When one retires with a big corpus in hand, it is very easy to get complacent. However, the ‘everything will be fine the way it has always been’ attitude may not work for two reasons:
(a) There is no monthly income anymore coming from anywhere, except from what one has already accumulated,
(b) Emergencies will always come unannounced; inflation will always eat into the purchasing power of money and the longer the horizon, the more pronounced will be the effect of such money depreciation; highest safety in investment will always get the lowest rates of return, and vice versa.
So, what is the way out so that one:
a) doesn’t take unnecessary risks with one’s life-time savings,
b) has the required funds every month to lead a comfortable life,
c) can cater to unforeseen emergencies, and
d) has the required insurance covers.
That is where the 4-bucket strategy comes in. The buckets would be as follows:
Bucket-1 ― Emergency Bucket
Prudent financial planning always demands this bucket be created first. This caters to the emergencies that may come up and needs a careful assessment of the amount required. General emergencies will not demand more than Rs 5 lakh for most people if health insurance is taken care of. However, circumstances like older dependents, loved ones abroad (hence, sudden costly travel) and medical conditions not covered by health insurance could demand a bigger bucket. The best place to invest is a few small FDs of Rs 1-2 lakh each, sweep account linked to savings bank accounts or liquid funds. For most people, an emergency fund of Rs 5-10 lakh would suffice.
Bucket-2 ― Monthly Income (Short-term) Bucket
This is the bucket that caters to monthly household expenses for the next five years of living. In addition, lifestyle travel plans (domestic and international), payment of premia for insurances (health, car, life, house, disability and critical insurance, etc), maintenance costs (house, car, appliances, etc), social obligations (festivals, events like family marriages) and miscellaneous regular requirements like replacement of white goods and house repairs would also be there. While household expenses can easily be calculated on a monthly basis, other expenses will normally be on yearly basis and divided by 12 to arrive at the monthly requirement. The sum of the two expenses would be the total monthly requirement. Do not forget to add 5-10 percent as contingency to total monthly requirements so that some extra expenses in certain months do not add to worry lines.
Typically, this bucket would be about 20 percent of the total corpus and the best place to invest this would be a sweep account or liquid fund for the requirements of the next two years and Ultra Short-Term Fund for three years beyond that. If one so wishes, part of the monthly funds requirement can also come from Senior Citizen Savings Scheme and PM Vyaya Vandana Yojana investments.
Bucket-3 ― Medium-term Bucket
This bucket is an intermediate bucket for growing the money. It would hold the money required for the period 6-10 years from now. It receives money from Bucket-4 and transfers the money to Bucket-2 on a yearly basis. It takes slightly higher risks than Bucket-2. This bucket would also hold about 20 percent of the total corpus and the best place to invest this would be longer term fixed deposits (FDs), hybrid mutual funds and conservative balanced advantage funds. A review would be required every year in this bucket wherein the next one year’s funds requirement would be transferred to Bucket-2 and the same amount would be transferred into it from Bucket-4.
Bucket-4 ― Long-term Bucket
This is the long-term investment bucket which caters for the requirements beyond 10 years from the date of retirement. It would hold the rest of the money (left after filling Buckets 1 to 3). A very careful risk assessment and preferably a discussion with a financial planner would be required to set up this bucket. This is the bucket which shields one’s life-time savings from the drastic effects of inflation and feeds the previous two buckets. It could take as much as 40-60 percent equity exposure, depending on the retiree’s comfort level. On every yearly review, one year’s requirement of funds goes from this bucket to Bucket-3, and the risk profile of the retiree may need to be reviewed.
Finally, a few important points that need to be kept in perspective, while creating and managing the buckets:
1. The buckets have been created with the premise that adequate corpus has been built for the entire retirement period of 25-35 years. In case the amount is lesser, expenses will have to be carefully calculated and taken out from Bucket-2. Some modifications to allocations will be required to various buckets.2. Risk profile of the retiree is an important ingredient in creating the buckets. An experienced financial planner would be able to align the buckets’ holdings carefully. Nevertheless, the tendency to put everything in the ‘safety’ mode should be avoided since returns would then go down, taxation would be heavy, and the purchasing power of the corpus would deplete significantly.