2 weeks Ago
Retirees or those close to retirement face the challenge of managing their savings throughout their lifetime. At this stage they no longer have the luxury of building up their savings and instead need to withdraw from their corpus. They cannot afford substantial erosion of their corpus as it must cover their expenses.
On the other hand, keeping a large portion of their savings in cash or cash equivalents may limit its longevity. Here, a well-thought-out bucket strategy—segmenting retirement savings into multiple buckets designed for specific time periods and risk levels—can provide growth potential and stability during retirement. Basics of the bucket strategy In the bucket strategy, retirees' assets are divided into three main buckets: short-term, medium-term and long-term.
Each bucket has its own purpose, time horizon, and risk level. Bucket 1: Short-term needs (0-2 years) This is the most conservative bucket, covering immediate and unforeseen expenses in the first two to three years of retirement. Assets in this bucket are kept in cash or cash equivalents, such as savings accounts, money market funds or short-term bonds.
These low-risk investments provide high liquidity, ensuring that retirees have quick access to funds when needed. Bucket 2: Medium-term needs (3-10 years) The second bucket covers medium-term expenses and carries a slightly higher level of risk. It usually includes bonds, bond funds or balanced funds.
While these investments are less liquid than cash, they are relatively safe and can offer higher returns than short-term assets, helping retirees keep up with inflation. The goal of this bucket is to provide income once the first bucket is depleted and, if possible, to help replenish it. Bucket 3: Long-term growth (10+ years) This bucket focuses on long-term growth, essential for ensuring that retirees don't run out of money over a 20-30 year retirement.
It is typically invested in a diversified portfolio of stocks or equity mutual funds to provide potential for higher returns. With its long time horizon, this bucket can withstand market fluctuations and grow over time. In periods of strong market performance, profits from this bucket can be used to refill the other buckets as needed.
Also read: This strategy helps reduce retirees’ anxiety about market volatility. With short-term needs covered by the first bucket, retirees gain peace of mind knowing they have funds set aside for essential expenses, regardless of market conditions. This approach can help curb emotional decision-making, such as selling stocks during downturns, which can lead to missing out on market recoveries.
Furthermore, by investing in equities in the long-term bucket, retirees create a hedge against inflation. The strategy also allows retirees to withdraw funds strategically based on market conditions. For instance, if the stock market is down, they can avoid tapping into the long-term bucket and rely on short- or medium-term assets instead.
In years of strong market returns, they can take gains from the equity bucket to refill the short- and medium-term buckets. Implementing the bucket strategy in four steps Also read | The bucket strategy offers a pragmatic, flexible approach to managing retirement income. By using this strategy, retirees can achieve peace of mind and potential growth, and reduce the risk of running out of money.
With careful planning and regular adjustments, the bucket strategy can provide a steady income stream, protection against inflation, and allow retirees to navigate the ups and downs of financial markets, making it an excellent choice for a secure and comfortable retirement. Also read |.
