Three-bucket strategy for retirement
You’ve spent decades building your nest egg in KiwiSaver. Now that retirement is on the horizon, the big question is how to turn those hard-earned savings into a reliable and lasting income stream. It can feel overwhelming, but a simple and effective approach is the "three-bucket strategy” or “bucket strategy”.
This method is designed to provide you with peace of mind. It allows you to manage risk, stay flexible in the face of market changes, and ensure your savings last throughout your retirement journey. While every retirement is unique, our AMP advisers often use the bucket strategy to help members design a plan that fits their specific goals and comfort with risk.
What is the three-bucket strategy?
The three-bucket strategy in investing is a straightforward approach to managing your retirement savings, dividing your money into three separate “buckets”.
Each bucket is based on a different timeframe, or when you will need to access the money. This structure helps you balance the need for immediate income with the long-term growth of your investments.
How does it work?
The idea is simple: you create three separate buckets for your retirement savings based on when you’ll need the money.
To see how it works in practice, let's apply the three-bucket strategy to retirement savings invested in a KiwiSaver account.
Bucket 1: Short-term bucket
This bucket holds the money you’ll need for your immediate spending needs over the next one to two years.
Purpose
To provide stability and a predictable income source. This is the money you will draw down on first.
Fund type
A low-risk fund is best suited for this bucket. These funds make lower risk, relatively stable investments in assets like cash or government bonds, so your money tends to grow slowly but more consistently. It’s a safer, less volatile investment that can have fewer ups and downs.
Why it’s important
Because you’ll need this money soon, you can’t afford for its value to drop due to market volatility. This bucket acts as your financial buffer, giving you peace of mind that your essential expenses are covered, regardless of what the market is doing.
Bucket 2: Medium-term
This bucket holds the money you’ll likely need in the next three to seven years.
Purpose
To serve as a bridge between your short- and long-term needs, providing moderate growth while still managing risk.
Fund type
You could consider a medium-risk fund for this bucket. These funds typically hold a mix of assets in stable investments like cash funds and bonds, and higher-growth assets like shares and property.
Why it’s important
This is the bridge between safety and growth. A medium-risk fund offers better long-term returns than a low-risk fund but is less exposed to market volatility than a high-risk fund.
Bucket 3: Long-term
This bucket contains the money you won’t need to touch for seven years or more.
Purpose
To help your savings grow more over time so they last throughout your retirement.
Fund type
A high-risk fund is best suited for this bucket. These funds mainly focus on investing in high growth assets like shares or property.
Why it’s important
This bucket focuses on growing your wealth over the long run. With more time before you need it, you can take on more investment risk for the potential of higher returns.
What is the rebalancing process?
The bucket strategy is not a “set-it-and-forget-it” plan. The key to its success is an annual review and rebalancing.
Here’s how it works:
• As you draw down funds from Bucket 1 (the short-term bucket), it will gradually empty.
• You will then rebalance by moving funds from Bucket 2 (the medium-term bucket) into Bucket 1 to replenish it.
• If market conditions are favourable, you can also take some of the returns from Bucket 3 (the long-term bucket) to top up Bucket 2, ensuring your entire system stays on track.
Let's see how it works
Let’s imagine you’re a 65-year-old named Jane, who is ready to retire. She has $110,000 in her KiwiSaver.
Jane has figured out that after NZ Superannuation, she needs an extra $7,770 per year to live comfortably.
To set up her bucket strategy, an AMP adviser helps Jane divide her savings:
| Bucket 1: Short-term | Bucket 2: Medium-term | Bucket 3: Long-term |
|---|---|---|
| Allocation | ||
| $11,655 This is 1.5 years' worth of her living costs. | $68,842 This is 70% of her remaining balance. This is money for the next three to seven years. | $29,503 This is 30% of her remaining balance. This is money for the long term. |
| How it works | ||
| This bucket's primary purpose is to provide immediate, stable income. Jane can withdraw her $7,770 annual shortfall from this bucket. | The goal is for this bucket to grow, so that when the time comes to refill Bucket 1, there is a larger amount than was originally invested. This growth helps to offset inflation and ensures Jane has enough income for the next phase of her retirement. | The returns from this bucket will ultimately make up the bulk of Jane's shortfall in the later years of her retirement, replenishing Bucket 2 and, in turn, ensuring Bucket 1 is always topped up. |
The key takeaway?
The bucket strategy helps to protects Jane's everyday spending money from market ups and downs.
By taking her income from the short-term bucket, she avoids selling her long-term investments at a loss, which is a common mistake that causes people's savings to run out too soon. This simple plan helps her money last longer, so she can enjoy her retirement with confidence.
The example featured in this article is for illustration only. The right plan for you will depend on your own goals and comfort with risk. An AMP adviser can help you create a plan that fits your unique situation.