Three Bucket Retirement Income Strategy Model #2

Here is my latest bates retirement income strategy model #2. You can check out retirement income strategy model #1 and compare them.Bates Retirement Income Strategy Model #2

As I learn more from my research I find the picture of what I need to do becomes clearer. So I have decided to revise my model and it is shown below.

This is what I think will work for me. It may not suit all Baby Boomers but I find simple diagrams and pictures give me a better understanding of what I need to achieve.

(A large diagram is displayed later in the Post)

The aim is to be able to manage my nest egg in retirement:

  • Rule #1 – Avoid Large Losses by using Stop Losses or other methods
  • Rule #2 – Minimize Fees and Charges
  • Maintain the Risk/Safe Asset Balance that I am comfortable with using the Teeter Totter Principle
  • Baby Boomers are Capital Preservationists first, then Investors
  • Ensure Risk-based Assets are managed separately from Safe Assets
  • Take Profits when I should and place into Safe Assets
  • Maintain an Income Ladder of Safe Investments that mature over time and can be rolled over it the cash is not needed
  • Legally Minimize taxes
  • Look for ways to Offset Inflation (This is still to be look at in detail)
  • Provide a reliable income stream regardless of Stock Market Volatility
  • Monitor the Nest Egg and use Otar Retirement Optimizer to make sure I am on track.
  • Have an Annuity Emergency Backup Plan if things go wrong.
  • Have a preference to invest in easily traded ETFs, Listed Stock Indexes and similar products rather than individual stocks.
  • Always remember history especially the Dotcom crash of 2000-2003 and how it affected Baby Boomers who retired then.

Here is my new diagram of my Retirement Income Strategy Model #2

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Explanation of how it all works (or is supposed to 😉

The diagram clearly shows Risk-based Assets are separate from Safe Assets. This is most important. You need to know how your risk-based assets are doing rather than have them “hidden” by the Safe Assets giving you an average return. This is how fund managers lull you into a false sense of security.

If risk-based assets fall sharply you need to know in plenty of time to take action. There is a Stop Loss you can adjust if you like. I would set it at no more than 10%. If you invest directly you may be able to set this automatically, if not you may need to talk to your financial planner or broker. This observes Rule # 1 – Avoid Large Losses in Retirement.

The Teeter Totter Principle helps you manage your exposure to risk-based assets and also keeps you on the right side of a trade. If you decide you are prepared to have 30% of your nest egg at risk then the Teeter Totter can help you maintain this.

If the Risk-Based Assets are making good profits then they will account for more than 30% of the nest egg. At regular intervals you will need to take profits and deposit them in the safe assets bucket to maintain your risk/safe asset mix of 30/70.

This is perhaps the opposite of what you did when you were working, which was to let profits run. Greed is NOT Good in Retirement – Thrift is. Now you should squirrel away some of the profits at regular intervals because you do not know when winter will come and more to the point, how bad it will be. So you need to plan for it. Taking profits regularly and keeping that money in a safe place helps you do that.

Nothing is fixed in concrete here though. If a bull market like 2003 returns and you have booked some good profits you might want to adjust your teeter totter to 40/60 and leave some profits in the markets. As long as you consider the risks and have protected your safe assets to keep you going if you are wrong, this is fine.

Note the bidirectional links between the risk-based assets and the safe assets and again between the safe assets and your cash at bank account. The first one is adjusted via the teeter totter periodically. The second is really up to you to decide how much cash you want on hand vs. getting higher interest on your money.

The Income Ladder is very important. With 70% of your money in safe assets you need to construct an income ladder of various safe investments that will give you higher returns than leaving all that money in a normal bank account.

The simplest way to do this would be to divide the money up into yearly pension amounts and invest the first amount for 1 year, the second for 2 years etc. It will take a little planning and reviewing what term deposits or other investments are on offer but it is definitely not something you need to pay a 2% fee to a financial planner to do for you. Diversifying into different financial institutions might be a good thing too for added safety. If you have mutual funds with a fund manager, doing it yourself can reduce your fees by 70% using the 30/70 teeter totter. That’s observing Rule #2 – Reduce Fees and Charges.

One thing I have tried to make obvious is the Nest Egg Drain. This is where all the costs to your nest egg drain into. Keeping an eye on the drain will help you focus on the main drainers from your nest egg. These are fees and charges, taxes and inflations. You need to have in place regular reviews of these drains on your nest egg. You might recall I strongly believe keeping costs down will have a more positive long term effect on your nest egg than increasing your risk-based exposure in the hope of higher returns to replenish your nest egg from the losses due to high costs.

Even the best laid plans can go astray. It maybe that even with good management of your nest egg it is reduced to a point where it may not survive you. That’s where you access the emergency survival annuity ladder. In such a case you may need to set up annuities that can pay you a regular pension. Annuities seems to be much more flexible today.

I don’t have too much knowledge of them yet. But I understand you can purchase annuities that are for a limited time only. Others you can get for life but that will still leave some of your nest egg to your kids. They should not be dismissed out of hand because of their bad reputation. They are just another tool to help you smooth your retirement income throughout your life.

This model is designed to get you thinking about how you can make your retirement nest egg work for you and provide you with a reliable stream of income without you having to decide each year whether you will be able to draw a pension that year because you don’t really know what is going on with your money. Being unsure you are likely to be overly cautious and the result will be you will be surviving in retirement – not living in retirement.

By the way I just noticed the pension isn’t going down the drain unless you are a gambler. On the diagram it might seem that way. It is just badly positioned. But at the same time it might be a caution to spend your pension wisely ;-(

I am a Baby Boomer in retirement. I am not a financial planner and do not offer financial advice. I do not have all the answers. I am working my way through the issues and coming up with my strategy. But I would welcome any comments from readers of my blog that will help me improve the model. So please comment away.

So take a look at my model. If it seems right for you discuss it with your trusted financial planner if you have one. Regardless you must get control of your nest egg and then much of the fear of the financial unknown will disappear.

3 Responses to “Three Bucket Retirement Income Strategy Model #2”

  1. Peter says:

    Hi David,

    If you have your Super funds in a flexible “Manager of Managers” type Super fund (is that what you call a WRAP fund?) you can change your “cash” to “at risk” ratio online within 24 hours. Obviously the cash component does not have as good a return as what you may be able to get outside (6% after tax versus 8-9% before tax) but it is ready to be re-invested when the market settles and you want to increase your at risk position again. With the availability of this flexibility, I wonder why more financial advisers did not suggest to their clients in Q4 2007 or Q1 2008 that it may be more prudent to move their nest egg to an all cash position until the markets settle – execute on a 10% stop loss. I think this is where the financial advisers have a real problem. Hyperthetically, if everyone moved their Super funds to an all cash position what would be the effect on the global financial markets? All those funds disappearing from Stocks, Property etc would have a devastating effect on the markets and create an even bigger panic. Is this the reason why 95% of financial advisers have to say “don’t panic – ride it out”?

    Cheers… Peter

  2. admin says:

    Peter,

    Again I was not aware of the Manager of Managers Fund and 24 hour cash option. I know my own WRAP Account when I had one took about three days to update the unit price!

    I assume it is a form of WRAP where they have all your money and just move it around within the WRAP Account.

    I agree with you on the moving money into cash – or at least reducing exposure to risk based assets.

    I have often thought about “What if everyone took a rational approach to the markets and pulled their money out when things were going bad” I came to the same conclusion. But I don’t think that is the reason for it.

    The primary aim of most funds is to increase the amount of money under management as that directly relates to the fees they get paid. That I believe is why they say “Buy and Hold” to us whilst they are feverishly trading our money within the Funds.

    The whole system might collapse if we all set stop losses at 10% as there would be no one to sell to. That is not likely to happen so Baby Boomers should be reasonably safe doing this in retirement I think in order to avoid large losses.

    David

  3. Peter says:

    Hi David,

    My “Manager of Managers” Super fund has about 25 Funds in which I can invest. Some Funds are premixed “balanced” funds with varying “cash” to “at risk” ratios which others are independent Fund Managers chosen on the basis of their performance. The individual Fund Managers can specialise in Australian Stocks, Global Stocks, certain types of Stocks or various Property based investments. Whichever individual Fund Manager has portions of my nest egg the overall Super Fund Manager is still getting fees based on the funds under management although the fees vary from one individual Fund to another.

    Each individual Fund Manager provides to the “Manager of Managers” its unit price on a daily basis – so today I will have access online to each of the 25 Fund Manager’s unit price as of the close of business yesterday. If I put in a change of distribution request amongst the 25 Fund Managers online on one business day it will be executed at the closing price for each Fund on the next business day. I have 4 free switches per year and after that each switch costs $39!

    This arrangement allows individual clients to quickly move to a low risk cash position in turbulent times without actually leaving the Super Fund. Once things settle down, clients can issue another switch to raise their “at risk” component to increase their capital gain.

    Cheers… Peter

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