A reader who prefers anonymity, asks, “I have been following your retirement bucket strategy illustrations with interest. While I have no issues with the plan and see the necessity for dividing a corpus into an income bucket, low risk, bucket, high-risk bucket etc. I wonder how practical all this is for a retiree. How many will be able to manage this elaborate scheme, particularly as they age?”
First the basics. 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.
We have seen how our parents and grandparents manage their money after retirement. For most of them, a pension would be the main component. The remaining corpus would be distributed among senior citizen saving schemes, PMVVY, monthly income schemes, fixed deposits etc.
The main purpose of this is to obtain constant income after retirement with some liquidity to handle small emergencies. Most of them did not have enough corpus to try and fight inflation – that is, an increase in day to day expenses – after retirement.
A bucket strategy also has a similar structure: pension + income-generating investments from which we can draw more if our expenses increase + investments for capital appreciation. Each category is referred to as a bucket. Regular maintenance is also necessary. That is moving from one bucket to another depending on asset allocation or market conditions to reduce risk.
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Not everyone can adopt a bucket strategy after retirement. Beating inflation after tax requires capital market risk. So only those who can afford to take on such a risk can afford to beat inflation after retirement.
For example, 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 in retirement. (2) the rest of the corpus should be high enough to invest for 15 years and then beat inflation with it.
This is why, investing as much as possible, as early as possible is key to a comfortable retirement.
The key technical factors to consider while building a bucket strategy have been discussed before: How to create retirement buckets for inflation-protected income. Let us now consider the practical aspects.
The main problem is, many people have the incorrect notion that retirees will have to spend a lot of time and effort in managing a retirement portfolio. This is not true. An annual review of about 30 mins and another 30 mins for course correction is all that is required for managing a portfolio before retirement.
The same applies to after retirement. There is one caveat though. DIYing a bucket strategy requires a good amount of capital markets investing experience. It is best done only by those who have been investing in equity MFs, debt MFs and stocks for at least 15 years prior to retirement. Again why one should plan and invest for retirement asap.
Those who lack this experience but have the necessary corpus to deploy into buckets can approach a SEBI registered fee-only financial advisor with such experience.
There are no set rules for managing the retirement buckets. It is entirely up to the comfort level of the retiree. For example, the freefincal robo tool assumes that the buckets will be progressively used for income. The income bucket handles the first 15 years in retirement. After that, the low-risk bucket will be used for income over the next 10 years or so. Then the medium risk bucket will be redeemed for income over the next 7-8 years and then finally the high-risk bucket.
Thus minimal maintenance is built-in although one will have to play it by ear depending on circumstances now and then. With advancing years, the effort decreases and in the last decade or so, the money can be simple be managed out of a single bank account (SB + FDs).
At any point in time, if the retiree is unable to DIY this management, then they or their relatives should immediately consult a SEBI registered fee-only advisor for assistance.
Of course, the advisor’s style is unlikely to match ours but that cannot be avoided. If an advisor is willing, I would recommend informing them of our plans at the start of retirement and DIY for as long as we can. A retainer fee can also be paid if agreeable to the advisor. So that they can step in as required. The retirees’ children can either step in or co-ordinate with the advisor.
So is a bucket strategy practical? Like all approaches, it too has its pros and cons. If we wish to maintain our lifestyle after retirement, capital market risk (and therefore bucketing) for a small portion of the corpus is essential. See for example Retirement plan review: Am I on track to retire by 50?
There is no reason to be apprehensive of a bucket strategy. It is not as if a senior citizen investing only in annuities, post office schemes and bank deposits have it easy. These require maintenance too. In fact, mutual funds offer much better service without requiring physical visits.
The only requirements for a bucket strategy are a robust corpus, experience and mindset. This must be acquired several years before retirement. Going forward, more and more retirees will qualify for a bucket strategy. Therefore, advisors also need to be equipped for this.
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