A robust post-retirement investment strategy requires the following: (1) A large cash buffer for emergencies, (2) A guaranteed income source that handles partial expenses for the entire duration of retirement (also known as an income floor) or guaranteed income that increases at a rate close to inflation for the first 10-15 years of retirement. (3) investment in buckets of varying risk to handle inflation and other exigencies in retirement.
This can be achieved by combining a retirement bucket strategy with income flooring. The goal is to reduce the management risks associated with a bucket strategy.
Bucket Strategy: The retirement corpus is typically divided into three parts (buckets). A low-risk bucket with little or no equity. A medium-risk bucket with a small equity exposure and a high-risk bucket with equity as the dominant constituent.
Inflation-indexed income is withdrawn each year from the low-risk bucket. The goal is to ensure that there are enough funds in the low-risk bucket at any point in time to cover expenses (incl. inflation) for the next five years or seven years or as the retiree (or advisor) desires.
To ensure this, the funds in the medium-risk and high-risk must be actively managed (with switches at least once a year). If the high-risk bucket increases due to a bull run, some funds should be switched to low- or medium-risk buckets. Those interested can see how this works with this free tool: The Retirement ‘Bucket Strategy’ Simulator.
🔥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 👈
Naturally, managing a bucket strategy is anything but easy. Even financial advisors in India do not have much experience with it. So when we designed our robo advisor tool, our primary considerations were two-fold:
- Minimize the sequence of returns risk as much as possible. This risk is associated with substantial negative returns from equity and extended sideways markets, particularly in the early stages of retirement.
- Reduce the active management associated with buckets as much as possible.
Therefore, we combined the features of an income ladder and a bucket strategy and then further optimised it with additional features. Let us discuss this with an example.
The robo tool divides the retirement corpus into five buckets. That is, the retirement corpus will be divided into five parts. This is only one of many ways to construct a bucket strategy. The following assumes 45 years in retirement.
- An emergency bucket to handle unexpected expenses. Example: 5%
- Note: the overall equity allocation from the entire corpus is only 35% after retirement in this example.
- Income bucket that provides guaranteed income for the first 15 years of retirement. This minimises the sequence of returns risk to a great extent. During this time, investments are made in the following three buckets.
- Corpus 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 50% equity and 50% debt during the investment period (years 1 to 15 of retirement). This corpus weighs about 25%.
- Corpus from a medium-risk bucket will provide retirement income from year 27 to year 35. 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 27). This corpus weighs about 15%.
- Corpus from a high-risk bucket will provide retirement income from year 36 to year 45. To provide this income, this bucket shall have an asset allocation of 100% equity during the investment period (year 1 to year 36). This corpus weighs about 9-10%.
- After 15 years, the low-risk bucket can be turned into 100% debt and provide income for about 11 years. After that, the other buckets can also be progressively used. One can always customize this usage after retirement.
- Please note that bucket allocations will change as per the user inputs and are auto-determined by the robo tool. Please do not blindly copy these numbers.
Here, too, rebalancing among buckets and occasional profit booking is essential. However, unlike a regular bucket strategy where everything is fluid, each bucket is designed to progressively “mature” at different times in the future (like an income ladder) to account for future income. So, in principle, one can manage the buckets without any “active” (market-dependent) management and opt for annual rebalancing.
A bucket strategy can be optimised further by combining it with income flooring or an annuity ladder. These two features mentioned below are now part of our robo-advisor tool.
(1) Using income flooring: Here, we buy an annuity (pension) for an amount equal to the expenses in the first year of retirement. Then, the expenses in the latter years are handled using the method detailed above. More details are here: How to beat inflation after retirement with a guaranteed pension. This further reduces the management of the retirement buckets.
(2) Using annuity laddering: We considered a single annuity in the above example. We can buy additional annuities (say, every decade) and further reduce the management of retirement buckets. This is also a form of income laddering and exploits the higher interest rate on pensions as the retiree ages. Details: Use this annuity ladder calculator to plan retirement with multiple pension streams.
Thus, we can eliminate management risks associated with a plain bucket strategy using features such as an income ladder and annuity ladders.
We are on Google News
Use this button to add freefincal.com as a preferred personal finance source on Google News.
Explore 1,400+ videos on YouTube!
Subscribe to get posts via email!
Join 32,000+ readers and get free money management solutions delivered to your inbox! (Link takes you to our email sign-up form)Join our WhatsApp Channel
Explore our products
🔥Join our community of 9000+ users! 🔥- Use our Robo-advisory Tool to create a complete financial plan! More than 3,500 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
- 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 conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
- Join the freefincal investor circle! An exclusive space for investors, advisors, fintech employees and students to access financial planning and insurance tools, mutual fund and stock analysis tools, coding strategies and Excel macros for data extraction. 750+ members are now part of our investor circle.
- Increase your income by getting people to pay for your skills! More than 900 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 side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
- Portfolio Tracker! Track your mutual funds and stock investments with our Google Sheet!
- We also publish monthly screeners for
Our Podcast: Let's Get Rich With Pattu
On Spotify: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! On Audible: Listen to the Let's Get Rich with Pattu Podcast
Listen to the Let's Get Rich With Pattu podcast on YouTube.
Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!About The Author
Dr M Pattabiraman giving a lecture
- 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 14 years of experience publishing news analysis, research and financial product development. He has over 28 years of teaching and research experience. He is also a public speaker and keynote presenter.
- He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
- Connect with him via @pattufreefincal on X LinkedIn YouTube
- Pattabiraman has co-authored three print books.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want. 
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
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.)Our publications
- Your Ultimate Guide to Travel. This is an in-depth exploration of vacation planning, including how to find 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)
- How to profit from content writing: Our ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!