Three-bucket retirement strategy: A simple way to manage liquidity, safety and growth

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One reason retirement planning feels stressful is that we expect one portfolio to do three jobs at once. It must pay next month’s bills, protect you from sudden medical or family shocks, and still grow fast enough to beat inflation for the next 20 to 30 years. The three-bucket strategy works because it stops forcing one pool of money to behave like a Swiss Army knife. Instead, it separates your retirement corpus by time horizon: money you need soon, money you need later, and money you may not touch for a decade.

The problem this strategy is trying to solve is not “low returns”. It is bad timing. If a market downturn hits early in retirement and you are withdrawing from the same portfolio that has fallen, you end up selling more units to fund the same expenses. That damage can linger even if markets recover later. This is the sequence-of-returns risk, and it is why retirees often need a withdrawal plan, not just an asset allocation.

The first bucket is for near-term spending, typically the next one to three years of household expenses. Think of this as your salary replacement. It pays for groceries, utilities, insurance premiums, routine healthcare, travel, and any predictable costs you do not want to fund by selling volatile assets in a bad month. In India, many retirees use a mix of cash equivalents and low-volatility options for this bucket, because the priority is access and stability rather than chasing returns. The psychological benefit is real: when markets wobble, you are not forced into hasty decisions because the next few years are already funded.

The second bucket is the “middle years” bucket. A common way to think about it is money you may need roughly three to ten years from now. This bucket is meant to be steadier than equities but more productive than pure cash. Its job is to periodically top up Bucket 1, so you can keep living costs funded without touching the long-term growth bucket at the wrong time. Many explanations of the bucket approach frame this as the income or stability layer that helps you ride out market cycles more calmly.

The third bucket is for the long run, typically ten years or more into the future. This is where you focus on growth, because inflation is the silent threat that stretches over decades. The point of Bucket 3 is not to look good on a one-year statement. It is to keep your purchasing power intact in your seventies and eighties, and to reduce the risk of outliving your corpus. The bucket approach is often described as a way to let long-term assets compound without being interrupted by short-term withdrawals.

Here is a simple example. Suppose your household needs ₹12 lakh a year after factoring in any pension or steady income. If you keep two years of expenses in Bucket 1, that is about ₹24 lakh. If you keep the next six years in Bucket 2, that is about ₹72 lakh. The remaining corpus sits in Bucket 3 for long-term growth.

You spend from Bucket 1 month by month. Once a year, you review the buckets. If Bucket 1 is getting low, you refill it from Bucket 2. Bucket 3 is left alone, except for planned rebalancing. In years when markets do well, you may shift some gains from Bucket 3 into Bucket 2, so the “safety layer” stays healthy. In years when markets are weak, you try to avoid pulling from Bucket 3, because that is exactly when long-term money needs time to recover.

Start with expenses, not products. Estimate your annual retirement spending in today’s rupees, then add a buffer for healthcare and surprises. Decide how many years of expenses you want protected in Bucket 1. Many retirees prefer one to three years, depending on comfort and other income streams. Next, decide how many years you want in the “safety” Bucket 2. What remains goes into Bucket 3.

The split is not fixed forever. Your needs change with age, health, and family responsibilities. The discipline that matters is this: do not let short-term spending leak into the long-term bucket during bad markets unless you truly have no choice. The bucket structure is essentially a behaviour tool that keeps your plan intact when emotions are running high.