Bucket strategy

A retiree needs money now, money in ten years, and money in twenty years. Those three needs do not belong in the same investment.

The bucket strategy splits the retirement corpus into three buckets, each matched to how soon the money will be spent. The first bucket is safe and liquid, because that money may be needed tomorrow. The last bucket can take real risk, because it has decades to recover from a bad year.

The point of keeping them separate is simple: a stock market crash should never force a retiree to sell shares at a loss just to pay this month's bills.

Bucket 1 holds 3 to 5 years of expenses (longer if the retiree wants more safety), plus an emergency fund. It sits in very low-risk assets: cash and equivalents for year one, bank deposits maturing in years two through five, the Senior Citizens Saving Scheme up to its limit, the Post Office Monthly Income Scheme, and, if needed, a short single-premium immediate annuity.

Bucket 2 covers the next 10 to 15 years. Because Bucket 1 already covers the near term, Bucket 2 can take some risk for better returns: long-term income funds, FMPs, bonds and debentures, real estate, gold, and equity capped at no more than 20% of this bucket.

Bucket 3 holds money needed 20 years or more away. It can carry the most risk — hybrid funds, large-cap equity funds and ETFs, long-term income funds, real estate and gold — because it has the longest time to ride out volatility.

Refilling runs one way only. Bucket 3 refills Bucket 2, and Bucket 2 refills Bucket 1 — never the reverse. If markets crash and Bucket 3 falls in value, it is not topped up from the safer Bucket 2 or Bucket 1; there is enough time (15–20 years) for it to recover on its own. One disciplined technique: set a target return on the riskier buckets, say 12% a year, and book profits above it by moving the gain down a bucket, so no single bucket grows to dominate the portfolio.

Three buckets are typical, but the framework scales — for example six buckets of five years each, with risk rising only marginally from one bucket to the next.

Mrs Rao retires with a corpus of Rs 1.5 crore and monthly expenses of Rs 60,000 (Rs 7.2 lakh a year).

Bucket 1 (years 1–5), Rs 40 lakh: roughly Rs 7.2 lakh in cash and equivalents for year one; four annual FD tranches maturing in years two to five; Rs 20 lakh in SCSS at the scheme's Rs 30 lakh ceiling headroom; plus an emergency reserve.

Bucket 2 (years 6–15), Rs 55 lakh: long-term income funds, corporate bonds and a modest 20% equity sleeve (Rs 11 lakh) — the maximum the workbook allows in this bucket — with the rest in debt and gold.

Bucket 3 (years 16+), Rs 55 lakh: hybrid funds, large-cap equity ETFs and gold, positioned for growth since this money will not be touched for at least 15 years.

In year 3, equity markets fall sharply and Bucket 3 loses 18% of its value. Mrs Rao's adviser does not draw from Bucket 2 or Bucket 1 to make up the shortfall in Bucket 3 — the fall is left alone to recover, since none of that money is needed for over a decade. Meanwhile, as an FD in Bucket 1 matures each year, it refills the year ahead, and periodically a maturing Bucket 2 holding tops up Bucket 1 — money always flows from the riskier bucket to the safer one, never back.

Chapter 7, section 7.4 (Bucket Strategy), is one of the most numerically dense sections in the retirement-strategies chapter. Expect direct recall of the three time bands (3–5 / 10–15 / 20+ years), the 20% equity cap in Bucket 2, and the one-way refill rule — as well as scenario questions about what should not be done after a market fall in Bucket 3.

• Refilling flows only from riskier to safer buckets, never the other way. A common wrong answer has Bucket 1 topping up a Bucket 3 shortfall — the rule runs the opposite direction.
• The 20% equity cap belongs to Bucket 2, not Bucket 3. Bucket 3 can hold considerably more growth exposure because its horizon is longest.
• Three buckets is the standard illustration, not a hard rule — the workbook explicitly allows more buckets (for example six buckets of five years each) with risk increasing only marginally between them.
• Bucket 1 is for drawing down; it is deliberately not optimised for return. Judging its performance against Bucket 3's return misunderstands the strategy's purpose.