A reader asks in response to – I am 30 and wish to retire by 50; how should I plan my investments? – “Can I use a single bucket to manage inflation-indexed income?”. The article details the retirement bucket strategy adopted by the freefincal robo advisor tool. We reproduce an extract below for a discussion.
The retirement corpus is assumed to be invested in five buckets.
- An emergency bucket to handle unexpected expenses.
- The income bucket provides guaranteed income for the first 15 years of retirement. During this time, investments are made in the following three buckets.
- Corpus is from a low-risk bucket that provides retirement income from year 16 to year 26. To provide this income, the low-risk bucket will have an asset allocation of 30% equity and 70% debt during the investment period (years 1 to 15 of retirement).
- Corpus from a medium-risk bucket will provide retirement income from years 27 to 34. To provide this income, this bucket shall have an asset allocation of 50% equity and 50% debt during the investment period (year 1 to year 26)
- Corpus from a high-risk bucket will provide retirement income from years 35 to 42. To provide this income, this bucket shall have an asset allocation of 70% equity and 30% debt during the investment period (year 1 to year 34)
That is, the retirement corpus will be divided into four parts (excluding the emergency bucket)
- 5% in an emergency bucket
- 47% in an income bucket will guarantee risk-free inflation-protected income for the first 15 years. The rest of the parts will be invested in three buckets: low-risk (26%), medium-risk (12%) and high-risk (9%) in the asset allocations indicated above. During this investment period, the buckets will be actively managed to reduce risk: rebalancing and profit booking from one bucket to another. To understand how this works, try The Retirement Bucket Strategy Simulator.
- After 15 years, the low-risk bucket will be turned into 100% debt and provide income for about 11 years. After that, the other buckets will also be progressively used.
The reader is asking, “Is all this gymnastics necessary? Why not use a single bucket with equity and fixed income?” The answer is subjective and depends on who you ask. Some would argue the above is an over-kill, and three buckets are enough, and so on.
Since we were asked the question, we can only offer our reasoning behind this structure used in the freefincal robo advisor tool. It all boils down to peace of mind and necessity.
🔥Secure your future with our Robo-advisory tool trusted by over 3,000 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality.🔥
The emergency bucket lets the retiree know that unexpected expenses can be handled. But how do we replenish this? Whenever the equity or bond markets are kind, we can top up the emergency bucket whether or not we have withdrawn from it.
A poor run of equity returns in the first decade of returns can severely deplete a retirement corpus. So, the income bucket is the most crucial element. It guarantees inflation-index income (income that increases at the assumed inflation rate) for the first 15 years of retirement. This ensures adequate protection from the sequence of returns risk.
With these two in place, the remaining corpus is distributed among low-risk, medium-risk and high-risk buckets. The retire can adjust risk levels according to the available corpus and risk appetite. Investors and advisors who use our robo tool assume 100% equity in the high-risk bucket or assume it is to be invested in an aggressive hybrid or balanced advantage fund, depending on the circumstances.
Is this a form of mental accounting? Not quite. The buckets do not have the same risk level. That is, the money is invested differently in each bucket. The income bucket could have a liquid or money market fund, while the low/medium/high risk bucket is a mix of equity and long term bond funds (corporate bond, conservative hybrid, gilts, etc). See: List of investments suitable for building a retirement bucket strategy
A retiree can safely take on varying levels of risk once the emergency and income buckets are in place.
In addition, the robo tools also have options for income flooring and annuity laddering. These provide additional layers of security. See:
- Use this annuity ladder calculator to plan for retirement with multiple pension streams
- Creating the “ideal” retirement plan with income flooring!
Assuming a single bucket with some expected return from equity and fixed income is a non-representative over-simplification. Without bucketing, it would be difficult to plan risk diversification efficiently.
It is not impossible, but it is hard for most retirees to pull it off. Even advisors prefer the above bucket strategy because it gives their clients peace of mind. They can stomach a capital market-linked post-retirement plan much better only because of these buckets. Therefore, we do not recommend using a single bucket for retirement planning.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥You can also avail massive discounts on our courses and the freefincal investor circle! 🔥& join our community of 8000+ users!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds, and ETF screeners, as well as momentum and low-volatility stock screeners.
You can follow our articles on Google News
We have over 1,000 videos on YouTube!
Join our WhatsApp Channel
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalised investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Increase your income by getting people to pay for your skills! ⇐ More than 800 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you. (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is designed to help you ask the right questions and find the correct answers. Additionally, it comes with nine online calculators, allowing you to create custom solutions tailored to your lifestyle. Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is designed for young earners to get their basics right from the start! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth exploration of vacation planning, including finding affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)