One of the biggest challenge faced by retirees is a defined investment strategy which can generate the desired post retirement income and can sustain for the life. Mr. Ravi Shankar has faced the same problem when he retired in June 2014. Without a proper investment plan he directed all his investments towards safer avenues which included fixed deposit, post office schemes, annuities, etc. etc. This strategy looks good when you see the generation of required fixed income instantly. But it has many issues. Annuities are taxable and the return offered at earlier age of retirement is not so good. Fixed Deposit and other avenues too have taxability and reinvestment risk associated with it.
On the other hand debt mutual funds have variable income and you are much dependent on the return they offer. Considering the debt markets also sees both sides of coin you will face with real issues when it is not in favor. So Mr. Ravi Shankar did not opted for it. When you work out his investment strategy, he falls short of funds in later years of life primarily because it has not been able to address taxation and inflation.
We all know very well that there is a life span of 25-30 years post retirement or even longer. With uncertain interest rate and absence of fixed return environment you cannot sit back and relax. You need to manage your investments efficiently so that it can provide necessary funds especially when your age does not allow you to work physically. What is the strategy then which can ensure your retirement needs are taken care and the corpus you have accumulated is good enough to provide you funds in the very later years of your life?
Let’s understand the bucket strategy and why it is the most viable option for your retirement fund-
What is a Bucket strategy?
As the name suggest the strategy is to form buckets of your portfolio to serve needs at various stages of life during the retirement period. So there will be different investment bucket to fulfill immediate living needs of next two years, mid-term needs between next 3-10 years and long term needs above 10 years. Since the objective will vary during the stages discussed above the investment bucket serving above needs will carry different investment portfolio. The immediate need is served by keeping part of the corpus in cash which provide for next two years of living expenses. Similarly for 3-10 years of expense the bucket will have mix of short term and medium term avenues. For needs above 10 years the money can be kept in growth assets such as equities which will ensure a proper growth of the portfolio and will take care of the inflation. This way you are ensuring the growth in the accumulated corpus is good enough to take care of the retirement expenses in the later years of your life. Any other requirement can be met by forming another bucket and investing funds appropriately.
How many investment buckets you should have will depend on what stage you are in? If you are young retiree then you will have 3-4 buckets. But if you are in your later years of life when you may have 10 years of life ahead your need will get fulfilled with two buckets as you may not require very long term investment to keep.
Case
Let’s understand the strategy with situation of Mr. Ravi Shankar. At age of 60 he has good enough of life remaining. He retired with R 2 cr corpus which he has built through his long working years. If we go by his simple strategy then this entire money will go in fixed income options which may serve him only for 15 years since inflation and taxes will eat up his returns and principal later. So he can create three buckets in the following manner:
1st Bucket- R 20 lakh
Investments- Cash, FDs, Money Market Mutual Funds
This bucket will meet his next two year expenses. Since it’s a short term investment and mostly up for withdrawal the corpus can lay in savings account, money market mutual funds i.e. ideally the most liquid asset class. The growth in the corpus will be very minimal and so the fund will be utilized solely for meeting the two year living expenses.
2nd Bucket- R 80 Lakh
Investments- Medium Term Mutual Funds, Bonds, Small Savings Schemes
This next bucket is to meet the income requirement for next 3-10 years. Ideally the approach is to have principal protection along with decent growth in the income which can actually take care of the inflation. Although the portfolio will be created on the basis of what withdrawal rate you assume ideally it will be a mix of short term and medium term avenues. MIPs in mutual funds can also form the part of the portfolio which provides a reasonable return. Since the holding period is minimum three years the long term taxation is also addressed on these investments.
3rd Bucket- R 1 cr
Investment- Equities, Long Term Bonds
The last bucket is for meeting the need beyond 10 years and up to 25 years or life expectancy. It will be a long term investment and the objective is to earn reasonable real returns i.e. above inflation. So the portfolio should be invested in growth assets which will comprised mainly of equities and long term bonds. Within equity also from the perspective of a retirement portfolio the corpus can go into large cap equity mutual funds and others which aim for consistency and downside protection. Some portion of the corpus can also be invested in long term income funds.
The above bucket strategy is only an illustration. How it will be set up and what it should comprise of is a decision taken based on your risk tolerance and your withdrawal need. The long term income generating products like annuities can come in at later stage of life so that more can be earned with minimal corpus. Similarly long term fixed income products like tax free bonds or corporate bonds can supplement the bucket strategy for those inflation beating returns. All in all, the ideal approach for your post retirement needs is to analyse your situation and plan the retirement corpus well so that it can sustain a longer period than what you have planned for.
What options you have availed for your post retirement needs?Did you followed this strategy?
Share your views in the comments section……
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In addition to this could we have a separate bucket for medical expenses provision, or continue with mediclaim? Medical expenses will rise substantially in the later years and I feel that mediclaim will not be able to cover them adequately. I would like to hear your views on whether a part of the corpus should be earmarked and invested for this contingency.
Rajan Hatiskar,
Yes. Ideally mediclaim becomes costly at very high age (Beyond 75 or 80s) and it may happen that premium you pay in those years may not justify the coverage amount. Also the premium for parents health insurance is paid by their children in most situations. So during retirement if one has a good surplus then a small portion of the retirement corpus can go for building this health fund for later years of life and as it is accumulated it can replace the health insurance.