Contrary to common belief, we really do not need a steady source of income throughout our retirement years; rather, we require cash flow or an income stream that increases in line with inflation. Designing a portfolio that emphasises returns rather than fixed interest payments can help you sustain cash flow.
By using a bucketing technique, one may increase the effectiveness of portfolio diversification, shield themselves from inflation, and reduce the actual danger of outliving their assets.
According to one’s investing objectives and time horizons, this method entails segmenting one’s retirement assets into several buckets.
One may control risk, assure liquidity, and increase profits by using a bucketing approach. The three main categories that should be taken into account while making retirement plans are broken out below.
Bucket 1: Investments in cash and liquid assets
Your retirement fund should be divided into cash and short-term investments as the first bucket. The amount of money required to pay your costs for the next two to three years should be placed in this bucket. It should be very liquid and simple to get to since you may need to often withdraw from it to pay your bills. For instance, if your monthly expenditure is Rs. 30,000, you may invest around Rs. 10 lakh in a highly liquid instrument.
Your savings bank accounts, money market funds, such as liquid funds, and short-term bond funds should all be included in this category. These investments come with little risk and a reliable revenue stream. Even though the returns could be low, they nonetheless provide the steadiness and liquidity you’ll need for your immediate expenditures.
Bucket 2: Safe Investments That Produce Greater Returns
After securing the cash flow for the first three years, you will need to manage it for the next five to seven years. It follows that you must make plans for the subsequent three to eight years. The amount of money required to pay your costs over the next four to ten years should be placed in this bucket. You will be able to clearly see when you need the cash flow on this basis. As you won’t have any other sources of income to fund your retirement, this will also help to some part define your risk.
There will be no room for taking risks as you will have to totally depend on your retirement resources. The only issue you have is inflation.
Your retirement plan’s second bucket should be devoted to cautious investments, such bank fixed deposits and cautious hybrid funds. The benefit of maintaining both fixed deposits and conservative hybrid funds will enable you to manage inflation by synchronising the cash flow from your bank fixed deposits with the lesser equity component in the latter.
Growth Investments: Bucket 3
The third bucket in your retirement plan should be set aside for growth investments now that you have previously anticipated the cash flow requirements for the first 10 years with the help of the first two buckets.
The amount of money required to pay your costs for the next ten or more years should be placed in this bucket. Long term growth and bigger returns are intended from it.
The traditional approach of keeping your retirement funds in bank fixed deposits may seriously jeopardise your retirement cash flow over time. This is due to the fact that no bank will provide fixed deposits for periods longer than ten years, and even if you deposit money now at a higher rate, there is no assurance you would still get that rate after ten years.
In this circumstance, it is crucial to invest in an asset type that promises stronger long-term growth, such as stock. To offer a boost to your return on investment throughout your whole portfolio, you may choose to add the flavour of equity to this bucket.
While equity is a more volatile asset type, it has better long-term returns. Mutual funds with varied portfolios should be included in this category. Mutual funds have the benefit of assisting you in reducing the risk involved with individual equities when you invest.
You may increase your portfolio with equity-oriented hybrid funds if you want to be extra secure, or you can invest in a mix of diversified equity funds, index funds, and equity-oriented hybrid funds.
How It Aids
Bucketing will assist you in better earning your returns as well as managing your cash flow.
Your retirement portfolio may be bucketed in one of two general ways: time-based bucketing or asset-based bucketing.
Asset-based bucketing will assist you in managing risk and liquidity based on the asset classes that are most crucial to your retirement objectives, as opposed to time-based bucketing, which lets you manage risk and liquidity based on your retirement goals and timeframe.