For your clients: Making your cash work harder

The original buckets strategy

‘Cash Buckets’ refers to a retirement planning strategy which divides a retiree’s portfolio into three buckets: short, medium and long-term, putting the money into investments with corresponding time horizons to manage cash flows over time. Typically, the short-term bucket is placed in bank accounts and term deposits, however today’s low interest rates mean this bucket is probably not generating enough income to pay for expenses.

 

Today’s Cash Bucket has been hit by a double whammy – negligible interest rates combined with increasing household expenses (Australian Bureau of Statistics: Selected Living Cost Indexes, Australia, Consumer Price Index, September 2020.).

This calls for a new approach; one we’re calling ‘Cash Buckets 2.0’.

Cash Buckets 2.0

‘Cash Buckets 2.0’ is an approach where the first bucket (1-3 years) is divided into two buckets: one for expenses in Year 1 (‘Now’) and the other for expenses in Years 2 and 3 (‘Later’). The longer-term buckets contain investments with longer time horizons and correspondingly higher growth expectations, so they are outside the scope of this strategy.

Now Bucket: Designed to meet expenses for 12 months. We suggest this bucket is invested in bank accounts which can be immediately accessed at no cost, and short-term term deposits.

Later Bucket: With a 3-year time horizon, more investment risk can be taken in this bucket in order to increase the potential income. A professionally managed, diversified fund is an option.

Does this increase the risk?

To achieve a greater return, you must be prepared to accept more risk. However, there are ways that risk can be managed in an investment portfolio. It’s important to understand your risk tolerance, and ensure your investments match your risk tolerance. Speak to your financial adviser to find out more.

Case Study: what impact will this have on income?

We have compared two self-funded retiree investors’ portfolios. Both have set aside $60,000 per year for three years of their retirement. This is approximately equivalent to the ASFA Retirement Standard – Comfortable lifestyle for couples ($62,083 in September 2020).

Jack adopts the traditional approach to Cash Buckets, investing three years of expenses in cash and term deposits, generating a first-year return of 0.54%, or $975.

Jack Investment Allocation Amount Return
Year 1 Cash 50% $30,000 0.10% p.a.
  6-month term deposit 50% $30,000 0.40% p.a.
  Total return - 6 months     0.15% p.a.
Years 2 and 3 1-year term deposit 50% $60,000 0.70% p.a.
  2-year term deposit 50% $60,000 0.80% p.a.
  Total Return     0.75% p.a.
Total First Year Return $975 0.54% p.a.

Jill adopts the Cash Buckets 2.0 approach, investing in a combination of cash and term deposits for Year 1 and the Schroder Absolute Return Income Fund in Years 2 and 3. She has been able to increase her return in Year 1 by 0.83%, representing an additional $1,500 in income for the year.  

Jill Investment Allocation Amount Return
Now Cash 50% $30,000 0.10% p.a.
  6-month term deposit 50% $30,000 0.40% p.a.
  Return in Now Bucket     0.15% p.a.
Later Managed Fund
Schroder Absolute Return Income Fund (after fees return)

100%

$120,000

2.00% p.a.

 

Total first year return

 

$2,475

1.37% p.a.

For the purposes of this example, we have assumed that the Schroder Absolute Return Income Fund delivered a return, after fees of 2.00% p.a. based on the Fund’s after-fees performance target of 2.00% over the Reserve Bank of Australia (RBA) cash target. The Fund’s return, after fees, for the 1-year period to 30 November 2020 was 2.96%. You should be aware that past performance is not a reliable indicator of future performance and there is no assurance that the Schroder Absolute Return Income Fund will be able to achieve its performance target.

The Schroder Absolute Return Income Fund is an actively managed fixed income fund with a track record of meeting investor needs for reliable monthly income, while providing peace of mind that there is a strong focus on managing risk, should markets fall. 

There’s no doubt that achieving a satisfactory return in the current environment is challenging, however we believe there are strategies to help boost the return on a portfolio without materially increasing the risk.

To find out more about how to access income-producing investment opportunities speak to your financial adviser or visit schroders.com.au.

 

Opinions, estimates and projections in this article constitute the current judgement of the author(s) as at the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice.

In preparing this article, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us.

Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person.

This article does not contain, and should not be relied on as containing, any investment, accounting, legal or tax advice. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the relevant disclosure document for that fund to consider the appropriateness of the fund to your objectives, financial situation and needs. Any references to securities, sectors, regions and/or countries are for illustrative purposes only and are not to be construed as a recommendation to buy, sell or hold.

You should note that past performance is not a reliable indicator of future performance.

Schroders may record and monitor telephone calls for security, training and compliance purposes.

 

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This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.