Last Updated on September 4, 2018 at 10:57 am
This is a ‘how to play’ guide for the retirement ‘bucket strategy’ simulator that was published more than three years ago. Many have used the simulator and provided feedback. I thought it maybe a good time to revive the idea since more and more people are interested in post-retirement income strategies. They can be categorised into three:
- Those who are on the verge of retirement.
- Those who would like to plan for early retirement: Is it possible to retire early in India?
- Those who would like to manage their parent’s retirement corpus. (several posts available, will compile them)
This simulator provides simplistic random market returns to see the effect on the retirement nest egg. The simulator helps the user ‘get a feel’ about the bucket strategy, and the dangers of taking on too much risk.
What is a bucket strategy?
You take the retirement nest egg and invest it in 2-4 instruments of varying risk profile. Some zero or low-risk to provide income for next few years, while others grow (hopefully untouched).
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W1: Systematic withdrawal (fixed return) A traditional retirement calculation assumes that the entire corpus grows at some net return while also being used for income (via withdrawals) each year. An example is the popular The low-stress retirement calculator (hopefully!)
In a bucket strategy, the buckets with varying returns are explicitly considered. An example is the even lower stress retirement calculator!
W2: Withdrawals from multiple buckets can be systematic without worrying about the returns in each bucket.
W3: Active bucket strategy: In this case, the retiree monitors the growth of each bucket and withdraws from a well-performing bucket to fund immediate income needs. The bucket strategy simulator generates random returns for the user to test out this active strategy.
The first few inputs are similar to any retirement calculator. It estimates the corpus required and if you want, you can enter a different corpus (typically lower). You also enter a constant pension and income from other sources.
The corpus calculated in the above screen can split across 5 buckets. For simplicity, I have used
Bucket 1: FD
Bucket 2: debt fund
Bucket 3: Balanced fund
Bucket 4: Large cap fund
Bucket 5: Mid/small cap fund
The user can determine the allocation to each bucket, expected return, and how much returns will fluctuate about an average return. This is a simplistic assumption. If there is enough interest, I can perhaps work with real returns.
The simulator page
Here one can track the growth of the corpus year after year by clicking on the yellow button.
Inflation-protected income is obtained from bucket 1, while other buckets are allowed to grow.
With each click, the evolution of the corpus for the three withdrawal strategies mentioned above (W1,W2,W3) are plotted.
If the corpus runs out of money, you will be informed!
The idea behind the game is to shift gains from buckets 2,3,4,5 to bucket 1 from time to time so that the corpus can be prolonged for as long as possible.
The shifting can be done each year even without any ‘lack of corpus’ error message.
The simulator has gone through several revisions thanks to user feedback: The retirement bucket strategy simulator
Nitin suggested that I incorporate the 75-80% correlation in returns between large caps and mid-caps. I have a version with this, but choose not to publish it, as it makes too easy to play with.
Instead of random returns, I can get random past returns and work with that. Do play with the sheet and let me know how well it can be improved.
I would like to make a similar sheet for goal-based investing as well.
Download the Retirement-bucket-strategy-simulator-May-2016
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