Ways to Draw Money Out

What if the hardest financial decisions don’t come when you're building wealth, but when you're spending it?

For retirees and those who are financially independent, navigating volatile markets can feel just as daunting as it does for those still accumulating assets. Instead of deciding when to buy, the key question becomes: when is the right time to sell? In this video we explore how a structured "bucket strategy" can help investors manage drawdowns with confidence, reduce emotional stress, and maintain long-term growth even when markets are uncertain.

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We also have plenty of clients who are fortunate enough to have retired or are financially independent, and they're doing the opposite - they're actually drawing money out of their super pension, pensions etc as in your own private pension - and in a reverse logic they have the same issue ie is it now a better time to sell to raise some money if prices are going lower, or should we wait?

So it's just it's the same emotions but in reverse, in terms of the direction of money as it's coming out of the portfolio not going in. But we still want to try to get good prices right? When you're going in you want to get the lowest prices - when you're coming out you want to get the highest prices. And so one strategy we use for a lot of clients is a bucket strategy.

For some of our clients who might not use that language, but effectively it's what's going on within their portfolio because we spread the money around in different investment areas, which broadly fit into 3 buckets. And so each bucket has a different purpose than a time frame. We've got a cash bucket, an income bucket and a growth bucket.

This is quite a good way to set up a a drawdown or a with a regular withdrawal process. The way it works is the first bucket is your cash bucket where you have maybe the first two years of drawings. So if you're drawing $50,000 a year to live off in your retirement, you might have $100,000 in the cash bucket.

The next bucket is the income bucket, which is what we call the medium term. So you might have the next three to five years worth of planned spending locked away in that bucket. So that if it was 50,000 a year, it would be $150,000 to $250,000 that you would park in the income bucket.

And then the last bucket is the long term bucket, so five years plus, and everything else goes in that bucket. Hopefully there's enough money in there to last you, if you've done the work and you've worked with your advisor or with me on the projections and the what ifs, then the chances are you're in good shape. That's why we're here, right? Because we want to take advice and try to do the right thing. And that's really where you put the growth assets, right? The stocks, the anything that's going to grow over time, but also has the most volatility along the way, and that volatility is what can hurt you in terms of the timing of when you want to take money out, just like we're talking about when you put money in as well, how can you mitigate that timing risk?

So effectively what the bucket strategy does is buy you time, because if it's a year in which shares share prices aren't great, then you don't have to sell the shares in the growth bucket because you've already ring fenced or farmed away at least five years of planned spending or drawing in the first two buckets, the cash bucket and the income bucket. And also you're also earning money while those two buckets are sitting there undrawn as well, because the income bucket is invested in perhaps some term deposits or fairly high quality bonds, and a bond is a promise to pay by someone other than a bank, right?

A term deposit you put your money with the bank, and in a year's time, you get an interest rate or an interest payment and your money back. A bond is a similar, partly similar structure where you place your money with the borrower like the Australian government, because they're spending more than they're taking in in taxes, as we know, or many other governments for that matter. And then in a certain period in the future, they'll give you your money back plus an interest rate. The reason that's attractive is usually you get a higher rate than just leaving your money in the bank, because you are taking a little bit of risk that the borrower or pay, so you're compensated for that risk, but the way we build these portfolios is to have high quality bond issuers. So you're giving your money to counterparties that are highly unlikely not to repay you. So first world governments or city governments, very large, high quality corporates with lots of cash flow, but you know they're part of their financing is borrowing money from investors like you.

So that's where we set the income bucket because you want to know that your cash and income bucket are going to be there no matter what. The growth bucket can do its thing, and so times like now where short term prices are down with the value of your investments, we don't need to touch that. In fact we've got a lot of breathing space if things get worse. We can lean on the cash and income bucket for many, many years.

And so hopefully for most of our clients, it takes away that anxiety, even though when you look at your account balance, you might see it dropping, it's only, as I mentioned before, you're only crystallising that loss in half dollars if you're selling the assets that are dropping in value. The idea is we're drawing from cash first bucket, and in good years when we've had a a strong return in shares or the growth bucket, whatever investments they are, is when we harvest some of that.

Again clients working with me would have heard me using that term take some profits off the table, harvest the shares, let's refill the other two buckets. And so the role of a proactive investment strategy, whether you're doing it yourself, or with an advisor is to regularly and periodically check the three buckets - and make sure that they're being refilled when the opportunity comes. In the last couple of years we've seen quite strong returns, so for most of our clients, we've been harvesting some of that growth and filling up the income bucket and the cash bucket where required. So it works really well from a sort of a a mental and a literally accounting point of view, because there are three buckets, right? You can see where your drawing is going to come from. As I mention you're not forced to sell off your good quality long term investments during times like now when shorter price shorter term share prices are dropping. So it it keeps your money growing and compounding because you don't need to touch it for a while.

It's important to regularly review it whether you're doing it yourself or working with an advisor. And you can tailor this ie you can have larger buckets, smaller buckets etc. So again, you know these things aren't perfect - you might have a bit more cash or conservative assets than you would otherwise. But again the idea is if this helps you stick to the plan and not abandon the whole investment strategy in our view that's worth a lot more than a few extra dollars. So that's just something to keep in mind.

The idea is to make your journey emotionally as smooth as possible, as well as hitting your financial goals. So that's a smart way, in our view, a systematic rules based approach to either putting money in with the dollar cost averaging plan or take your money out with the bucket strategy using three different buckets depending on market conditions. 

Thanks for watching!

Simon

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