Understanding how to invest your money as you approach retirement can seem daunting. Many moving parts affect your nest egg, and it is not always clear how they all interact with each other. The good news is that once you know what to look for, there is a straightforward process to implement the plan. This article will give you a simple guide on retirement bucket strategy.
A retirement bucket strategy is an investment approach that involves dividing your investments into different buckets based on the goals you want to meet.
The first step in creating a retirement bucket strategy is to decide how much money you need to retire. The best way to do this is by using an online retirement calculator.
A typical retirement bucket strategy might include three buckets, each with its purpose and timeline for when you plan to access it. However, you can also create more buckets depending on your requirement.
When creating your retirement bucket strategy, you must consider what you want each bucket to accomplish and how much risk you’re willing to take with those investments.
Types of retirement buckets
The short-term bucket can take care of daily expenses, emergency funds, or any funds required to fulfil short-term goals. The money in this bucket is generally kept in extremely safe options such as savings accounts, liquid funds or short-term goals, as the funds should be extremely easily available with no to minimal risk to capital.
The second bucket offers stability and income for your retirement portfolio. As the assets in the short-term bucket depreciate, income from this bucket is utilised to replenish it.
The goal is to produce steady growth as we move slightly beyond the next three to four years. High-quality debt securities, including high-quality short-duration funds, may be appropriate in this situation. Although the returns in this category could be low, the goal is to avoid taking unnecessary risks.
The third bucket is designed so that you don’t run out of your retirement savings. And you will invest in investment options that can offer inflation-beating returns for those long years of retirement.
As a result, you must include a little amount of equity in your overall portfolio of investments in this bucket. The investment returns from this bucket are expected to fluctuate as the equity allocation of this bucket will be higher.
The assets in this bucket are not sold when the market goes down. Instead, they are kept for a long time and held through any changes in return.
Advantages and disadvantages of retirement bucket strategy
Like any other investment strategy, retirement bucket strategy has pros and cons. Here are some of the pros and cons of the retirement bucket strategy:
The bucket strategy has the advantage of assisting in emotion management during times of market turbulence. You won’t have to worry about selling at a loss when the stock market is weak. It is because the money for your daily requirements will be taken from the short-term bucket that carries almost no volatility.
You accomplish the appropriate diversification by grouping your investments and assets into various asset groups. It substantially evens out the risk-reward equation.
Designed to take care of the requirements in the different life stages
You can have it all with three buckets, each designed for a particular stage of growth. You always have a portion of your portfolio available to cover your daily expenses while the remaining funds keep growing so that you don’t have to run out of your retirement savings.
Reliance on precise forecasting is too great
It can be difficult to predict how much you need to allocate to these three buckets. The idea depends far too much on correctly predicting your retirement needs. The wrong estimation may lead to putting too much money in one bucket while disregarding the others, which could lead to problems.
Somewhat difficult to manage
The three-bucket retirement plan can be challenging to handle on your own. It is because you must keep shifting or rebalancing the different buckets per your current scenario. You have to decide the amount and time when you would have to shift money from the medium-term to the short-term bucket. And when you do that, you also have to transfer money to the medium-term bucket from the long-term bucket. So, it would be a better option to consult a financial advisor.
Worrying about how to predict your retirement date is stressful and unnecessary. You don’t need a specific date. You need a strategy that works for you. And retirement bucket strategy can be a strategy that might work for you.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.