Bucket system to protect super
Rice Warner gives the example of a member who retires at 65 with $500,000 and allocates a year’s drawdowns to cash, then 50% in a balanced portfolio to cover the next 10 years and 50% in high growth for the period thereafter. Then there is a market crash.
The correction results in a -15% return on the high-growth assets and -10% on the balanced portfolio.
The funds recover back to the base after three years.
After the recovery the cash portfolio earns 2.5%pa, the balanced portfolio earns 6%pa and high growth earns 8%pa.
As the graph shows, the simple bucket strategy of sticking to growth outperforms investing higher proportions of the portfolio in cash, as well as crystallising losses at the bottom of the market. This strategy sees the retiree through to 90.