The three-bucket approach is a straight-forward strategy to help retired and cash-flow-focused investors sustain their investment income and preserve their wealth through all market conditions.
Market volatility often strikes fear into the hearts’ of retirees and those that rely on their investment portfolios to meet or augment their cash flow needs. Pressure on assets prices during market downturns can sometimes result in negative outcomes for such investors, including:
- When the need arises to sell assets to generate cash flow or to meet spending needs, it may be at a loss or at a poor valuation level.
- Fixed income yields and rates can fall as central banks move to cut interest rates to spur economic growth, in turn reducing the income investors’ can expect to generate through bond coupon payments and/or GIC interest.
- Companies that pay dividends and distributions may need to reduce or suspend those payments in the face of challenging economic circumstances, putting income-focused investors’ cash flow at further risk of reduction.
In short, periods of heightened market volatility are an important reminder of the need to ensure that portfolios of cash-flow-focused investors are structured to meet the challenges of volatile or even extended bear markets. This can help prevent a need to change their lifestyles in the face of shrinking cash flow – or worse, face the ultimate risk of outliving their savings.
Shoring up your defences
Fortunately, there is a way to help ease income-focused investors’ minds when faced with the twin threat of lower asset prices and portfolio cash-flow generation during volatile markets: the three-bucket approach. So long as it’s aligned to their investment objectives and suitable given their risk profile, retirees and other cash-flow-focused investors may wish to leverage this approach to help ensure that they have enough income to provide for their short-term needs, while still growing their portfolio over the medium- and long-term:
Easy as 1-2-3:
An example of the three-bucket strategy using an initial investment of $1 million to generate required annual income of $50,000
The three buckets:
- Short term – Income (1-5 years): The short-term bucket holds cash and short-term investments for cash-flow withdrawals and emergency funds, while also helping to reduce the impact of short-term market volatility on the portfolio.
- Medium term – Buffer (6-10 years): Holds income-generating investments, including low-risk, low-volatility equities for stable capital gains. This bucket serves as a buffer between the cash bucket and the long-term growth bucket.
- Long term – Growth (10+ years): Holds growth-oriented equity funds, which are more volatile but offer higher potential for capital growth to sustain the portfolio for the later years of retirement.
The best defence is a good offence
Longer term, preserving your wealth benefits from a degree of growth in order to protect your portfolio from the impact of ongoing cash-flow demands, as well as the ravages of inflation. To do so, investors can use a well-structured and considered strategy that, if properly aligned to their investment objectives and risk profile, should help them ensure they meet their long-term cash-flow needs while still preserving their retirement nest egg.
Speak to us today to discuss how we can help you achieve your cash flow and investment needs with risk-appropriate strategies like the three-bucket approach.
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