An effective retirement income strategy can help clients safely and confidently spend their super savings. Understanding the broad mechanics of some common retirement income strategies can help you better meet the needs of clients who are seeking sustainable and stable income, coupled with flexible access to their retirement savings when they need it.
Common approaches
A range of strategies are used across the marketplace, each varying in their complexity, ability to mitigate the unique risks of decumulation, and degree of personalisation.
Ranked in order of complexity and personalisation (lowest to highest), these include:
1 The same strategy & asset allocation as used in accumulation
2 A more conservative allocation
3 Safe withdrawal rate
4 Simple bucketing
5 Complex bucketing
6 Income layering.
What is Bucketing?
A bucketing strategy aims to help balance the need for ongoing income and capital growth throughout retirement by establishing and maintaining different pools of savings, each with their own purpose and liquidity needs. The aim is to generate capital growth while reducing the risk of having to sell investments when the market is down.
There are many variations, but a simple bucketing strategy might have three buckets:
• The short-term bucket. The liquid component from which your income is drawn. Invested for stability not growth and therefore immune from volatility
• The medium-term bucket. Balances need for stability with potential for medium term capital growth
• Long term bucket. Invested for long term growth, designed to mitigate longevity risk.
Positive returns from the long-term bucket are used to top-up or repair the short-term bucket. If the market falls, the aim is not to sell from this bucket.
Complex bucketing strategies would involve more buckets, tailored to specific financial objectives, and with a more dynamic top-up or repair process.
What is layering?
Whereas bucketing is more of an asset allocation strategy, layering is more dependent on different product solutions to deliver different layers of income.
These layers could include:
• The basic layer, which is about essential expenses (food, housing, utilities, transport)
• The contingency layer, which is about unexpected expenses, such as healthcare or home repairs
• The discretionary layer, which funds the nice to have assets and activities, and
• The legacy layer, to leave funds for family.
Product solutions typically supporting these strategies can include the age pension, account-based pension, term annuities and lifetime annuities (as well as the new era innovative income stream products).
Access our latest adviser research report.
Our latest adviser research report delves into the different aspects of retirement planning, identifying strategies to help navigate the decumulation phase and manage the associated risks. It provides a framework for developing your own retirement income philosophy aligned to your unique beliefs and business model and the needs of your client base.
To gain deeper insights and practical advice, download your free copy of "Towards a Retirement Income Philosophy" here.