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Trustees benefit from bucketing approach

Income bucketing strategies have proved effective for many SMSF trustees due to their ability to help retirees maintain a disciplined approach to investment while providing them with regular income payments.

Speaking at the SMSF Association 2016 National Conference in Adelaide today, Accurium associate actuary and SMSF technical services manager Melanie Dunn said a key risk for SMSFs in the pension phase was experiencing poor returns at the start of retirement when balances were at their largest.

The SMSF would still be drawing down regular payments, yet in poor years the fund would be required to realise assets that were lost in order to fund the pension standards, Dunn said.

“The key to the income bucketing strategy is securing cash flow for long enough that should there be a downturn, there’s sufficient time for growth assets to recover without being drawn on,” she said.

“If a key concern of your clients is sequencing risk, income bucketing looks to alleviate this by using assets that lock in future income payments.

“This protects growth assets from being drawn on should they experience poor returns.”

Instead of investing all of a trustee’s assets into a balanced portfolio, a bucketing strategy sets aside some of the assets in order to provide regular income payments over a certain number of years.

The remaining assets are then invested into cash and growth buckets to maximise potential returns over the period.

“They might experience greater volatility, but because they’re protected from being drawn on, they’re allowed sufficient time to recover,” she said.

“So the bucket strategy aims to improve the SMSF balance at the end of the term compared to the traditional strategy.”

Research conducted by Accurium showed income bucketing was likely to be effective for many SMSF trustees, and was also useful in regards to maintaining a savings plan as the income bucket provided them with sufficient regular income payments to meet their capital needs.

“The bucket strategy combines elements of both secured and self-managed investment strategies, and it’s quite a useful tool for aligning a client’s needs for cash-flow security with their desire for long-term growth potential,” Dunn said.

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