Many people assume that retirement planning requires one to blindly save money. However, it is more than that. A well-thought-out retirement plan should have a variety of options that help you at different stages of your retirement and for different needs. The retirement bucket strategy can help achieve this. It is a method of retirement planning that divides your retirement savings into segments or ‘buckets’ based on when and for what you will need the money.
If you are wondering how to structure your retirement plan, the bucket strategy could be a solid approach to take.
What is the Bucket Strategy?
The bucket strategy is a way to organise your retirement savings into different categories. You can create categories based on different needs or stages. The common way of categorising retirement plans in the bucket strategy method is to create different ‘buckets’ for different time horizons, such as short-term, mid-term, and long-term. Each ‘bucket’ has a specific set of financial instruments that can help you meet your income needs during that particular stage of retirement. By doing so, you create a balanced approach where all your needs are met without one affecting the other.
Now that you know what the bucket strategy is, let’s see how you can design each bucket.
Bucket 1: Short-Term Needs (0 to 3 years after retirement)
This is your most accessible bucket of the retirement bucket strategy and is meant to cover your immediate living expenses. Here, the focus is on liquidity and the safety of your capital.
What goes into Bucket 1?
- Savings accounts
- Fixed deposits
- Short-term debt funds
- Liquid mutual funds
Since this bucket will be used first, the emphasis is on low-risk, stable investments that allow you to withdraw money easily when needed. For example, if you have estimated your per-year retirement expenses to be ₹5 lakhs, you might want to keep ₹15 lakhs in this bucket, for covering the next three years. A retirement calculator can be a great help, as it can help you determine your monthly or annual expenses so you can plan how much to allocate here.
Bucket 2: Medium-Term Needs (4 to 10 years)
This bucket should be created to support your expenses once Bucket 1 runs out. You still need relative safety, but there is more room for moderate growth.
What goes into Bucket 2?
- Balanced mutual funds
- Guaranteed annuities
- Government savings schemes
- Medium-duration debt funds and corporate bond funds
The idea here is to balance safety with a little more return. This bucket should be able to replenish Bucket 1 when needed, ideally through investments that have matured or planned withdrawals. These funds may carry some risk but are generally stable enough for mid-term access.
If you are planning to follow the FIRE method (Financial Independence, Retire Early), this can be a good strategy, as it allows access to income while your long-term investments continue to grow.
Bucket 3: Long-Term Growth (10+ years)
This bucket is where you can put all your high income-generating instruments. As you may not be planning to touch this bucket for a decade or more, you can add high-risk, high-return options that offer compounding growth in this bucket.
What goes into Bucket 3?
- Equity mutual funds
- Index funds
- Stocks
- Real estate investment trusts (REITs)
- Long-term debt instruments.
In addition, the retirement plans in this bucket should also be able to beat inflation and ensure your retirement funds last. Since it has a long time horizon, it can recover from short-term market fluctuations. If you are wondering how to retire early and still have steady funds, this bucket is all the more important. It will ensure that your future is secure while you access the income from the first two buckets.
Is the Retirement Bucket Strategy Flexible?
Yes, you can customise the bucket strategy as per your goals. You can create more buckets based on specific needs, such as:
- A healthcare bucket for medical emergencies
- A travel bucket for vacation goals
- A legacy bucket for estate planning.
The point is to create buckets according to your lifestyle, spending habits, and retirement goals. It is advisable to use a retirement calculator to experiment with different scenarios and estimate how long your savings will last.
Also, do not forget to factor in retirement plans tax benefits while setting up your strategy. Many plans, such as life insurance-linked retirement plans and government schemes, offer tax deductions and exemptions on maturity proceeds, which can improve your after-tax returns.
The retirement bucket strategy is a practical and easy-to-understand approach to managing your retirement savings. However you plan to spend your golden years, it is a strategy worth considering for a worry-free retirement.
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