Three-tier approach to retirement

Running out of money in retirement is one of the biggest worries for retireees. A disciplined savings and investment strategy over your accumulating years determines how much you accumulate. Equally important is how and where you allocate your assets during your retired years.

If you have ample capital, you can afford to take more risks via a longer-term investment focus. However, if you need to draw more from your portfolio than the interest and dividends can produce and draw down on the capital over time, you ought not take so much risk. A large market correction in your first years of retirement can significantly affect how long your retirement savings last. This is commonly referred to as ‘sequencing risk’. With average returns or better in your first decade of retirement, your capital is more likely to last than if you experience below average returns in those early years. So, accumulating enough capital and drawing commensurate income is just part of the challenge.

Carefully structuring your investments for reliable income in retirement is important so you’re able to ‘stay the journey’ when your long-term investments fluctuate in value. Wealth can easily be destroyed by panic selling at a bad time. At Wotherspoon Wealth, we use the underlying philosophy of a ‘three-tier approach’ to construct our retirement portfolios. It’s a way of providing reliable income while encouraging the patience to stay the course when the value of your long-term growth investments fluctuate. Essentially, this ‘three-tier approach’ seeks to allocate at least 4 to 5 years of your income needs to capital stable, income-producing investments, and holding the rest in long-term capital growth investments so they remain untouched long enough to perform well.

The three-tiered retirement portfolio approach: 

The amount held in each tier depends on how much retirement capital you have, how much you need for annual living costs and your tolerance to investment risk. In normal and bullish markets, income would flow as shown and top-ups can be made by taking profit from the long-term portfolio (tier 3). But when markets turn negative, the long-term portfolio can be left untouched while any top-up income requirements can be met by drawing down on capital reserves (tier 2). This protects your long-term assets until the market recovers. It may even be prudent to use some capital reserves to add to the long term portfolio at times when prices are extraordinarily low. This all takes courage but having capital reserves makes that courage easier to find. It’s also a time where a good adviser can add significant value.

Tier 1: SHORT TERM LIQUIDITY (Portfolio Cash)

Set aside your short term spending needs (1 year) as liquid cash in a portfolio account and draw your regular income from here – usually a monthly direct credit into your daily living account (like a regular salary). This portfolio account acts as your central cash hub, into which all investment income from the rest of the portfolio is deposited. This regularly replenishes the account after living cost withdrawals. If your spending exceeds in-flowing portfolio income, top-ups can be made by drawing on capital reserves or taking profit from performing assets held in tier 3.


This is a reliable top-up reserve from which to replenish your Tier 1 cash. It should hold about 4 years of ‘top-up’ amounts. This ensures your long-term portfolio can last at least 5 years (1+4) before any growth-oriented investments need to be redeemed. That ‘elbow room’ allows longer-term growth investments time to recover from market dips along the way. In that way any selling is done at more ‘opportune’ prices to minimise self-destructive, emotional investment decisions.

These capital reserves should be invested in capital stable assets like term deposits, bonds and interest bearing securities – assets that don’t fluctuate in value much over a year or so, meanwhile earning enough to buffer against inflation.

When your portfolio cash needs replenishing (if withdrawals exceed income flows), redeem capital reserve investments to replenish it. Replace your Capital Reserves in times of plenty.


Invest the rest of your capital for the longer term (5 years or more) in growth-oriented investments. These include shares, property and infrastructure assets, which can fluctuate in value but offer potentially higher longer term returns. Growth assets play an important role for most retirees as they usually grow your capital as well as income. This is vital to help your capital last over your retired years. Some cash and fixed interest investments can also be held here, depending on your risk/return preference and market circumstances.

Three-tier advantage?

This tiered approach gives you peace of mind and more investing predictability with a clearer overall retirement picture. It allows you to stay the course and manage your emotions during times of financial drought. It’s a method that can over-arch your portfolio asset allocation strategy and complement your personal circumstances.

Obviously, the strategy relies on accurate assessment of your sustainable retirement expenses. It also relies on your overall portfolio asset allocation being able to generate the required return to match your retirement needs.

Regularly re-assessing your portfolio’s income capacity against your income needs during your retired years can also add significant value, clarifying opportunity and avoiding nasty surprises.

If you would like to discuss your investment options with one of our wealth management professionals, get in touch with Wotherspoon today!