Investing in retirement: Balancing risk, income and longevity

In this video interview we’re tackling one of the biggest challenges facing retirees – how to invest once you’ve stopped working and started drawing down on your savings.

It’s easy to hear advice like “just de-risk your portfolio” or “live off the income and don’t touch the capital” — but the reality is far more complex. The wrong approach can leave you with less income, or even running out of money too soon.

To help us cut through the myths, we’re joined by Dr Geoff Warren, Research Fellow at The Conexus Institute and Honorary Associate Professor at the Australian National University. Geoff has done extensive research on investing in retirement and will help us explore the key trade-offs.

Our conversation covers the role investments play alongside the Age Pension and other income sources, whether and how retirees should reduce risk, the impact of sequencing risk, and different approaches such as income investing and bucketing strategies.

Transcript

Robert Barnes

A lot of advice for retirees sounds simple, things like just de-risk your portfolio or try to live off the income and don’t touch your capital. But the reality is much more complex, and the wrong approach can leave you worse off. To cut through the myths and look at what really matters, I’m joined today by Dr. Geoff Warren, research fellow at the Conexus Institute an Honorary Associate Professor at the ANU.

We’re going to talk today about investing in retirement. Can you talk a little bit about how it differs in the retirement phase versus what we see in the accumulation phase?

Geoff Warren

Yeah, certainly, Robert. The thing that happens at the point of retirement is your investments go from the objective of trying to accumulate as much wealth as you can while managing the risk you’re willing to take to get those additional returns into generating income for retirement. That changes the framing around what the investment services are required to do in the way you might look at them because they’re now supporting income generation. The other thing that happens is when you’re in drawdowns, you can incur sequencing risk, which we’ll talk about later. But that is also a reflection of the amount of investment risk you take.

Robert Barnes

What role do the investments themselves play in retirement?

Geoff Warren

I have a slide for this, which we’re just going to put up. This is my roadmap, if you like, for where the investments sit. And so the investments are sitting there in that black box at the top. And there’s two boxes underneath it. There’s the age pension at the bottom, and in the middle is lifetime income streams or annuities, which are products that you can buy, although not many do, may increase in the system going forward. And they work together to deliver income.

So the age pension feeds into the regular income you have to spend The lifetime income streams, you have some would add to that. Then what you’re doing is you’re doing a drawdown from your investments, which could be in the form of an account-based pension if you’re in super, to top up that regular income to get the total income you enjoy. So the investments are operating along with those other two components. And there’s a thing called the draw down strategy there, which we did another webinar on earlier. But there’s also another role that the investments plays that is not played by those other two boxes. And that is, they’re your flexibly accessible funds.

And so they’re there if you need them, but they’re also what’s left over for a bequest or an inheritance, when it when you actually leave this mortal coil when it comes to that.

Robert Barnes

It’s often thought that retirees should be derisking their portfolios. What’s your take on that?

Geoff Warren

Well, it seems intuitive at first glance, but it’s actually a lot more complex than I might see. You already mentioned complexity, and this is one area where not everything is as you see. The first problem is that de-risking your portfolio usually comes with lower returns. And what investments are doing is that they’re generating the returns in your portfolio. So if you actually cut back your risk and you end up with lower returns, the consequence of that is you’ll end up with lower ability to generate income over your period of retirement, which could last 10, 20, 30 years. So there’s a cost in doing so. In fact, there could be a risk that you actually don’t to sustain your income. There’s that risk. There’s a risk of running out may become greater if you de-risk. There’s a trade-off there. If you go into more defensive assets, you’re more likely to get the income stream you expect, but it’s going to be lower. If you go into risky assets, you’re more likely to get a higher income stream, but there is a chance to that things don’t work out and you get poor returns, and it actually ends up lower or the money runs out earlier.

You’ve got a trade-off there. It’s a risk-reward trade-off, but it’s around the income that can be generated from the assets. The other thing is that retirement is long term. As I said, 10, 20, 30 years. You’re really in the frame of investing for the long run, particularly earlier on in retirement. You’re going to think of it as long term investing and what extent that you want to reduce volatility given that you’re investing for the long run. Another thing What we consider, and it’s very much in that chart that we had previously, is that the investments are working together with other types of income insurance. There could be viewed as your defensive part of your income stream. For those who don’t have much in the way of assets, you have the age pension, and that acts as a low risk asset for you, a low risk source of income stream. That might actually say if that’s there and that’s a big part of overall mix, you might want to take more risk in your investments. The same thing you could also buy a lifetime income stream to guarantee some income and de-risk. There’s an argument here that there’s other ways that you could reduce your income risk and then go for a little bit more by investing more aggressively in your investments.

So again, when you look at it from a holistic perspective, it doesn’t necessarily lead to de-risking your investments. I might just give a little bit more weight to that by showing you what actually happens here. And these are just taking $100,000 invested at the point of retirement in three different options, a high growth fund, 90% growth, 10% defensive, a balanced fund, 60, 40, and a conservative fund, 30% growth and 70% defensive. The returns I’ve just simply put as 4, 2, 3, and 2. What it does is show the trajectory of the income you get, you’d expect to get, and also the balance you’d expect to get. Not surprisingly, the numbers are much higher if you invest more aggressively. By the way, the chart on the left assumes you drawing down at the minimum draw-down rules, which chunk up over time, so you get a saw-tooth pattern. That’s the cause of that. Now, this only shows part of the story, of course. It doesn’t show the volatility volatility around that or the variation around those paths. This shows the paths you can expect if you invest more aggressively, you get a higher income path and a higher balanced path in the red line, which is the high growth, and the lowest, of course, in the green line.

But what it doesn’t show you is the variation around those paths. Of course, in the red line, in the high growth is going to be a lot more variable. It could be higher, it could be lower. But there is actually a good argument that the chances of the red line working out lower than where the green line would be, that is the high growth being lower than the conservative portfolio is actually quite slim. There might be a 5% or 10% chance over the long run, but it’s not necessarily as high as it might seem. It tends to say that if you’re willing to take some risk, that you your income might be lower at the end of the day and not be sustained as long, if you’re willing to run that risk, then you might be saying to yourself, Well, I might as well go for a bit more and put it in take my chances and go into the more aggressive portfolio mix, the growth mix, or at least the balanced mix. This puts a good framing on why it’s important to think about what else you have there that might help ensure you against poor investment returns.

That’s the role that the age pension and potentially annuities can play. They give you the insurance in case the investment returns aren’t there. I would just back up, and as I said before, you got to You got to think of this holistically. You got to think about it as a combined solution rather than just looking at the investments in isolation. There’s also another thing that you might ask yourself in how much investment risk you take, and that is how much investment risk can I stomach? Some people get very nervous when they see their account going up and down. You may feel that when market decline comes, it looks very scary, that at that point you might actually feel like you want to sell out. Many people make a mistake of selling out at the wrong time. The other question to ask yourself is, how much tolerance do I have to burying that type of volatility in my balance? Can I live through it and stay the course?

Robert Barnes

You’ve touched on sequencing risk or what’s known as sequence of return effects. Can you expand a little bit more about what it is and what might retirees be able to do about it?

Geoff Warren

This is one of these things. It’s a bit complex, but it’s important to know that it’s there. I’m going to try and break it down to the essence of what sequencing risk is or sequence of return effects. That is that when you’re in drawdown from your asset, markets, you’re taking money out. If the market falls and you take money out, it can diminish your balance at a quicker rate. If you end up with a sequence of bad returns earlier on in retirement, you can find your balance disappears quite quickly. Let’s have a look at a chart here, and that might help explain it. I have to explain this chart a bit, but I think it captures the essence of what I’m talking The black line is a series, is based on investing $100,000, and it’s looking at the balance is remaining, and it’s designed so that given the sequence of returns and drawing a certain amount each year, $6,000 in this, the balance exactly runs out at age 95 in 30 years. It exactly arrived last year, 30 years. Now, what I’ve done is I’ve said, Okay, we’ve got this sequence of random I’ve done some returns in various orders, and I’ve reordered them.

The green line puts all the good returns first and all the bad returns at the end. If you go through that, what you’re doing is you’re drawing $6,000, but your balance keeps on going up because you’re getting good returns and it just keeps building up. What you find is that under this great example, if it happened, you’d end up with $150,000 and still get all the income. The red line is exactly the opposite. The worst returns occur first and the best returns occur last. But unfortunately, you never get them because your money runs out by the age about 74. That’s really bad. That’s like living through a major sustained fall equity markets for 5, 10, 15 years and just running your money out. There’s a few grey lines in between, and they’re all different reorderings of this sequence, just random reorderings of it to show that you can get it. There is actually a range So sequencing risk can actually impact the extent to which your balance lasts and how much income it can fund. And so it does matter. And one way What you’re thinking about it is it’s like an interaction effect. It’s the interaction between volatility in investment returns and the amount you’re drawing down.

If you draw down more, you’re more exposed to it. If If your balance is bigger, you’re more exposed to it. That’s usually just after the point of retirement because movements in returns matter more to the balance. If you draw a fixed amount, it also heightens the sequencing risk Because if you’re drawing a fixed amount and you end up with a bad investment return, so the amount you’ve got goes down, you’re drawing a higher portion of that amount.

Robert Barnes

I guess compounding also has an effect as well. If Looking at the ones where the best results are stacked at the front, they’re going to compound more as well because you’ve still got more in at the start. But this is fascinating. It’s fascinating. These are all just exactly the same, collectively the same returns is truly the order.

Geoff Warren

The order. It’s only the order is the only difference here. They’re all the same lot of 30-year returns just reordered.

Robert Barnes

Wow. The green one is unlikely to happen, but could happen, but so could the red.

Geoff Warren

That’s the one you got to worry about. How would you deal with that? Well, one thing is if you’re incurring that, you might have to cut back your spending. You wouldn’t spend 6,000. You say, well, my balance is down. I’m going to cut it back to three. There is a broader question about what you should do about sequencing sequencing risk. And that’s not altogether straightforward, because if you de-risk your portfolio, you go to a more defensive portfolio, you limit the amount of sequencing risk you’re exposed to, but it will have a cost of also allowing your income. What sequencing risk is doing is, I said there’s this trade-off between take more risk, higher expected income, and lower the aggressiveness of your portfolio, go more defensive, you end up with lower income. Sequencing risk is magnifying that effect in essence. If the solution to it is to de-risk, well, that has a cost because then you’re going to end up with lower income. Again, what it does is it brings you back to that initial trade-off I was talking about, and you just say the presence of sequencing risk heightens that trade-off rather than What does that necessarily means you should adjust your risk.

Robert Barnes

Just to give some peace of mind, realistically, that red line is probably impossible. We’re looking at 30 years worth of returns. There might have been five or six bad years, say. Statistically, that’s what’s happened in the last, say, 30 years. It’s only five or six negative years, I think. To have them all sequentially after each other hasn’t happened before. Before, they’re more likely to be dotted out through your entire 30-year retirement.

Geoff Warren

Is that right? Absolutely. That’s correct. It’s probably three of those four grey lines of what probably more close to the range you might expect to get. That’s the way it is. This is why it becomes then important to say, do I have some other insurance that I can rely on? Am I happy to live on the age pension? Do I have a lifetime income stream or an annuity there protecting me? Another thing you might consider is, do I have ageing parents who are going to leave me a big inheritance? But the mindset there is, do I need to worry about this and cut back my investment risk because I can’t afford to go through that scenario, or do I have some other form of making sure I’m okay, some other form of insurance?

Robert Barnes

What’s been the longest period of downtime in your knowledge? Sorry, in terms of negative There’s only… I mean, in the GFC, that was probably the worst. Was that? That was only a couple of years in a row that were negative?

Geoff Warren

No, that was not so bad, actually, in terms of time. By the way, sequencing risk is not so bad if the market goes down and goes straight back up. So COVID, who cares? GFC, a bit more worrying. What you’re really worrying about is periods like the ’70s where equities went down and sideways for a decade or more. In real terms, after inflation is what we’re talking about here, they’re very poor performance. Another example would be in US equities, took 13 years after the tech wreck in 2000 to recover for the returns to get you back to where you were. Another classic example is Japanese equities went nowhere for decades. There are other examples in history. So yes, it can happen. Don’t kick yourself a car. Is it likely? Probably not.

Robert Barnes

So retirement accounts in super are tax-free. At least that’s up to the transfer balance cap, which is currently 2 million. What implications are there for retirees because of that in terms of how they might invest?

Geoff Warren

The one simple answer is ranking credits are probably valuable unless something happens like the government changes the rules on that. The way I look at ranking credits is they’re like a potential return bonus you get in the form of the government writing retirees a check to give them back the value of the ranking credits. It’s a little bit more complex than that because the question you need to ask is whether those ranking credits are priced in the market, which is code for saying is that if I buy a high, a stock with a high fully-franked dividend yield, do I get lower returns, capital gains and so on? So there’s an offset. Most of the academic literature said, If there is an offset, it’s partial at best. I’d say, Yeah, definitely take them into account. Would I buy a stock purely because it offers high fully-franked dividends? No, I wouldn’t do that. That’s not the only reason you would buy the stock. You got to be comfortable. It’s a good company and it’s not overpriced and so on. But all things remaining the same, yes, I take up franking credits. That’s the main implication

Robert Barnes

Retirees can be particularly vulnerable to inflation and, of course, rises in the cost of living. We’ve seen that a lot recently. What are the implications in terms of investing in retirement because of that?

Geoff Warren

This is a really interesting one because most people say, Oh, inflation. It’s a real risk for retirees. If inflation goes up, they won’t be able to afford things and they’ll hurt. The question is, though, is what happens to your investments when inflation comes along? Because quite simply is, if inflation comes along and your asset prices go up in line with inflation, the spending power that you have in those assets hasn’t changed. Really, the question is, how would the asset you invested in perform if inflation comes along? Here there’s a lot of misconceptions and half-choose about how this operates. I might go to a slide He said, Yeah, and I’m just going to go through the experience of COVID. Now, that was one recent experience where inflation came along unexpectedly. Ultimately, central banks tightened the rate in inflation, and we had corrections in markets. The interesting thing during that period is that inflation hedges did not do very well. I’ll unpack why, but if we just look at the The chart, the table on the right there. These are Vanguard index funds. They’re just the return over December ’21 to December ’23. That’s basically 2022 was when central banks type in policy, and We’re looking here, rather than just looking at that period, we extended a little bit.

If you have a look at that, what I’m looking at in particular is the supposed inflation hedges, Australian inflation-linked bonds, inflation-protected bonds, if you want, global infrastructure and global and Australian property securities were all pretty poor performers and up there with Australian fixed income. But they’re all supposed to be inflation hedges. So they didn’t hedge inflation. So what’s going on here? If we look on the left here, that shows graphically what happened to that inflation-linked bonds over that period. Inflation spikes. This is the period circled in red. And then inflation-linked bonds get slammed, and they’re supposed to be bonds. Where’s all this risk coming from? This is the way I’d unpack it. When you buy an investment, quite often these inflation hedges have inflation hedge cash flows. Their cash flows adjust with inflation. But the problem is that interest Interest rates can also go up at the same time. That’s particularly likely to occur if the central bank comes out and tightens in response to inflation to rein it in. When interest rates go up, you can take losses in these assets to the extent they’re interest rate sensitive.

Inflation-linked bonds are very sensitive to the discount rate or the yield they trade on. They’re highly responsive to that, and that’s why they underperform. You get this small inflation adjustment relative to the big capital loss. Same happens with infrastructure, that can be interest rate sensitive. Same happens with property where the interest rate sensitivity is more through the fact that higher interest rates is usually bad for the property market. It’s complex. Don’t believe just something is because something has inflation in cash flows, it will necessarily hedge your asset. Interestingly, in this period, it was equities that provided the best protection of your wealth. But that could have been just because of the specific set of circumstances at the time. If you went back to the 1970s, which I referred to earlier, equities were not a very good inflation hedge at that period. It varies with equities. It There may or may not. I’d probably conclude from this, yes, inflation is a worry, definitely. It’s a lot harder to hedge than you might think. But don’t think that these things that people tell you are an inflation hedges That’s not necessarily going to do the job.

I think inflation is basically, it doesn’t work out well for retirees because most assets go down when inflation goes up. Perversely, the one that might hedge you is cash, and that depends on what happens to the central bank does. If the central banks come in and they high cash rates in line with inflation, remember, they lag doing it this time around, what happens is they’re keeping you at least, you might get a great return, but at least the value of your capital, let’s stay intact.

Robert Barnes

You mentioned at the start that investments not only play the role of generating income, but they also provide a source of accessible funds if needed. What are the implications of that?

Geoff Warren

That, I think, depends on why you need accessible funds. I’m just going to click over to this slide and talk about four reasons I can identify why you might want to have funds that you can access. The first one is just having funds for occasional spending, not covered by regular income. I’ll refer to this later as a rainy day fund, just in case you need it. My income is not covering this. I need to cover some medical expenses. I need to do a refurbishment. You might need it any time. I would argue that if that was the reason why you wanted the accessible funds, you probably might have invested in cash. You could just stop the values there and There if you need it. Another one is you want to relieve a request, access your funds upon death and pass it on to your kids or whatever. You’re going to need them much later, hopefully. Because it’s a long-term investment, you might be able to afford to take a bit more of a growth exposure there. You might want to use them for access to age care. Again, that’s going to be used much later if you need it at all.

It It’ll probably be less needy if you own a home because it’ll finance you into it. In that case, you might actually invest more aggressively, at least initially, and then maybe the risk later. Finally, you might just want to have accessible funds so you can change course, take opportunities or so on. If you lock yourself into a lifetime income stream, you don’t have that flexibility. If you have it in accessible funds, you do. You probably won’t need to change course immediately, and the benefit of that will reduce over time, but you might want to change at some stage and perhaps a more balanced approach is there. I’d say it’s important to have accessible funds, or at least some in the mix, but ask yourself, Why do I need it? Given that, why am I keeping funds accessible? Why do I need them? Then that might dictate where they should be invested.

Robert Barnes

There’s quite a mix here. I guess for some of it, the more defensive parts, you might not have it actually invested. You just might have access to that in your own bank account, for instance. I guess what I’m getting to is people are not going to have different sorts of investment. They’ll need to weigh up all of their needs, and then they’re not going to say, Well, I need this amount to be invested aggressively, this amount to be invested in a balanced way, etc. In your experience, do you find that retirees are thinking like that, or how do they weigh up all of these decisions?

Geoff Warren

That’s a very good question, Robert. Now, a first thing I would say in response to that question is, even though this is a SuperGuide webinar, what I’m referring to here applies to all your assets. It’s best to think holistically about all of them and super being part of that. What you have outside super matters and how you structure super may matter. You might want to keep your accessible funds in the bank account, for instance, just in case you need them. Subject, of course, that you probably tax-advantaged if you keep them in super. The other thing, how do people do it? One of the things that is what I call a behavioural The issue, perhaps a behavioural floor, is people tend to adopt narrow framing. Narrow framing means that you tend to look at everything in its frame itself. This is my investments. I’m going to think about how to invest them. This is my pension, that’s something else. This is my house, that’s something else. This is what I’ve got outside super in my bank account. This is something else. These are the shares I’ve got. And look at them all individually and make a decision for them.

I’d question whether that’s the most sensible thing to do, whether, in fact, you should be thinking about all the combined set of resources you can draw on. But one thing we’re going to talk about in a moment is bucketing strategies. And what that does is it uses that behavioural floor to your own advantage. It makes it easier for you to navigate. That’s probably how I’d answer that. But you’re touching on some really deep issues here. People generally have a tendency so you’ll look at everything in isolation. I’ll clear you whether that’s the sensible thing to do.

Robert Barnes

I guess it can really appear overwhelming. But yeah, what we’re trying to do is help to break down all of these elements for people. Many people argue that retirees, you often hear retirees should just live off the income and not touch their capital, so-called income investing. What’s your view on this? Do you think that’s a sensible approach?

Geoff Warren

It has advantages and disadvantages. I’ve listed them all here. It’s a fairly complex, two-wordy slide. You break all the rules if you want. I might just… You can ignore what’s on the page and just listen to me if you like, but I’ll break it down. On the arguments four, number four down the bottom there says, Can make sense if you’re wealthy and you want to build a request and not spend it all. If you’re that class, I don’t care about spending my money. I have plenty. I can easily afford I afford everything I want. I just want to keep my capital intact and pass it on, then income investing makes sense. The problem is that most people aren’t exactly like that. They’re saved for retirement, and for them to enjoy their retirement properly, they should be spending their assets, and living off the income does not do that. It means that you will die with your assets intact. That might not be what you want because you won’t get as much out of them. And in fact, that’s number two on the arguments it gets. In retirement, it’s actually quite dubious whether you should do this.

So you should be thinking about what do I need to draw down on some capital. And that means not just spending the income. It means spending some of the capital or capital gains. And the other thing that could happen, particularly if you’re in equities, if you buy shares and live off a dividend income and dividends go up over time and share prices go up over time, just think of the pattern you’re getting there. You’re getting increasing income, and most people show that they decrease what they spend through retirement, and you’re going to end up with more money when you die than you actually went into retirement with. And that pattern seems all wrong for somebody who wants to get the most out of their assets. So I’d say it’s quite dubious for somebody who’s trying to maximise the income they get out of their savings and enjoy them to the full There’s a couple of arguments for it as well. I’m dropping back and forth here. One of the key arguments for this is, again, it’s behavioural. It’s that if you just invest in something and just worry about the income and forget what happens to the price of the volatility, that can give you a lot of peace of mind.

The income is stable. It looks like you’re doing okay. I don’t care if the share price goes up and down. I’m not going to care if it goes down. I’ll just sit there and collect the dividend. There is a benefit in doing that. I’m not disparaging this. I’m just saying that does help some people out. Another positive is it limits the cost of investing. You’re not trading as much, so that does. If you pay capital gains tax, then it can limit that. The other thing is in equity markets, income investing, capture, franking credits, and quite often, companies that pay high dividends also happen to be good returns. Not always, but that’s the tendency. There are some positives in doing it. But the argument against this, well as a dubious strategy in retirement, which is number two. Number one says, who cares whether it’s income or capital gains? What does it matter? If you get it through capital gains and you need the income, we’ll just sell a bit of your shares. What’s the problem in doing that? Another problem is just sitting there and taking an income can never sell. I’ll just live off the income mentality is fine if everything goes That’s okay, but you could land yourself in a bad investment that doesn’t deliver and just continues to go down.

You could end up in a dividend trap, for instance. And that’s number four, high yields could be a warning sign as what’s known as a dividend trap. That is, it looks like a high yielding stock, but it’s on a high yield because the market knows something’s wrong and those dividends are going to go down and that company is in trouble. So high yields aren’t necessarily good. Bottom line is, I’d say, question whether it’s the right thing for you if you’re a retiree. You’re happy to build your wealth up or do you want to actually spend it? But otherwise, generally, there’s arguments for and against, but I wouldn’t let income investing dominate your thinking. I would do it with open minds, why you’re doing it and what it means and keep your eyes open because there might be a reason why you just need to change course on that investment.

Robert Barnes

I’m guessing it’s really a strategy for SMSFs anyway. It’s not something that you couldn’t go to AustralianSuper or a big super fund and just say, I just want to do dividend investing in retirement.

Geoff Warren

No, the dividends get put back into Australian super. If they pay the money out of your account, they effectively blend capital gains and income for you. It is largely an SMSF, and it is, I think, people who are wealthy enough who could just live off the income because the income is sufficient, well, they might be able to do it. But somebody with $200,000, $300,000 in their super or their total asset should be thinking about, and how do I use those best in retirement so I can enjoy my life? That’s what you should be thinking about, not just living off the income. Can I do better?

Robert Barnes

We touched upon bucketing strategies. Can you expand on those a little bit in terms of how they work in principle?

Geoff Warren

This is a basic, simple bucketing strategy. You could add extra buckets, which I might touch on at the end, but let Let me just explain how it works. It’s typical of what you see some financial planners recommending. There’s three buckets here. I’ll start at the left. One is a ready day bucket. That was available for occasional spending. That’s the one that could be invested in cash that you can dip into if you need to because it’s not going to be covered by regular income. The second is what you call an income bucket. What would be typical there is that you You put three to five years of income into that, and the idea is to draw that back at to fund your income, and it’s invested conservatively, so you’re pretty confident that you’ll have that enough to fund your income for the next three to five years. And then the rest, you say, All right, I’ve taken care of my income for the next three to five years. Let’s go for growth in the rest and then increase income for the long run. And that would be seeking capital appreciation. And they usually have with some rules, how do you top up the income bucket?

Maybe the rainy day bucket as well, but the income bucket, let’s say from the growth bucket. It’s usually rules such as if the market’s down, I don’t top it up or I top it up left. If the market’s up, I top it up fully. And what that does is that has a strategy for not selling out of, say, equities when the market’s down, you hold back a bit and then you top it up over time, ideally the market recovers. So the one way of looking at this is all those things put together in just your total portfolio. I like describing this as a behavioural sleight of hand that helps you out. The fact that you got that rainy day bucket there in an income bucket gives you the confidence to take additional growth exposure. You feel better about it. You feel better about it because I’ve got my immediate needs and my flexibility covered. The other thing you could do here is you could add on additional buckets Why? If you want to bequest, carve out a bequest bucket, for instance, or any particular purpose. It has another name. It’s goal-based investments. I’ve got particular goals, and I just slide my assets down through an investment in a way that helps me achieve that goal.

As I said, it’s a behavioural sleight of hand, but it can be a really useful one because as I mentioned earlier, people tend to indulge in narrow framing. This exploits narrow framing in a constructive way because it’s occurring within an integrated overall structure, a holistic view of what you should do with your assets. This is a good middle course between just looking at everything individually and looking at everything totally holistically. This is a way of joining those two extreme in the middle.

Robert Barnes

I think there are a couple of super funds that offer this, this structure. But that’s only two out of 100 or 50 odd superfunds around that. So that’s a shame. But maybe we’ll see more of these type of innovative products coming up in the next few years.

Geoff Warren

Yeah, we certainly should. The Conexus Institute, we’re an advocate for paving the way for the superfunds to provide rainy dark up buckets for their members. What would be ideal a policy change that exempts them from a minimum draw down rules and allow It allows people just to dip into it as they need. We think that would really help low balanced members who would rely on the age pension, and they really want to use their super as an additional source of funds if they need it. Maybe it’s up to a minimum of $50,000 or something, but I think that would be very useful, and that would be a useful use of bucketing.

Robert Barnes

So fantastic. Thanks so much, Geoff. I think this has been really useful, really eye-opening. So thanks again for all your time and input, and hopefully we’ll have another session with you again soon.

Geoff Warren

You’re most welcome. I just hope that I made a few people think about a few things.