Making the most of your hard-earned savings is essential to live a stress-free life post-retirement. Safeguarding the nest egg is equally important owing to the rising rate of inflation and the comparatively poor return from low-risk investing options. One of the best-known strategies for effectively managing one’s retirement corpus is the ‘bucket strategy'.
What is bucket strategy?
Bucket strategy is nothing but dividing the retirement corpus into two or three parts and appropriating into different investment buckets based on your requirements.
Every bucket has a distinct risk profile, time horizons and serves a specific purpose. It helps to have meaningful cashflows to meet the regular commitments and contingencies without depleting the corpus too quickly.
Also see: How to choose the right annuity plan in NPS?
“Bucket strategy is essentially a way to withdraw and generate income from your retirement corpus. What you do in a bucket strategy is that you divide your retirement corpus into different buckets with varying risk approaches,” says Ravi Saraogi, Co-founder, Samasthiti Advisors.
The bucket approach was the brainchild of financial-planning guru Harold Evensky in 1980s.
Since every person has a unique risk profile and set of requirements, the most widely used technique is the three-bucket strategy. The corpus is proportionately divided among short-term bucket, medium-term and long-term bucket.
Also see: Why systematic withdrawal plans in MF work best for retirees
I. Short-term bucket
This short-term bucket is meant for meeting your regular and unexpected cash flow needs.
Goal: Liquidity and easy access.
Proportion of the bucket: About 10 per cent of the retirement corpus can be put into it. It should be at least 8-12 times of your monthly expenses. Any other income including pension income and systematic withdrawal income from mutual funds, national pension scheme (NPS) and others to be routed to this bucket.
Time horizon: 0-3 years.
Parking avenues: The amount can be parked in savings account, debt mutual funds including overnight funds, liquid funds, ultra short duration and money market funds.
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II. Medium-term bucket
This medium-term bucket can be used to meet the expenses that can occur in the next 4-8 years like travelling, down payment or pre-closure of home loans.
Goal: Capital safety and income generation.
Proportion of the bucket: About 30 per cent of the retirement corpus can be allocated towards this bucket.
Time horizon: 4- 8 years
Parking avenues: Investment products that can generate return while protecting the capital include debt mutual funds like short duration funds, corporate bond funds, banking and public sector unit (PSU) debt funds, Bank and corporate fixed deposits, Reserve Bank of India (RBI) bonds, corporate non-convertible debentures (NCDs), tax-free bonds and hybrid mutual funds.
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III. Long-term bucket
Long-term bucket is meant for generating inflation beaten return aiming to build wealth without worrying the intermittent withdrawals.
Goal: Capital growth.
Proportion of the bucket: About 60 percent of the retirement corpus can be put into it.
Time horizon: 9 years and more.
Parking avenues: Some of the options include equity stocks, equity mutual funds such as large-cap, mid-cap, small-cap and flexi-cap funds, gold investments including sovereign gold bonds, and real estate.
Points to consider
- Bucket strategy helps to get rid of ‘sequence-of-returns’ risk. This helps avoiding possible negative returns from the invested securities in the initial period of the retirement life which could take a huge slice out of your retirement corpus.
- There are different proportions in which you can keep those buckets which is dependent on investor preference, risk appetite and how much income is needed. So accordingly, the split can be made.
- Periodical review of buckets and compare the amounts in each bucket to your upcoming needs make the process easier.
- ·Timely refill of short-term bucket from the medium-and long-term buckets help to accumulate a larger emergency corpus that could reduce the likelihood of an inopportune asset sale.
It is prudent to implement the bucket strategy for retirement, as it is very intuitive to understand, says Saraogi. Most investors struggle because they don't know which investment corpus to withdraw from and how much to withdraw. Investors can work with advisors who are retirement specialists, a custom-made bucket strategy design for themselves, Saraogi advises.
Also see: Should retirees invest in tax-free bonds in secondary markets?
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