A reader asks, “How can we be sure that post-retirement, our bucket strategy will help us to sustain the corpus in our retirement period with an assumed return of different asset classes and beat inflation?”
While there are no guarantees, we can do enough to ensure we have more than a reasonable chance of success. Those odds are higher than what we normally get in life career choices or relationships!
The question assumes a person about to retire or has retired has a bucket strategy. This means the person has a sizeable corpus to work with, or as is the case with most community members – they have enough time (10Y or more) to retire to accumulate a sizeable corpus.
A retirement bucket strategy refers to how a retiree invests her corpus in different investments and tries to generate inflation-protected income. The illustrations mentioned above are: I am 30 and wish to retire by 50; how should I plan my investments? And How to draw one lakh monthly income from a retirement corpus.
Our robo advisory tool imposes stringent conditions on when bucketing is allowed: (1) The retiree must have enough corpus to generate inflation-protected income from 100% safe investments for the first 15 years of retirement. (2) the rest of the corpus should be high enough to invest for 15 years and beat inflation.
🔥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 👈
How does this help?
- It helps us emotionally handle sequences of returns risk better. That is, any large crash or a poor run of returns from equity at the start of retirement can hamper our ability to beat inflation.
- As a retiree, I need peace of mind. I need to know that come rain or shine. I can fight inflation for X number of years after retirement. The income bucket essentially guarantees this for the first 15 years. We believe 15 years is enough to handle poor equity market returns. Typically, only 20-40% equity allocation is recommended for most retirees. So, this is a huge safety cushion.
- During these 15 years, the rest of the corpus grows. Most of it is in debt and 20% to 40% in equity, depending on the profile of the retiree. This allows us to reasonably combat poor equity sequences of returns (poor returns after five years, seven years, etc.) in the remaining buckets. Also, the low-risk bucket will be least affected by equity as it has the least exposure, and the other buckets will have additional time to grow (another 7-10 years for the medium bucket and 14-20 years for the high-risk bucket).
- Yes, these are arbitrary mental subdivisions, but once I make them, I can better face market downturns and crashes. And I can even afford not to worry about bucket management – shifting funds from one bucket to another is, in principle, unnecessary.
- However, some management will make us sleep better. For example, the retiree can ensure at any point in retirement that 10-15 years of income (inflation-indexed) is always in safe income assets.
- One can further strengthen the plan with any income from pension, rent, etc., forming what is known as an income floor, further cementing our peace of mind. See: Creating the “ideal” retirement plan with income flooring!
- If you want a plan almost as good as a guarantee, consider annuity laddering, where additional pension streams are added each decade. See: Use this annuity ladder calculator to plan retirement with multiple pension streams.
Naturally, the more safeguards you add, the higher the corpus. This should not be a problem for those with time on their side. This is a withdrawal rate comparison of strategies: I plan to retire in 25 years; what should be my safe withdrawal rate?
What if I am about to retire, and my corpus is not too high? Market-linked options then become quite limited. See: My withdrawal rate is 5% -what are my post-retirement investment options? And Benefits for Senior Citizens Proposed in Budget 2023
The moral in all this is to make hay when the sun shines. Start planning for your retirement today. The more time you have, the better your chances of success. So, just because returns from the market are uncertain does not mean it is all gloom and doom. Proper planning is the key.