Quiet Wealth Club 25

Calm investing, simple systems, real-life FI for normal people with busy lives.

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If you’ve ever tried to “calculate retirement”…you’ve probably run into the same dead end: “Use 4%.” Which is like saying:

“Just drive to Sydney.” …without telling you where the petrol stations are, what to do in a storm, or how to avoid running out in the middle of nowhere.

So today I want to discuss a topic that most people don’t go deeper on:

How do you actually fund retirement year by year, whether it’s early retirement or normal retirement?

The Squence Risk

The biggest risk of retirement funding is the Squence Risk, which is what happens when markets are down in the early retirement years and you still need money? Because if you’re forced to sell shares after a bad year just to pay bills…you can accidentally hurt your portfolio early. Let’s do the maths:

Two retirees. Same starting portfolio ($1M). Same withdrawals (4%). Same market returns.

Only difference: the bad years happen early vs late.

Scenario A: bad years first (sequence risk hits) : -20%, -10%, and 8 years of +10%

Year 1: -20% → $1,000,000 becomes $800,000 → then withdraw $40,000 → $760,000

Year 2: -10% → $760,000 becomes $684,000 → withdraw $40,000 → $644,000

After 10 years (with the same set of returns): you end around $923k.

Scenario B: bad years last: 8 years of +10%, -20%, -10%

After 10 years: you end around $1.138m. Outcome gap: about $215k (~23%).

The first 5-10 years are the danger zone, especially for early retirees.

So the goal of a retirement funding plan is simple:

Don’t force yourself to sell shares when they’re down in the first couple of years.

That’s it.

The Buckets

By understsanding that, now we can assign the retirement money different ‘jobs’:

Bucket 1: Pay-the-bills Money (1-2 years)

This is your spending (Baseline + Flex) - groceries, bills, insurance, school costs, holidays. Keep 2 years of the expected spending in cash. You pay yourself from here monthly, like a salary. Bucket 1’s job is to keep your life stable even if markets are messy.

Bucket 2: The Shock Absorber Money (3-7 years)

Bucket 2’s job is to stop you from selling shares when they’re on sale. It’s the money to refill Bucket 1 when markets are down, so you can leave Bucket 3 alone to recover.

What normally sits in Bucket 2?

• High quality bonds (note: bond ETFs don’t really ‘expire’ like an individual bond, and their prices will fall when interest rates rise)
• Term deposits/High-interest savings accounts

Bucket 3: The Growth Engine (the rest)

This bucket’s job is to grow over decades and beat inflation, which can include: - Global shares - Australian shares - Diversified Growth

The Operating Rules of the Buckets

These are directional, adjust based on your own situation:

Rule 1: You always pay yourself from Bucket 1

Rule 2: You refill Bucket 1 when it falls below 12 months

• if markets are up: refill Bucket 1 from Bucket 3 (sell a little growth after a good run)
• if markets are down: refill Bucket 1 from Bucket 2 (leave Bucket 3 alone)

Rule 3: Turn down Flex spending temporarily in a bad year.

Let’s run a quick example:

Let’s say your spending target is $80k/year.

• Baseline: $60k (bills, groceries, insurance, school costs etc.)
• Flex: $20k (travel, upgrades, fun money)

Now the buckets:

Bucket 1: Pay-the-bills + some joy (2 years of total spending) $160k in cash (2 × $80k)

Bucket 2: The shock absorber (4 years of baseline) $240k in defensive assets (4 × $60k)

Bucket 3: The growth engine (the rest)

Bad market year?

1. You still pay yourself from Bucket 1 (baseline + some flex)
2. You turn down flex first if the downturn continues (maybe $20k becomes $10k)
3. You refill Bucket 1 from Bucket 2 instead of selling shares
4. You leave Bucket 3 alone to recover

Good market year?

1. You skim gains from Bucket 3
2. Refill Bucket 2 and Bucket 1
3. You can increase Flex, but cap it so you don’t “lifestyle inflate” permanently

You may notice I skipped one major number: how much money can last you 30 or 45 years with $80k yearly spending. Bucket Strategy reduces the sequence risk, but they don’t change the basic equation. So for $80k average spending, you would need $2-$2.3M to start with for a 30-year retirement; $2.3-$2.7M for a 45-year retirement (early retirement).

But what about super?

Super is just the container.

Buckets are just jobs for your money. It’s not separate from the bucket strategy.

When you start an account-based pension, the money can still be invested (including in shares). However, you must withdraw a minimum amount each year.

Your pension withdrawals are the “tap” feeding your real-world buckets. If you withdraw more than you spend, you can either:

• top up Bucket 1 and Bucket 2 outside super, or
• invest the leftover outside super (because it’s already been forced out by the minimum)

You may ask: “At 65, should you move everything into pension phase?”

Not always.

1. Pension phase earnings are generally more tax-friendly.
2. But pension phase has minimum withdrawals, whether you need the cash or not
3. And there’s a transfer balance cap, so you can’t move unlimited amounts anyway

So move what you can (within your cap) into pension phase when it benefits you… …but keep your overall bucket plan intact.

If this feels useful but a bit “okay… now what?”, start here:

1. Work out your annual spending (baseline + flex)

2. Map what you own and where it’s sitting

My Cashflow Tracker helps with #1, and my Wealth Tracker helps with #2. I’ve bundled them together here.

Talk soon, Irene

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