Retirement planning: What is the bucket strategy?

Imagine your retirement savings as a big pot of water. Now, wouldn't it be helpful to have that water readily available for different purposes throughout your golden years? That's the basic idea behind the bucket strategy, a retirement planning approach that helps you organize your savings into multiple sections based on when you'll need the money.

In simpler terms, the bucket strategy divides your retirement corpus (savings) into three buckets:

• Bucket 1: Short-term (0-5 years):
  This bucket holds funds for your immediate needs after retirement. Think essentials like living expenses, healthcare costs, or that dream vacation you've been putting off.
• Bucket 2: Medium-term (5-10 years):
  This bucket focuses on planned expenses that might arise in the middle years of your retirement, such as a car upgrade, home renovations, or helping your children with a down payment.
• Bucket 3: Long-term (10+ years):
  This bucket is for the long haul. It houses investments meant to grow over time and support you throughout your entire retirement.

Now, let's delve deeper into each bucket and understand how you can fill them effectively:

Think of this bucket as your readily accessible savings account. Here's what you should consider including:

• High-yield savings accounts:
  These accounts offer easy access to your money while generating some interest income.
• Money market accounts:
  Similar to high-yield savings accounts, but may offer check-writing capabilities.
• Liquid assets:
  Easily convertible investments like short-term fixed deposits or certificates of deposit (CDs) can be helpful here.

The ideal amount in this bucket depends on your individual circumstances. A good rule of thumb is to save enough to cover 3-5 years of living expenses. This buffer protects you from unexpected costs or market fluctuations without having to dip into your long-term investments.

This bucket caters to your planned expenses in the middle years of retirement. Here, the focus is on generating some income:

• Fixed-income instruments:
  Bonds, fixed-maturity deposits with slightly longer terms than those in bucket 1, or annuities that provide guaranteed³ payouts can be suitable options.
• Dividend-paying stocks:
  Companies that distribute a portion of their profits to shareholders can offer a steady stream of income. However, remember that stock prices can fluctuate.

This bucket is all about growth potential to ensure your savings keep pace with inflation and support you well into your retirement. Here, growth-oriented investments take center stage:

• Equity funds:
  Mutual funds or Exchange Traded Funds (ETFs) that invest in stocks offer the potential for high returns over the long term, but also carry higher risk.
• Real estate (indirectly):
  Consider Real Estate Investment Trusts (REITs) that allow you to invest in income-generating properties without the hassle of direct ownership.

Remember, the key here is diversification. Don't put all your eggs in one basket! Spread your investments across different asset classes to manage risk.

• Peace of mind:
  Knowing you have a readily available pool of funds for immediate needs can be a stress reliever.
• Financial flexibility:
  The bucket approach allows you to plan for different expenses throughout your retirement.
• Market protection:
  By separating your long-term growth investments from your short-term needs, you avoid having to sell stocks or bonds during a market downturn.
• Psychological advantage:
  The bucket strategy can provide a sense of control over your finances, knowing your retirement is well-planned.

• Review and Rebalance:
  Your needs and risk tolerance will change over time. Regularly review your bucket allocation and rebalance as needed to maintain your desired asset mix.
• Time Horizon:
  Carefully consider your retirement age and life expectancy when deciding on the time horizon for each bucket.
• Professional Guidance:
  While the bucket strategy is a great framework, consulting a financial advisor can be immensely helpful for personalized advice based on your specific circumstances.

The bucket strategy empowers you to take charge of your retirement planning. By organizing your savings into different sections based on your needs, you can create a roadmap for a financially secure and fulfilling retired life.