What is the bucket strategy in retirement planning?
Retirement planning is like hitting a moving target, where the target is your retirement goals. These goals are essentially what you want to spend and achieve with your finances in retirement years. Retirement is said to be a moving target because no one knows how long one is going to live. It might last for 10 years and even go on for 50 years. It is said that the bucket strategy helps you serve the purpose.
What is the bucket investment strategy?
Bucket strategy is nothing but segregating your retirement into different time frames (known as buckets) and investing accordingly. They are not your regular plug-and-play investment strategy. It believes in the fact that no size fits all. In general, it divides the retirement into three distinct time frames:
1. Short term
2. Medium term
3. Long term
The short term comprises of the first 5 years of retirement, the medium term comprises of the next 5 to 10 years, and the long term comprises of the remaining years of retirement. By segregating the time frames, you would be able to prioritize the times when you would need the money. This means that the most recent bucket would focus on a fixed income and the later ones would be more aggressive.
For short term bucket, you would be investing in safe investments as this is something that you would surely need after you retire. So, investing in fixed income would serve the purpose of capital protection in the initial years of retirement. For medium term bucket, you would be investing in a bent portfolio comprising of equity as well as debt. According to this approach, it is assumed that you would be able to take the risk in the medium term because you would be still far away from needing this money to spend. For the long term bucket, you would be investing in a more aggressive portfolio as you would be putting more of your assets in equity. According to this strategy, it is assumed that the money in this bucket is not required for a long period.
The only drawback of this strategy is that it takes the reverse glide path. It means it gradually increases allocation to equity, whereas, in a normal glide path, it slowly decreases allocation in equity. So, it becomes riskier as you get older, which might defy the purpose of retirement planning. However, you can fix this by reviewing it annually and changing the allocations accordingly by increasing the investments in debt in the near term.