Dear friends, we know the importance of retirement planning. We try hard to accumulate sizable retirement kitty in our earning years so that we can live a comfortable retirement life. But the efforts we take to accumulate retirement kitty in the accumulation phase, we hardly give thought how we are going to reinvest it in different financial instruments to get steady inflation hedged returns post-retirement in the distribution phase of this retirement kitty.
Retirement goal is the only goal where the payout of the corpus has to manage for next 30 yrs if you retire at 60. (YES 30 yrs, assuming your life expectancy up to 85 years and if your spouse is younger than you by 5 years) More years, if you take early retirement, unlike other life goals as vacation, kids education and marriage planning or house purchase.
In many examples can be found where the retired couple enjoyed first 15/20 years of their retirement life very comfortably but the last 10 years were very miserable as they were running out of money. In this scenario, if you plan to invest your retirement kitty in such a way that your capital is being protected as well as you earn inflation hedged returns you can live comfortable retirement life without worrying much about money.
Bucket strategy is a useful technique for planning your retirement kitty
Bucket strategy is a technique used to conserve your retirement kitty as long as you and your spouse live along with comfortable living in the retirement period.
This technique helps to manage the withdrawals required to maintain for daily lifestyle as well as important life goals of life post-retirement from the Retirement kitty.
As the name suggests it has a bunch of buckets ranging from 2 to 5 as per the individual’s convenience.
Different buckets:
1st bracket consists of 1/3 years estimated expenses with inflation and to manage these expenses financial products used are cash and cash equivalents like SB account balance, RDs, FDs, overnight and liquid funds. This bucket is called Cash Bucket.
In the second bucket estimated expenses of 3 to 10 years are invested in Government sovereign schemes POMIS, SCSS and FDs, RBI’s tax-free and taxable bonds. Interest earned through these funds can be invested in PPF if not needed for monthly expenses. This PPF account can be used for long term goals in the retirement period. You can add liquid and arbitrage funds too. This bucket is called a Bond bucket.
For 10 to 20 years invest part of your kitty into third bucket consisting of conservative balanced funds, aggressive hybrids funds and Index funds
In forth bucket invest part of a kitty for your long term goals in multicap mutual funds and blue-chip stocks for 20 to 25 years horizon
Remaining small part of kitty to be invested in mid and small cap fund for last 5 years span.
This way we are planning retirement income for the next 30 years.
In numerical terms, if you have 1 Cr as your retirement kitty you can invest as follows.
It is a sample illustration.
Bucket one: 20 lakhs
Bucket two: 24 lakhs
Bucket three: 36 lakhs
Bucket four: 10 lakhs
Bucket five: 10 lakhs
You can follow 20%, 24%, 36%, 10%,10% ratio of retirement kitty in these buckets as per your risk appetite.
You can refill 1st bucket by transferring the periodic profits earned from bucket 2/3/4. This step is very important as you will have cash in hand at your disposal each time for your emergency expenses too. This way you can protect your capital as well as earn inflation hedged returns.
Benefits of Buckets strategy.
If you fail to accumulate large corpus at the time of accumulation phase for retirement goal still you can mange your expenses in a structured way.
It gives Peace of mind to the retired couple as you know your next 15 -20 years expenses are taken care of. And the amount for the same is invested in secured instruments.
You are not much affected by up and down of share market: As you know that the amount which you have invested in Equity mutual funds and stocks are needed after 15+ years you are not affected by the short term volatility of the market.
Human emotions are not intervened in Investment decisions. As the proper allocation of retirement kitty done in different financial instruments as per risk-taking capacity of the individual as well as per asset allocation we are not carried away by our emotions and we do not make a hasty decision which can impact our retirement kitty.
Keep in mind that the number of buckets, amount of investment in buckets all are flexible. It depends upon each individual and his family needed. You can invest in these instruments according to your risk profiling. Always analysis your risk-taking capacity based on your current financial position and your net worth.
I always go in a conservation investment strategy for my senior citizen clients. My ratio of investment for well-placed retiree with pension and rental income investment in Debt and Equity should be in the ration of 75:25 and those who are only depends on this accumulated kitty then investment ratio would be 80:20 or 85:15
If you plan and start working on this Bucket Strategy 6 months prior to your retirement and apply this on the day you get your retirement kitty you can rest be assured of your retirement expenses(including inflation, emergency medical expenses and increased lifestyle expenses) and enjoy your retirement peacefully. Here pensions, rental income and any other regular income source. If you are blessed to have that in your retirement you are better placed. Enjoy your Golden years !!!
This post is useful for retirees as well as those who are close to retirement. Youngsters kindly help your parents to invest their retirement kitty according to this Bucket Strategy !!