Tag Archives: Superannuation
Protecting retirement income from inflation
By Robert Wright /August 22,2025/
The fall in inflation from multi decade highs is good news for the Australian economy. Many retirees are struggling to manage their cost of living because of the cumulative impact inflation has had on their financial position.
Looking forward, retirees need a portfolio that is protected from inflation risks so that they don’t experience another cost of living crisis when inflation has another upturn.
Maintaining the long-term real value of investments
The key to a successful investment strategy is the ability to generate returns over the long term. Managing inflation is an important piece of the strategy. Long-term investments need to be able to generate a real rate of return that provides growth in the investment value. The investments do not need to capture short-term inflation changes, but they need to offset the impact of inflation over time. Assets that are expected to do this are generally referred to as ‘growth’ assets. To demonstrate this, we can look at the historical performance of assets over the long run1. Looking at Australian investment returns between 1900 – 2023, equities provided a return higher than inflation in 81 years which was 73% of the time. The one-year success rate for bonds and bills (cash) were lower, constrained by historical limits on bond yields. Both bonds and bills provided a one-year real return only 62% of the time in the same period.
The long run probabilities are shown in Figure 1. As the investment horizon extends out, up to 25 years, the probability of equities providing a real return increases. The higher returns on the investment eventually overcome any initial shortfall. Bond and bill investments show little improvement with a longer investment horizon2. At horizons of 20 years, the probability of delivering a positive real return from nominal bonds was only 60%. Historically, all investment horizons of 16 years (and longer) have provided a positive real return for Australian equities. While history does not provide a guarantee, the increase shown in Figure 1 should provide confidence that a long-term investment in equities will provide real capital growth. This analysis can be extended to diversified products such as a 70/30 growth fund (70% equities and 30% bonds) and a 50/50 balanced fund (50% equities and 50% bonds). These both show trend improvements over time, benefiting from the exposure to growth assets, but over longer periods. The 70/30 fund needed 20 years and the 50/50 fund 25 years historically to ensure the positive real return.
The portfolio comparison in retirement is important in the generation of income over longer periods. If income is taken as a set percentage of the balance than changes in income will directly link to market movements. Also, there are market linked annuities available in Australia where the capital is consumed but the income, which is paid for life, will be directly linked to the performance of the specified market or underlying investments. This paper provides a historical basis to consider the inflation protection provided by these income streams. Historical investment performance is not a reliable indicator of future performance, but it is worth considering the timeframe for recovery from historical shocks.
Figure 1: Historical probability of positive real returns, 1900-2023
Source: Calculations, based on data from Morningstar, S&P, Bloomberg and ABS
Inflation risk in retirement
Inflation is often called out as a risk in retirement that needs to be managed differently. Longevity and sequencing risks are also noted as being different, and these are not present in the accumulation phase. One of the challenges with managing inflation risk in retirement, is that inflation risk has a different impact on a portfolio in the retirement phase. Management of inflation risk in retirement needs a different approach. It is not just that capital needs to regain its real value, but every income payment needs to keep its value to maintain the target lifestyle of the retiree.
We can examine this difference by considering the outcome for someone who started to draw an income at the start of 1973. This was one of the worst years in the historical comparison where the inflation spike meant that any investment linked income would be falling in real terms in the first year. If a retiree’s income was linked to an investment, the real value would have declined for any of the three assets: Bills by 3.5%; Bonds by 26% and Equities by 30.7%. What happens over time is the recovery in the level of income. Income linked to equity performance briefly exceeds the original value in 1980 but dips again before maintaining real gains from 1983. Bills provide higher real income from 1985 while bonds will take until 1992. The 19 year impact on bonds highlights the exposure that nominal bonds have to inflation risks. The pattern for income linked to the different markets from 1973 can be seen in Figure 2.
Figure 2: Investment-linked income example
Source: Calculations, based on data from Morningstar, S&P, Bloomberg and ABS
There is more at stake for retirees. The impact is not just the length of time to recover the real capital value, but the income that is lost over that period. For the nine years that the real equity linked income is under the starting point, a retiree needs to reduce their lifestyle or run their capital down early. The shortfall is shown in Figure 3. It highlights the cumulative shortfall in income, relative to the initial lifestyle of the retiree. The starting point is where inflation risk creates an impact which might be after the start of retirement.
The shortfall highlights the extent of the impact from an inflation shock. The worst performance is from bonds, where more than 7 years of income (lifestyle) were lost over a 17-year period before a modest recovery. For equity-linked income, nearly three years of lifestyle were lost over nine years. While there was a strong recovery after, this is an average of a third of total spending that needs to be cut for an extended period. Cash investments took longer to fully recover, but the extent of the pain was not as large. The worst point is ten years after the shock, where the retiree has missed 1.7 years of real spending.
Figure 3: Cumulative shortfall in real incomes
Source: Challenger calculations, based on data from Morningstar, S&P, Bloomberg and ABS
The extended pain highlights why inflation risk is an additional risk to consider in retirement. It is not just the capital recovery, but it is the lost lifestyle that happens when an income stream does not keep pace with inflation. Retirees that choose a market linked income stream need to have the capacity to sustain a potential extended period of reduced lifestyle before they can enjoy an increased lifestyle later in retirement.
Payment profiles and income indexation
The analysis so far has highlighted how inflation shocks can impact a lifestyle based on an initial spending level. In practice, not all spending profiles are the same. The different approaches to generating income provide differing levels of starting income. Some differing options for indexation of an income stream include:
- CPI linked lifetime income
- Market linked lifetime income3
- Accelerated payments with market-linked lifetime income
A CPI linked lifetime income stream sustains the lifestyle of the retiree by adjusting their payments with changes in the cost of living. A market linked income stream uses an indirect approach, that requires market movements to exceed CPI inflation over time to maintain the lifestyle of the retiree. Accelerated payments are designed to smooth the income profile of market linked income streams. Recognising that payments are expected to grow over time, some of the income can be front-loaded by indexing the payments by a fixed percentage lower than the market return. This provides a higher starting payment that will grow more slowly. This fixed percentage is sometimes called the assumed investment rate (AIR). The analysis includes payments for an AIR of 2.5% p.a. and 5% p.a. The difference in the initial payment rates as shown in Figure 4 can be substantial.
Figure 4: Initial payment rates
Source: Challenger, as at 8 April 2024
Current rates provide a range of starting payments, per $100,000 of around $4,000 to $7,000 a year, for a 65 year old male. A market-linked lifetime annuity with a 5% AIR has payments starting at a rate 78% higher than one with no AIR. Over time the payments will increase by 5% less each year so over time the payments will cross over. This wedge is independent of market movements.
The paths for the 30 years from Dec 1993 to Dec 2023 can be seen in Figure 5. This shows the five-fold increase for payments that were linked to the accumulation performance of the S&P/ASX200 over that time. The 5% AIR hurdle provided the highest initial payment, but lower indexation meant that this would not have been the highest after 2004, only 11 years into retirement. The smaller increase in the payments with a 5% AIR would not have kept up with inflation from the initial payment level. It provided a flatter spending profile that declines in real terms.
Figure 5: Market-linked payments over time
Source: Challenger, S&PASX200
Dividend strategy
Another approach with an equity investment is to use only the dividend payments for retirement income. Dividend yields tend to be counter cyclical so dividends are not as volatile as share prices. The question is how well they keep up with inflation over time. Again, we can use the available historical data4 to see what might have happened. One difference is that none of the dividends are reinvested. When dividends are higher, a market linked strategy effectively reinvests the excess. A dividend strategy spends this excess which has an impact over longer horizons.
Another difference with a dividend strategy is the starting income levels. The starting income reflects the dividend yield available at the time, with no consumption of capital over time. The first challenge is to see if the dividends protect from inflation for the given starting level. Figure 6 highlights how the dividend strategy does not provide the same level of protection of an equity market-linked strategy. It begins with a 60% success rate, similar to the equities market linked strategy with a 5% AIR. Over time, the success rate improves, but it does not match an equity market linked strategy. Historically, dividend growth over 25 years was below inflation in 10% of the scenarios. The earliest in this sample was 1929-1954 and the latest was 1969-1994.
Figure 6: Inflation protection of a dividend strategy
Source: Challenger calculations, based on data from Morningstar, S&P, BHM, Bloomberg and ABS
The dividend strategy maintains the capital invested in the underlying equities so the income payments will be lower than what can be achieved if the capital is consumed over retirement. On average, the dividend yield has been 4.65% p.a. and is currently 5.2% including franking credits. Investors might expect inflation protection similar to an equity linked 5% AIR investment. In practice, the initial income is lower with a dividend strategy, but the lower income is better protected than the 5% AIR strategy. However, it can take a long time to catch up the initial income gap.
Another impact of maintaining the capital is that the dividend strategy does not increase payments at older ages. The comparison to market linked lifetime income streams is shown in Figure 7 which shows that only the market-linked strategy with a 5% AIR has a higher initial payment at age 65, but by age 75, the dividend strategy provides lower payments than any of the other strategies. This demonstrates that a dividend strategy supports a lower lifestyle than a strategy that will consume capital over time. Retirees are unable to maximise the money available to spend through retirement if they do not draw down on their capital.
Figure 7: Initial payment rates per $100,000 investment at different ages
Source: Challenger as at 8 April 2024 with calculations based on S&P data as at Dec 2023
Age Pension
Another consideration for retirees thinking about inflation protection is their entitlement to the Age Pension. Around two in three current retirees receive at least a partial Age Pension, and while this is likely to decline, a significant proportion of retirees will continue to receive some Age Pension in the future. The Age Pension provides an income stream that automatically increases with inflation. Over time, it will also increase with real wages growth, but the real wage declines in recent years mean that it is probably still several more years until the Age Pension will increase more than inflation. The mechanics of the Age Pension indexation can result in retirees receiving a partial Age Pension being over compensated. The full Age Pension payment is indexed and any means tested amounts are calculated relative to the new full payment. While earned income is likely to increase with inflation, the assets held by an asset tested pensioner might increase by less than inflation, or even fall. In this case, the proportionate increase in Age Pension payments might be higher than inflation reducing the need to fully protect a retirement portfolio from inflation. This protection is provided only up to the value of the Age Pension. If a retiree has any lifestyle requirements above the safety net provided by the Age Pension they need to be fully protected against inflation.
Conclusion
Protecting an investment portfolio from inflation can be an important concern for any investor. In retirement, the challenge increases as a retiree needs to protect their income stream to be able to sustain their lifestyle. While some investments can protect against inflation over the long run, market linked investments don’t necessarily protect an income stream from inflation over the short to medium term. Retirees who want to be able to maintain their lifestyle need the inflation protection that can be provided by a CPI linked income stream. The Age Pension will deliver some of this for retirees, but those with a lifestyle goal above the Age Pension’s safety net will need an additional source of inflation protected income.
1 The historical data in this paper comes from the Dimson, Marsh and Staunton dataset as provided by Morningstar. Recent data on indices relates to the S&P/ASX 200 Accumulation index, Bloomberg AusBond Composite 0+Yr Index and Bloomberg AusBond Bank Bill Index. Recent inflation data is the CPI sourced from the Australian Bureau of Statistics.
2 The majority of these periods were between 1933 and 1973 when bond yields were set by regulation.
3 Different market-linked options are available, but the initial payment is the same for each option.
4 Historical data is calculated as the difference between Accumulation and price returns in the BHM dataset: Brailsford, T., J. Handley & K. Maheswaran (2012) The historical equity risk premium in Australia: Post GFC and 128 years of data. Accounting and Finance Vol52.1 pp237-247. Franking credits have been included for the period post 1987
Source: Challenger
Federal Election 2025
By Robert Wright /May 23,2025/
During the Federal Election campaign, the Government made a number of election promises, which may impact your finances. There were also a number of support measures proposed in the recent Federal Budget. What could this mean for you?
These announcements are proposals only and may or may not be made law. The information below, including the policy details and proposed start dates, is based on the information announced as at 5 May 2025. You should speak to your financial adviser to discuss how these proposals could apply to you.
Election promises
Taxation
$1,000 instant tax deduction for work-related expenses, proposed from 1 July 2026.
What’s proposed?
Taxpayers who have eligible work-related expenses may be able to claim a tax deduction of up to $1,000 without having to keep individual receipts. It will still be possible to claim work-related expenses above this limit, however evidence will be needed.
Who could benefit?
The deduction will be available to people with ‘labour income’. This doesn’t include income from running a business or from investments, where the usual rules will continue to apply.
$20,000 small business instant asset write-off extension, proposed from: 1 July 2025 to 30 June 2026.
What’s proposed?
The higher instant asset write-off threshold of $20,000, which currently applies until 30 June 2025, is proposed to be extended for another 12 months until 30 June 2026. The threshold is available for more than one asset. Eligible businesses can continue to place assets valued at $20,000 or more into a depreciation pool, where a deduction of 15% can be claimed in the first income year and 30% thereafter.
Who could benefit?
Small businesses with an aggregated annual turnover below $10 million will be able to claim an immediate tax deduction for the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use by 30 June 2026.
Help for home buyers
Expanded ‘Help to Buy’ scheme, proposed from: to be confirmed.
What’s proposed?
The Government has proposed to expand access to the Help to Buy scheme to more home buyers by increasing the property price caps and income test thresholds, which determine eligibility to participate in the scheme.
The scheme is a shared equity scheme, which allows eligible home buyers to purchase a home with a smaller deposit, of as little as 2%. The Commonwealth will contribute up to 30% of the purchase price of an existing home and up to 40% of the purchase price of a new home.
The Help to Buy scheme is expected to open for applications later this year. Although the Federal Government has legislated the scheme, the States and Territories need to pass legislation for it to operate in each jurisdiction.
Who could benefit?
Increasing the income cap and property price caps will enable more people to participate in the scheme.
For singles, the income cap will increase from $90,000 to $100,000. For joint applicants (and single parents), the income cap will increase from $120,000 to $160,000.
The property price cap will depend on the location of the property and details can be found in the Government’s media release.
Participants must meet a number of eligibility rules and conditions, including repaying the Government when the home is sold or when certain changes occur in their circumstances. So it’s very important to understand the rights and responsibilities of participating in the scheme before making an application.
Previously announced measures
Cost of living support
The below proposals were announced by the Government in the March 2025 Federal Budget.
Energy bill relief extended for six months, proposed from: July 2025.
What’s proposed?
The Government will provide further energy rebates in addition to the bill credits people have received since July 2024. The rebate will be applied automatically to electricity bills between 1 July and 31 December 2025, in two quarterly instalments of $75.
Who could benefit?
All Australian households and eligible small businesses will receive the additional energy rebate. It’s expected the eligibility rules that apply to small businesses (quarterly power consumption) will not change.
Lower cap for PBS medicines, proposed from: January 2026.
What’s proposed?
The maximum cost of Pharmaceutical Benefits Scheme (PBS) medicines will decrease from $31.60 to $25 per script.
Who could benefit?
This will benefit people who don’t hold a concession card and would otherwise pay the maximum amount to fill a script. It doesn’t apply if the script is for a medicine not on the PBS, which may cost more than $25. Pensioners and Commonwealth concession cardholders will continue to pay the subsidised rate of $7.70 per PBS script until 1 January 2030. This is an existing measure.
Student loans to be cut by 20%, proposed from: 1 June 2025.
What’s proposed?
Student loans will be reduced by 20% before the annual indexation (at a rate of 3.2%) is applied on 1 June 2025.
Who could benefit?
The changes will benefit all people who have Higher Education Loan Program (HELP) Student Loans, VET Student Loans, Australian Apprenticeship Support Loans, Student Start-up Loans and Student Financial Supplement Scheme, based on their outstanding 1 June 2025 balance.
Importantly, voluntary loan repayments that are processed before 1 June will reduce the loan balance that’s indexed on 1 June. However, the 20% debt reduction will be applied to the 1 June balance. So if this proposal is legislated, before making a voluntary repayment, it’s worth doing the numbers to see if it’s best to make a voluntary repayment before or after the 20% reduction and indexation is applied on 1 June. The table below provides an example which shows the difference between making a $5,000 voluntary repayment before and after 1 June, where the outstanding debt balance is $30,000.
| Outstanding debt today | Voluntary repayment before 1 June | Loan balance on 1 June (after 20% reduction and indexation applied)
|
Voluntary repayment after 1 June | Outstanding balance |
| $30,000 | $0 | $24,768 | $5,000 | $19,768 |
| $30,000 | $5,000 | $20,640 | $0 | $20,640 |
Reduced student loan repayment obligations, proposed from: 1 July 2025.
What’s proposed?
The minimum income that can be earned before student loan repayments need to be made is proposed to increase. This is in addition to the standard indexation of the income repayment thresholds which ordinarily happens on 1 July each year. Also, the way repayments are calculated will be changed.
Who could benefit?
People with student debts will benefit from lower compulsory loan repayments in 2025/26 and beyond, if their ‘repayment income’ is above the minimum threshold at which loan repayments need to be made and less than $180,000.
The minimum income threshold is $54,435 in 2024/25 and will automatically increase to $56,156 on 1 July. Also, the Government has proposed:
- increasing the minimum income threshold to $67,000; and
- calculating repayments on just the repayment income earned above the income threshold, not on total income.
The list of qualifying student loans is the same as those to be eligible for the 20% debt reduction on 1 June 2025 (see above).
Expanded ‘First Home Guarantee’ program, proposed from: to be confirmed.
What’s proposed?
Help will be extended to all first home buyers under the Commonwealth’s First Home Guarantee Scheme. The scheme enables home buyers to purchase their first home with as little as a 5% deposit. The Government provides a guarantee for the remaining portion of the deposit (up to 15%), to ensure the first home buyer doesn’t pay Lenders Mortgage Insurance.
Currently, income limits and property price caps apply and access is only granted to a maximum of 10,000 eligible participants each year. These requirements are proposed to be removed, opening the scheme to all first home buyers.
Who could benefit?
The extension of the scheme may help first home buyers to purchase their first home sooner. It’s important to understand that purchasing a home with a smaller deposit may increase the total interest that is paid over the life of the loan.
Superannuation
The below measure was initially announced by the Government in 2023, with support reconfirmed in the 2023 Federal Budget. Legislation was introduced to Parliament to make this change law in 2024 but lapsed when the election was called. The Government will need to reintroduce and pass legislation in Parliament before this change can take effect. Given the complexity of the policy and the number of days that Parliament may sit between now and 1 July, we don’t know if the proposed start date will change if the policy is reintroduced.
Higher taxes for balances over $3 million, proposed from: 1 July 2025.
What’s proposed?
Where people have more than $3 million in super (both accumulation and retirement values) from 1 July 2026, higher taxes are to be paid on investment earnings, with payment due in the 2027 financial year.
Currently, investment earnings within the ‘accumulation phase’ of superannuation are taxed at a maximum rate of 15%. With a ‘retirement phase income stream’, such as an account-based pension once retired, investment earnings are generally tax free.
It’s proposed that from 1 July 2025, where a person has a ‘total super balance’ exceeding $3 million at the end of the financial year, an additional tax of 15% will apply to a portion of the investment earnings. The new tax will be called ‘Division 296 tax’, as that is the name of the relevant section of tax law where the proposed rules are covered.
Additional tax won’t be paid where the total super balance is less than $3 million on 30 June 2026 (the end of the first year it will apply) or the end of any following financial year.
Where to from here?
It’s important to remember these changes need to be legislated to become law. The information above is based on the announcements made to date, and there may be changes to the start dates or other details if the policies are formalised. You should speak to a financial adviser to understand more about what has been announced and how these changes could apply to you.
Source: MLC
Spouse super contributions – what are the benefits?
By Robert Wright /May 23,2025/
If your partner is earning a low income, working part-time, or currently unemployed, boosting their super could be a smart financial move for both of you.
When your partner isn’t earning much, or is out of work, their super might not be growing enough to support them in retirement. By contributing to their super, you may not only help them but also enjoy some tax benefits yourself.
We’ll explore how the spouse contributions tax offset works and how it differs from contribution splitting.
The spouse contributions tax offset
Are you eligible?
To be entitled to the spouse contributions tax offset:
- You need to make a non-concessional contribution to your spouse’s super. This means you add money from your after-tax income and don’t claim a tax deduction for it.
- You must be married or in a de facto relationship together and are not living apart or separately.
- You must both be Australian residents.
- Your spouse’s income should be $37,000 or less for the full tax offset, and under $40,000 for a partial tax offset.
- Your spouse is under 75 years of age, and their total superannuation balance is less than the general transfer balance cap ($1,900,000 for 2024-25) as at 30 June of the prior year.
What are the financial benefits?
If eligible, you can generally make a contribution to your spouse’s super fund and claim an 18% tax offset on up to $3,000 through your tax return.
To be eligible for the maximum tax offset, which works out to be $540, you need to contribute a minimum of $3,000 and your partner’s annual income needs to be $37,000 or less. If their income exceeds $37,000, you’re still eligible for a partial offset. However, once their income reaches $40,000, you’ll no longer be eligible for any offset, but can still make contributions on their behalf.
Are there limits to what can be contributed?
You can’t contribute more than your partner’s non-concessional contributions cap, which is $120,000 per year for everyone, noting any non-concessional contributions your partner may have already made.
However, if your partner is under 75 and eligible, they (or you) may be able to make up to three years of non-concessional contributions in a single income year, under bring-forward rules, which would allow a maximum contribution of up to $360,000.
Another thing to be aware of is that non-concessional contributions can’t be made once someone’s super balance reaches $1.9 million or above as at 30 June 2024. So you won’t be able to make a spouse contribution if your partner’s balance reaches that amount. There are also restrictions on the ability to trigger bring-forward rules for certain people with large super balances (more than $1.66 million in 2024-25).
There are also different super balance limits in place if you want to take advantage of the bring-forward rules.
How contributions splitting differs
Another way to increase your partner’s super is by splitting up to 85% of your concessional super contributions with them, which you either made or received in the previous financial year. Concessional super contributions can include employer and or salary-sacrifice contributions, as well as voluntary contributions you may have claimed a tax deduction for.
What rules apply for contribution splitting?
To be eligible for contributions splitting, your partner must be between age 60 (preservation age) and 65 (and not retired).
Are there limits to how much can be contributed?
Amounts you split from your super into your partner’s super will count toward your concessional contributions cap, which is $30,000 per year for everyone.
On top of this, unused cap amounts accrued in the last 5 years can also be contributed, if they’re eligible. Note, this broadly applies to people whose total super balance was less than $500,000 on 30 June of the previous financial year.
Do all super funds allow for this type of arrangement?
You’ll need to talk to your super fund to find out whether it offers contributions splitting, and it’s also worth asking whether there are any fees.
What else you and your partner should know
- If either of you exceeds super contribution caps, additional tax and penalties may apply.
- The value of your partner’s investment in super, like yours, can go up and down, so before making contributions, make sure you both understand any potential risks.
- The government sets rules about when you can access your super. Generally, you can access it when you’ve reached age 60 (preservation age) and retire.
- While you can’t personally make further non-concessional contributions into your super once you have a total super balance of $1.9 million or above (as at 30 June of the previous financial year), it’s still possible to make contributions to your partner’s super (noting the caps).
Where to go for more information
Your circumstances will play a big part in what you both decide to do. And, as the rules around spouse contributions and contributions splitting can be complex, it’s a good idea to chat to your financial adviser to make sure the approach you and your partner take is the right one.
Source: AMP
Using the bucket strategy to make your money last longer
By Robert Wright /February 28,2025/
How do you find the sweet spot between using your retirement savings to enjoy a comfortable standard of living, and investing so you won’t run out of money in the future? It’s a big question for many retirees.
Two in three retirees (69%) are concerned about running out of money in retirement, according to new research from Colonial First State (CFS)*.
A total of 41% said they sometimes felt so concerned about running out of money that it affected how they used their retirement savings and their current standard of living. A further 28% said this fear affected them significantly. Just one in three said they never worried about it.
With that in mind, it’s worth understanding what’s known as the ‘bucket strategy’ for how to manage your savings in retirement.
This strategy was conceived as a way for retirees to balance spending with the need to preserve capital and invest to grow your future retirement savings to last the distance.
How much you put into each bucket, and how you invest those buckets will depend on your level of retirement savings, the lifestyle you want in retirement, your risk appetite and any other income you may have. It’s worth getting financial advice to ensure this approach is right for you.
What is the bucket strategy?
Simply put, the bucket strategy involves keeping your money in different investment types designed to deliver short term, medium term and long term returns.
- Short term bucket: This is money you think you’ll need to access in the next one to three years. Consider keeping it in cash, such as high yield savings accounts or term deposits with staggered maturity dates.
This is money to live on and perhaps an emergency fund for those unexpected expenses, such as when your washing machine stops working or your car conks out.
There should be enough to get you through a market downturn if needed, so you don’t need to cash in higher growth investments and turn paper losses into real ones or sell units in your pension investment option when they may have experienced a short term drop in value.
Factor in any other income, such as the Age Pension if you receive it, or any work income, and set aside money to cover the rest.
- Medium term bucket: Consider holding money you may need in the next four to six years in income producing, relatively ‘safe’ assets like high quality bonds, fixed income investments, low risk, dividend paying stocks or a balanced pension investment option.
This bucket is designed to help your retirement savings keep pace with inflation. If you hold too much in cash, your retirement savings won’t grow very quickly.
- Long term bucket: This is the money you want to invest to grow over the long term. It can be kept in higher growth investment types that are often seen as higher risk, such as a growth pension investment option or growth shares.
This should be money you won’t need to touch for seven to 10 years, which gives it time to grow irrespective of any short term market volatility that may occur.
More than half your retirement savings may be generated from earnings on your pension investment option after you have retired^, so it’s worth quarantining a good amount in your long term bucket.
How does it work?
The bucket strategy is intended to balance the need to preserve your capital in retirement by putting some of your savings into low risk cash options.
This enables retirees to access income when you need it without dipping into higher growth investments that will grow your retirement savings over the long term and can therefore provide peace of mind about spending while also helping your retirement savings last longer.
It can be particularly beneficial in times of market volatility, such as if there is a market downturn, to prevent you having to sell higher risk investments at an inopportune time.
Keeping all your retirement savings in conservative investment options or cash that may not keep pace with inflation may be low risk but it won’t provide you with the best retirement outcomes over the long term.
As the funds in bucket 1 are used, consider topping it up from bucket 2, or even bucket 3, depending on market conditions, what you’re invested in, and how your investments are performing.
As mentioned, how much you put into each bucket, and how you invest those buckets will differ depending on your individual situation. It’s worth getting financial advice to ensure this approach is right for you.
And this strategy may require more active management of your retirement savings than some people may be comfortable with.
But the bucket strategy offers built in diversification by incorporating different investment types and time frames and can be useful for helping you decide how much to spend and how much to invest for the long term.
* Financial literacy and retirement study conducted between July and September 2024. Respondents included 834 retiree respondents.
^ Calculations by CFS. Projection starts at age 25 (with salary of $100,000), retirement at age 65 and super lasts until age 92. Superannuation earnings, tax on earnings, investment and administration fees, and yearly indexation of contributions and income stream payments, are based on the default assumptions used in ASIC’s Moneysmart calculator, available at moneysmart.gov.au as at August 2024.
Source: CFS