Optimising cash allocations in retirement portfolios

By Stuart Dear – Deputy Head of Fixed Income
6 minute read

How much lower can Australian cash rates go? 

In the wake of Global Financial Crisis, Australia’s path to near-zero cash rates has been elongated compared to other developed economies. This has been largely influenced by Chinese demand for our key commodity exports and the effectiveness of lower rates in stimulating house prices and activity. Offsetting this, however, has been an overvalued AUD (above USD1.00) and high relative wages, which have led to a decade of soft wages growth and lower retail prices in the face of greater offshore competition. 

More recently, the tighter regulation of banks and focus of the Banking Royal Commission has restricted their ability to lend. Australia’s fiscal policy has also been kept deliberately tight, with both sides of politics aiming to restore the federal budget to surplus.  

This year global central banks swung back to easing again, and with global growth slipping, the local housing market challenged and inflation continuing to fall below target, the RBA has cut rates three times in recent months. We think rates can continue to fall - even to 0% given the global experience. This may occur as early as the middle of next year. Further, it's likely that cash rates will be kept at low levels for a considerable period of time.

Figure 1: Australian Cash – headed for zero?

How much should investors hold in cash? 

In a low rate environment, the investor group most likely to be impacted are retirees, with many relying on their allocation to cash to meet their day-to-day expenses.  As interest rates have fallen, their ability to generate income without taking excessive amounts of risk has become more difficult. 

A commonly used investing technique for retirees is the ‘bucket strategy’, which employs three asset buckets: equities, diversified but defensive, and cash (typically holding up to 3 years’ of cash). As depicted in Figure 2, the income and capital from the ‘cash bucket’ is consumed and the income from the riskier buckets flows down to top-up the buckets below. 

With significantly lower return on cash there clearly is a problem with this model.

Figure 2: A typical retirement portfolio bucketing approach

Optimising cash allocations

We believe that it makes sense for investors to consider making changes to their ‘cash bucket’ in order to generate more return. 

By investing in alternative options to cash, investors are taking on more risk - where in an ideal world of higher cash rates, they wouldn’t need to. As such, investors should choose options that can generate higher returns, while maintaining the level of liquidity they require and relative certainty of return, both key features of cash. 

Segmenting the cash bucket 

Schroders suggests segmenting the cash portion of portfolios into three timeframes which vary according to their requirements for liquidity and certainty.

Figure 3: Segmenting the cash bucket


  • Next 12 months – over this period investors want the greatest certainty and liquidity, so we suggest it is maintained in existing cash investments.

  • 1 – 2 years –investors can take a little more risk to invest for slightly higher returns. However, this allocation away from cash should only be into defensively oriented strategies with high liquidity. Cash should still be a large part of this segment.

  • 2 – 3 years – this segment can take more risk again, and this is where it may make sense to blend some of the higher risk options, alongside cash and more defensive options.

This strategy aims to lift income generation and as depicted in Figure 3, recommends a little less than half the total cash bucket be invested into fixed income, with the aim of lifting income generation, but still largely preserving the certainty of capital and liquidity requirements.

Schroders believes a diversified, defensively oriented fixed income strategy that offers periodic income and daily liquidity is best placed to substitute cash for a component of the ‘cash bucket’. Such a strategy should be predominantly comprised of high quality, liquid, publicly traded securities. In addition, it should be a holistic solution that benefits from the diversification of assets, the skill of the manager in selecting individual investments, and from aggregate risk control of the exposures. 

Schroders has launched an active fixed income exchange traded fund (ETF) on Chi-X Australia, the Schroder Absolute Return Income (Managed Fund) (Chi-X code: PAYS) with the aim of helping investors strengthen the defensive allocation within their portfolios by boosting income, while seeking to protect capital.

PAYS delivers exposure to the Schroder Absolute Return Income Fund, which has a track record of meeting investors’ needs for reliable monthly income, delivering a total return of 6.13 per cent over the last 12 months (post-fees) with a competitive management fee of 0.54 basis points.

PAYS gives investors the flexibility to access their money if they need to, providing peace of mind that there is a strong focus on managing risk, should markets fall. 


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Important information

This article is intended for professional investors and financial advisers only and is not suitable for distribution to retail clients. Opinions, estimates and projections in this article constitute the current judgement of the author(s) as at the date of this article.  They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice. In preparing this article, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person. This article does not contain and should not be relied on as containing any investment, accounting, legal or tax advice. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the relevant disclosure document for that fund to consider the appropriateness of the fund to your objectives, financial situation and needs. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.