How can we be sure that post retirement our bucket strategy will work!

Published: November 8, 2023 at 6:00 am

Regular readers may be aware that we occasionally publish articles on rolling SIP returns and point out there is no point in expecting a certain return from an equity or debt mutual fund. Instead, we should focus on our target corpus and manage our portfolio accordingly.

Many readers get perturbed by this reality and ask, “If that is the case, how can we be sure our investment choices and strategy are correct?”. No one can offer guarantees, but at freefincal, we have enough backtested support to draw up a plan with more than a reasonable chance of success no matter the market conditions (aka sequence of returns risk).

As shown before – How to reduce risk in an investment portfolio, no matter what the sequence of returns is (which is the reason for the return variations), one can, with a clear asset allocation plan and stepwise reduction of equity can, help us reach a target corpus.

So the solution is to replace target return (= expectation) with a target corpus. This is possible only when we are clear about the purpose of the investment. You can use the Freefincal Robo Advisory Tool and create a concise plan for each goal. You can sign up for lectures on goal-based portfolio management to plan your asset allocation strategy.

So just because we cannot expect any set return from equity does not mean everything is uncertain. We can control the asset allocation – vary it within the confines of what we can invest in getting as close as possible to the target corpus. This has significantly higher odds of success than running a SIP only on industry propaganda and hope.

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The above will do if you have a target corpus to invest in and look forward to. What about after retirement, when we are supposed to have a target corpus in place?

A reader says, “I agree with you we should focus on target corpus as against target return. 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? Now don’t tell me, “We do not know” – that’s even scarier than retirement planning”

No, I am not going to say, “We don’t know”. There are no guarantees, but again we can do enough to ensure we have more than a reasonable chance of success. Those odds are higher than what we get normally 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 members of the community – they have enough time (10Y or more) to retire to accumulate a sizeable corpus.

A retirement bucket strategy refers to the way in which 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.

How does this help?

  1. 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.
  2. 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 more than enough to handle poor equity market returns. And typically, only 20-40% equity allocation is recommended for most retirees. So this is a huge safety cushion.
  3. 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).
  4. Yes, these are arbitrary mental subdivisions, but once I make them, I can face market downturns and crashes with much better ease. And I can even afford not to worry about bucket management – shifting funds from one bucket to another is, in principle, unnecessary.
  5. However, some management will make us sleep better. For example, the retiree can ensure at any point in retirement than 15 years of income (inflation-indexed) is always in safe income assets.
  6. One can further strengthen the plan with any income from pension, rent etc., which also forms what is known as an income floor, further cementing our peace of mind. See: Creating the “ideal” retirement plan with income flooring!
  7. 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.

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Pattabiraman editor freefincalDr 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 ten 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 investment advice.
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