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What is the three-bucket strategy to get regular income from retirement corpus?

Ashutosh Gupta explains the mechanism of this strategy and suggests funds suitable for each bucket

Please explain the 3-bucket strategy for a retiree to get regular income from his retirement corpus and which category of mutual funds to be used in each bucket.
- Anant Garg

The idea with a three-bucket system for retirement is to apportion your retirement corpus across different time buckets suitable for that time horizon and help you derive regular income. For instance, the money you need as regular income in the next one to one-and-a-half years has to be invested in an absolutely safe way so that your income needs are well taken care of during this period. So, return is a secondary criteria, and thus, products like liquid funds suit this kind of a bucket.

As we move slightly beyond, up till the next three to four years, the aim is to generate steady growth. Even though the returns might be modest in this bucket, the idea is not to take any undue risks. High-quality debt products such as high-quality short-duration funds can fit the bill here.

Beyond that, for a slightly longer horizon, the idea is to invest so that your investments can generate inflation-beating returns for those long years of retirement. Therefore, it is necessary to add a little bit of equity to your overall mix of investments in this bucket.

Now taking all of this together, the retirees can allocate the income requirement for the next one-and-a-half years in one or two good liquid funds. From there, set up a systematic withdrawal plan to derive monthly income. Apart from that, they can look to allocate about one-third of their total accumulation in a few good equity products such as one or two good multi-cap funds that should generate inflation-beating returns over the long term. The balance amount can be invested in a few high-quality fixed income alternatives such as high-quality short-duration funds. For this bucket, government-sponsored schemes like the Senior Citizens Saving Scheme can also be appropriate. After setting up a retirement portfolio in this way, one can rebalance these allocations periodically, say at the start of every year, to restore the equity allocation to one-third of the remaining portion and shift the following year's income requirement to a liquid fund. The allocation can keep rolling in this manner, and one can keep deriving regular income year after year.

Note that an essential ingredient for this kind of framework to work is that one should not go overboard and be too aggressive with the withdrawal plan. More so, at the start of the retirement phase. So, one should typically aim to withdraw not more than 4-5 per cent of accumulation as retirement income in any year. Otherwise, you would end up drawing down your accumulation at a very rapid pace and face the risk of outliving your retirement savings.

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