tolerance, and market conditions.

• Managing Withdrawals: By structuring your savings into distinct buckets, you can systematically withdraw funds according to your income needs. This method reduces the risk of selling investments during market downturns, thereby preserving your overall portfolio.

Practical Steps for Implementation

To effectively implement the bucket investment approach:

• Assess Your Financial Goals: Determine your income requirements and risk tolerance to establish appropriate allocations for each bucket.

• Diversify Your Investments: Select a diversified mix of assets within each bucket that reflects your risk profile and investment horizon.

• Regular Monitoring and Adjustment: Periodically review your portfolio to ensure it remains aligned with your retirement goals and market dynamics. Adjust allocations as necessary to optimize performance and manage risk.

• Consider Tax Efficiency: Evaluate the tax implications of your investments and optimize asset allocation to minimize taxes over time, especially considering New Zealand's tax regulations.

Conclusion

Planning for retirement demands foresight and strategic investment planning. The bucket investment approach offers retirees in New Zealand a structured framework to achieve both income stability and long-term growth potential. By harnessing the power of compounding returns and strategic asset allocation, you can build a robust retirement nest egg that meets your financial aspirations.

At Compound Wealth, we are dedicated to guiding you through the complexities of retirement planning. Whether you're beginning your journey or refining your investment strategy, our team is here to support you every step of the way.

If you are interesting in learning how Compound Wealth can help you to understand how much money you need for retirement or if you are after a comprehensive retirement plan, please complete our retirement planning quiz and book in a time to talk to Adam.

Disclaimer: This blog post is for informational purposes only and should not be construed as financial advice. Please consult with a qualified financial advisor before making any investment decisions.

Compound Wealth is a KiwiSaver, Retirement and Private Wealth Financial Advice Firm based in Mount Maunganui, Bay of Plenty with clients all over New Zealand.