Retirement Corpus Building Made Easy: Unlock the Power of the 3-Bucket Strategy

Jun 21, 2023 / Reading Time: Approx. 10 mins

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Many people have multiple financial goals, such as purchasing a house, buying a car, providing for their children's education, or indulging in luxurious vacations. Unfortunately, when it comes to prioritizing these goals, retirement often takes a back seat, as if it is something to address in the later stages of life. However, it is crucial to understand that retirement planning, including estimating expenses and building a sufficient corpus, deserves immediate attention. Neglecting retirement planning can have detrimental consequences for your financial well-being. Therefore, it is crucial to prioritize retirement and take proactive steps towards securing your financial future.

Creating a smart retirement strategy is crucial to ensure you spend the golden years of your life stress-free. Increasing life expectancies coupled with dwindling days of fixed pension means you need to build and manoeuvre your retirement corpus in a way that generates income and takes care of your needs.

You see, retirement is a phase of life where you stop earning a fixed income like a salary and need a consistent income stream to manage the expenses in your golden years. Contrary to common belief, you actually don't need a constant salary during your retirement years; instead, you need a reliable cash flow that keeps up with inflation. The solution to maintaining the cash flow is to design an investment portfolio that focuses on deploying a corpus for income generation in your retired years.

In order to do so, by using a bucketing strategy, one may increase the effectiveness of portfolio diversification, safeguard oneself against inflation, and reduce the real risk of outliving their assets. Developing retirement income solutions can be overwhelming for many because everyone has different demands. However, a '3-bucket retirement strategy' can ensure that you are well-positioned to fulfil your retirement needs and help you make the most of your retirement corpus. So, what is this strategy, and how can it be of benefit to you? Let's explore.

What Is the 3 Bucket Strategy for Retirement Planning?

A 3-bucket retirement strategy is intended to distribute your retirement corpus across several time buckets appropriate for that time horizon and assist you in building a retirement corpus. According to one's investment objectives and time horizons, this method entails segmenting one's retirement assets into various buckets. The 3 bucket method, which Harold Evensky, an American financial advisor, first proposed in the 1980s, split assets into three buckets:

  • Emergency savings and liquid assets

  • Medium-term holdings

  • High-risk holdings

The retirement bucket strategy is an investment approach that segregates your sources of income into three buckets. On the basis of urgent (short-term), intermediate, and long-term demands, each of these buckets serves a specific role. Using a bucketing approach, one may manage risk, assure liquidity, and increase gains. Here is a breakdown of the three key buckets one should consider when planning for retirement:

Bucket #1 - The Immediate Bucket

The immediate or short-term bucket includes cash and other liquid investments; as the name suggests, the first bucket is targeted towards saving for an emergency. It is meant to cover the initial years of retirement and would primarily invest in low-risk instruments such as short-term debt. While earning interest on this money is appealing, the main focus is on reducing risk and ensuring that the money is easily accessible in times of need.

In other words, this bucket adds to your retirement income from traditional sources like monthly pension or income from government retirement schemes etc. An emergency can strike anytime and wipe out your retirement corpus in no time. This fund fills up the income gaps you have after retirement. The majority of the money in this bucket is invested in swiftly convertible liquid assets like liquid mutual funds or short-term debt.

You are free to take money out of this bucket in the event of any unforeseen circumstances. The short-term bucket is all about liquidity and allows you to meet your retirement needs without worrying about market fluctuations.

Retirement Corpus Building Made Easy: Unlock the Power of the 3-Bucket Strategy
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Bucket #2 - The Intermediate Bucket

Once you have secured the initial years of cash flow, you will need to manage the cash flow for the next 5-7 years. Money in the intermediate bucket should continue to grow to keep pace with inflation. However, you may avoid investing in high-risk assets. The second bucket, meant for the intermediate term, can invest in a mix of medium-term debt and equities. Its purpose is to provide stability and income. Too much safety can make it tough to keep up with inflation, and too much risk can lead to losses that make it difficult to save enough for retirement.

The second bucket in your retirement plan should be allocated to conservative investments that offer decent returns, such as bank fixed deposits, hybrid mutual funds and conservative balanced advantage funds. Holding a combination of these instruments allows you to better control inflation by synchronising the cash flow from your bank fixed deposits with the lower equity component in hybrid mutual funds and conservative balanced advantage funds.

Bucket #3 - The Long-term Bucket

Now that you have already planned the cash flow needed for the first 10 years with the two buckets, the third bucket in your retirement plan should be mostly devoted to growth investments. Long-term bucket investments are invested in riskier assets that may be volatile in the short-term but have growth potential in the long run.

To create this bucket, a thorough risk analysis and ideally a conversation with a SEBI registered investment advisor would be required. This is the bucket that guards against the devastating consequences of inflation on one's lifetime investments. In this bucket, you may like to add the flavour of equity to give a kicker to your returns in your overall portfolio. It is designed to provide growth and significant returns over the long term.

Although equity is a volatile asset class, it has offered better long-term returns in the past. This category ought to contain a diverse array of mutual funds. Mutual funds have the benefit of assisting you in reducing the risk involved with individual equities when you invest. One can invest in a mix of diversified equity funds, index funds, and equity-oriented hybrid funds to play safe.

As you can see, this 3 bucket strategy allows you to build a respectable retirement corpus with clarity on the timeframe when you require the cash flow. The immediate bucket should always come first when employing the 3 bucket approach. Further, one may begin investing in the next two buckets. The quantum of money depends on the time horizon you have left for retirement. If you have a longer time to retire, you should put more money in the third bucket. Additionally, you must keep an eye on these buckets and adjust their balance as per your changing needs. Also, gradually keep increasing your contributions as and when possible.

[Retirement Calculator]

Apart from this, one needs to take meticulous efforts and follow the basic retirement planning steps to ensure a blissful retirement.

  • One must ensure to invest in the right asset allocation and review the type of investments in their portfolio.

  • You may consider utilising a part of your windfall income, like an annual bonus, to boost your retirement corpus.

  • It is crucial to maintain financial discipline while planning for your retirement. Avoid withdrawing from your retirement corpus before you reach retirement. Invest regularly regardless of market fluctuations. Since retirement planning is a long-term goal, short-term volatility may not have a major impact.

While retirement planning focuses on building a wealthy retirement corpus, it also involves certain rules for withdrawal of this corpus post-retirement. There is a thumb rule called - 'The 4% retirement rule' that one may apply post-retirement.

What Is the 4% Retirement Rule?

Retirees could safely spend about 4% of their retirement savings in the first year of retirement. In subsequent years, they could adjust the annual withdrawals by the rate of inflation. The 4% rule is easy to follow. In the first year of retirement, you can withdraw up to 4% of your portfolio's value.

For instance, if you have a retirement corpus of Rs 1 crore, you could spend Rs 4,00,000 in the first year of retirement following the 4% rule. In next year, you may take the prior year's allowed withdrawal, and then adjust that amount for inflation. The objective is to retain the 4% that was withheld in the first year of retirement in terms of purchasing power. Despite the uncertainty of the future, history clearly implies that the 4% rule is a reliable approach to determining how much one can spend in retirement.

To conclude...

As it is important to follow the aforesaid strategies for income generation during pre-retirement years, it is equally important to follow the 4% rule to ensure sound withdrawal. If you do not start planning early for your retirement, you may not be able to amass the necessary corpus, and hence you may suffer to manage your finances in your golden years.


MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.

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