Retirement planning: What is the 3 bucket strategy for retirement?

To have a stress-free retirement, it's smart to start planning for it early. A retirement bucket strategy is a money plan to help save for retirement. It involves dividing your savings into three "buckets" based on when you'll need the money.

Here are five quick points to know about the bucket strategy for retirement planning

1.It is an investment approach that bifurcates your retirement corpus into three buckets.
2.These buckets are based on the time horizon for when the money will be required-immediate, medium-term and long-term.

3.Immediate bucket holds money in liquid assets, medium-term bucket in income assets, and long-term bucket monies in growth assets.
4.It helps with stand market fluctuations while managing withdrawals.
5.This strategy should be topped up with asset allocation and rebalancing strategies for optimisation

The 30:30:30:10 rule of saving for one's retirement

Now let us take a look at the retirement bucket strategy a little closer.

What is the three bucket strategy in retirement planning

The buckets are divided based on when you'll need the money: short-term, medium-term, and long-term. The short-term bucket has easily accessible money, the medium-term bucket has money in things that generate income, and the long-term bucket has money in things that grow over time. This helps manage changes in the market while taking out money. It helps retired people meet their financial needs at different stages of retirement. It's also good to combine this strategy with other ways of managing assets, like asset allocation and rebalancing, to make it work best.

Retirement planning: How to calculate retirement corpus

First bucket

The first bucket in this strategy is for covering everyday expenses and any sudden needs like medical bills, especially in the first 3 to 4 years after retiring. The money in this bucket is usually in things you can quickly turn into cash, like savings accounts, fixed deposits, liquid funds. It's important for this bucket to be very safe and not too risky, because it's what you'll use for your immediate needs.

Second bucket

The second bucket in the retirement bucket strategy is for money you'll need for medium-term goals, like traveling or pursuing hobbies. This money should be enough to cover expenses for at least 5 to 10 years. Investments in this bucket usually give moderate returns, helping your savings grow slowly but steadily. It's a good idea to consider investments like short-duration funds or high-quality corporate bond funds for this bucket.

Third bucket

The third and final bucket in this strategy is for long-term investments that aim to earn the highest returns adjusted for inflation. It's designed to provide a steady income for retired individuals and can also replenish the first two buckets if needed. For long-term goals, it's important to invest in assets with high growth potential, like stocks. Bluechip funds and multi-asset funds are good options for investments in this retirement bucket.