Making your money last longer than you do
A wag once quipped that the best financial plan is one where you die with your last $5 still in your pocket. Well, if you are facing retirement it's better to try and not cut it that close! The majority of us have heard of a Bucket List but are we forgetting that a plan is needed to convert this important list into reality?
Sorry to shatter any dreams of expensive retirement trips around the world, but deciding on how to invest your savings when you are going to stop earning a full-time income is a challenge. Ultimately, you need to make sure your money doesn’t run out before you do.
Certainty is something we would all like in our financial fortunes – if you get it wrong or if the markets are unkind, time is not on your side as a retiree to rebuild your wealth. It’s one thing to make a bad investment decision in your 20s, quite another to lose money in your 60s!
On the other hand, you do need to protect what you have earned against inflation and the fact that we are living longer than ever. When the average life expectancy for someone in their 60s is more than 20 years away, putting your savings in a bank is rarely the right option.
This raises all-important questions, like how in the hell do you ensure you make your money last longer than you do and how do we make sure that when you need some money you have a smart place in which to draw it from?
Enter the Bucket Plan and more specifically the three magic buckets.
"It’s one thing to make a bad investment decision in your 20s, quite another to lose money in your 60s!"
Bucket Number One
For Bucket One set aside a sum of money to cover your short-term living expenses, usually two to three years’ worth of income. Place this in a bank account or cash management account and make sure that you will never need to sell quality assets at a depressed price. You use this account to pay for groceries, holidays, living expenses – it becomes your personal pay-office.
Bucket Number Two
Bucket Two is filled with another couple of years’ income. However, this is invested in a range of term deposits and bonds. It’s designed to be higher yielding but a little less accessible and certainly still conservative.
Bucket Number Three
Last but not least, Bucket Three holds the balance of your money. This is the money that needs to still be invested with a long-term eye to last longer than you do. Invest this into a diversified portfolio of growth assets such as Australian and international shares and property. Focus on assets that will provide a reliable income yield, without too much price variation.
This latter point is the key to successful retirement planning. You need to capture secure income even if this means investing in assets that can move up and down in value in the short term. We also need to protect against the cash crunch that happens if you need money in a downturn. Nobody wants to have to sell quality assets at a depressed price!
Telstra is a share that is a classic example, specifically the period from July 2005 to July 2013. At the beginning and end of this time its price was around $5.00 and it went as low as $2.60 at one point, nearly half that value. But if you didn’t look at the price, you would never know… Why? Because the dividend was a rock solid 28 cents per share, per annum, all the way through.
So, as you walk your own path of retirement these regular dividends from Bucket Three can be used to top up Bucket Two. This in turn is poured into Bucket One to ensure you always have a few years’ income available to you!