A reader asks, “Sir, you have shown in many articles that the freefincal robo advisor tool uses a four-bucket strategy. Can I DIY a three-bucket strategy using the tool?”
Short answer: Yes, you can, but we do not recommend it.
Those who wish to start with the basics head over here: What is a retirement bucket strategy? How to implement it?
Retirement planning illustrations using the freefincal robo advisor tool
- Retirement plan review: Am I on track to retire by 50?
- I am 30 and wish to retire by 50 how should I plan my investments?
- Can I retire by age 55? Retirement Planning Case Study
- Case Study: Achieving Financial Freedom for Early Retirement
- How should I plan if I want to retire in 20 years?
- Is it possible to combine a bucket strategy with income laddering after retirement?
The four-bucket approach used by the tool explained.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
The primary thumb rule we follow in our robo advisor tool is that the retiree should have enough money to generate inflation-proof income for the first 15 years of retirement. If this is not available, creating a bucket strategy is quite risky. A few years of poor market returns, especially in the first few years of retirement, can wipe out much of the corpus.
The robo template divides the retirement corpus into four buckets (plus an emergency bucket_. That is, the retirement corpus will be divided into five parts. This is only one of many ways to construct a bucket strategy. This assumes 45 years in retirement.
- An emergency bucket to handle unexpected expenses. Example: 5%
- An income bucket that provides guaranteed income for the first 15 years of retirement. During this time, investments are made in the following three buckets. Example: About 40-45%.
- Corpus from a low-risk bucket provides retirement income from years 16 to 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). Say about 25%.
- Corpus from a medium-risk bucket will provide retirement income from years 27 to 35. 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). Say about 10-15%.
- Corpus from a high-risk bucket will provide retirement income from years 36 to 45. 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 35). Say about 10-15%.
- 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. One can always customize this usage after retirement.
This is a schematic from a previously published illustration: Creating a retirement income plan for 27-year-old Amar. Please note that bucket allocations will change per the user’s age profile, which will be auto-determined by the robo tool.
What is a three-bucket approach? This approach has an income bucket (which doubles as the low-risk bucket), a medium-risk bucket, and a high-risk bucket. There is nothing wrong with using this approach, but one should be careful with the assumptions.
Some users assume there is no need for an income bucket, while others plan for only 5-10 years of inflation-indexed income (instead of our recommended 15 years in a separate income bucket). Such approaches in our opinion do not protect the corpus enough against the sequence of returns risk and therefore do not recommend that users play with the custom DIY bucket sheets.
How do you create a three-bucket approach using the freefincal robo advisor tool?
The robo advisor tool has a “DIY Bucket calculator” sheet, which is usually hidden. (because only expert users should use it). Users wanting to customise their bucket strategy can unhide and change this cell. In particular, if those who prefer a three-bucket approach can change the number of buckets from four to three by changing cells AK52 to AK55 in said sheet.
For example, suppose 40 years of retirement is distributed automatically in this way, the robo tool
| Income | 15 years (cell AK52) |
| Bucket 1 | 10 years (cell AK53) |
| Bucket 2 | 8 years (cell AK54) |
| Bucket 3 | 7 years (cell AK55) |
The user can change this to
| Income | 15 years (cell AK52) |
| Bucket 1 | 15 years (cell AK53) |
| Bucket 2 | 10 years (cell AK54) |
| Bucket 3 | 0 years (cell AK55) |
This will result in a three-bucket strategy. The sheet will then auto adjust to the new setting and determine the new corpus. Again, we do not recommend this approach.