Factoring the short term could be critical to your retirement strategy

Retirement investing isn’t just about generating returns - it’s about managing risk, especially the risk of poor market performance early in retirement. This is known as sequencing risk, and it can dramatically impact long-term outcomes if retirees are forced to sell growth assets during downturns to fund living expenses.

To address this, many investors are turning to Time Horizon Investing (THI) - a strategy that segments retirement assets into short, medium, and long-term buckets based on expected cashflow needs. The short-term income bucket, covering the first 1–3 years of retirement, is designed to deliver reliable income while shielding the rest of the portfolio from market volatility.

Why the short-term bucket matters

The short-term bucket plays a critical role in retirement strategy by:

• Providing predictable income: It’s invested in defensive assets like cash and high-quality fixed income, which are less volatile and more suited to funding immediate needs.

• Reducing sequencing risk: By covering the first few years of retirement income, it prevents the need to sell down growth assets during market downturns.

• Creating a buffer for recovery: It gives the medium- and long-term buckets time to recover from market dips before any rebalancing or drawdowns occur.

• Supporting behavioural discipline: Clients are less likely to panic or make reactive decisions when they know their short-term income is secure.

This structure is especially effective for clients drawing 4-7% of their capital annually, where income stability is crucial.

Why SMAs are ideal for implementing the short-term bucket

Using Separately Managed Accounts (SMAs) to implement the short-term bucket enhances its effectiveness in several ways:

• Transparency and control: Investors can see exactly what they own, how income is generated, and how their portfolio is managed.

• Professional oversight: SMA managers can rebalance portfolios, monitor income flows, and adjust allocations in response to interest rate changes or market conditions.

• Platform automation: Income can be set to distribute automatically from the short-term bucket, with clear sequencing rules for drawdowns - first from income, then from capital if needed.

A practical example: Centaur’s Short-Term Income SMA

Centaur’s short-term income SMA targets a 4-6% annual yield, using a diversified mix of:

• Cash and enhanced cash ETFs for liquidity.

• Australian fixed interest for stability.

• Alternative credit strategies for yield and diversification.

This mix ensures income is generated consistently across market cycles, without exposing the portfolio to unnecessary risk.

Yield and defence through your short-term bucket

The short-term income bucket is more than just a yield engine; it’s a strategic shield against market volatility and behavioural risk. When implemented via SMAs, it becomes a powerful tool for delivering reliable income, maintaining portfolio integrity, and supporting confident retirement outcomes.

In the next article, I’ll explore how passive strategies can be used to build transparent, low-cost SMA portfolios for long-term growth. 

For the first part of the SMA series, click below.

Education

Your guide to building a growth portfolio in an SMA

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