Financial Planning
Struggling with financial planning? Use the 'Bucket Strategy'
Know more about the three-bucket strategy to organise your future finances that enables better liquidity, growth, and stability in retirement.
Key takeaways
- Organises investments into distinct buckets for liquidity, stability, and growth.
- Ensures immediate access to funds during market fluctuations.
- Balances short-term needs with long-term growth objectives.
- Provides clarity and control in retirement planning.
Are you tired of financial planning that feels like a juggling act? You can choose a transparent system of purposefully organising your money with a retirement bucket strategy. That will help you confidently reach your retirement goals while protecting you from market volatility.
Such a strategy segments your investments into distinct “buckets.” Each of them will be aligned with specific financial goals and time horizons. This post will help you understand the benefits of the strategy and how to use it better.
What are the benefits of bucket strategy?
- Financial flexibility: The 3-bucket strategy allows you to plan for various expenses throughout your retirement.
- Peace of mind: You will have a readily available pool of funds for your immediate needs. That can be a stress reliever.
- Psychological advantage: The 3-bucket retirement strategy can provide a sense of control over your finances. You will know your retirement is well-planned.
- Market protection: With this strategy, your short-term requirements and long-term growth investments will be kept apart. That means you don’t have to sell bonds or stocks during a market downturn.
The three-bucket strategy explained
Bucket 1: Safety & Liquidity
For emergencies and short-term needs with easy access and capital protection. These are things you should consider including:
| Savings Account | Fixed Deposits (FDs) | Liquid Funds |
|---|---|---|
| Highly liquid | Low-risk, fixed returns | Invest in short-term debt instruments |
| Low returns (~2–4%) | Tenure-based (flexible durations) | Potential to earn better returns than Savings Account |
| Ideal for emergency fund and daily expenses | Penalty on premature withdrawal | Usually redeemable in 1–2 days |
The right amount you would want to put into this bucket is dependent on your situation. A better rule of thumb is to save up to three to five years' worth of living costs. This cushion can save you from market gyrations or unforeseen expenses without tapping into your long-term investments.
For example, let's say that the forecast for your living expenses each year is about ₹10 lakhs. By adding ₹30 lakhs to this bucket, you have coverage for three years. You might consider placing ₹10 lakhs in a savings account for liquidity, and ₹20 lakhs in short-term FDs for a potentially better interest rate and liquidity.
Bucket 2: Stability & steady growth
This bucket is intended to cover your budgeted costs in the mid-retirement years. This bucket is meant to ensure steady growth, stability and comes with moderate risks. It provides room for funds availability for expenditures in the middle term and minimises severe market risks. In this bucket, the emphasis is on earning income for these expenditures that somewhat surpass inflation but are not extremely risky. You can consider these investments:
| Debt Mutual Funds | Hybrid Mutual Funds | Index Funds / ETFs |
|---|---|---|
| Invest in bonds and debt securities | Mix of equity and debt | Track market indices (e.g., Nifty, Sensex) |
| Generates regular income | Balanced risk and returns | Low cost, passive investing |
| Lower risk than equity funds | Useful during market volatility | Suitable for moderate risk appetite |
Bucket 3: Growth & Wealth Creation
The third bucket is primarily focused on growth potential. It will ensure your savings keep up with inflation and support you during retirement. Here, growth-oriented investments will take centre stage:
| Stocks | Equity Mutual Funds | REITs & InvITs* |
|---|---|---|
| High growth potential | High return potential | Backed by income generating real estate or infrastructure assets |
| Higher risk & volatility | Plethora of options | Regular income + moderate growth |
| Requires research and active tracking | Higher risk, market-linked | Listed instruments with some market risk |
* Real Estate Investment Trusts. Infrastructure Investment Trusts | ||
One key factor to keep in mind is diversification. You should not put all your eggs in one basket. You should spread your investments across different asset classes. That will help you manage risk well.
An investor can put in ₹70 lakhs in this bucket as ₹50 lakhs in equity mutual funds and ₹20 lakhs in REITs. Assuming an average of 10% long-term equity returns and a 7% REIT return, this bucket could potentially compound over 15-20 years. However, it's important to note that these returns are not guaranteed and depend on market conditions. This could provide a solid financial cushion for later retirement years.
Visual representation of the bucket strategy
Below is a table summarising the three buckets, their purposes, components, and potential returns:
| Bucket | Purpose | Components |
|---|---|---|
| Bucket 1 | Short-Term Needs | Savings Account, FDs, Liquid funds |
| Bucket 2 | Mid-Term Goals | Debt oriented funds, Hybrid funds, Index funds and ETFs |
| Bucket 3 | Long-Term Growth | Stocks, Equity-oriented funds, REITs & InvITs |
Conclusion
The financial bucket strategy could potentially assist you in managing your retirement planning. You should organise your savings into different sections based on your needs. This way, you can create a roadmap for a fulfilling and financially secure retired life.
The three-bucket retirement strategy could potentially provide a useful framework, but it's important to consider your individual financial situation and consult with a financial advisor. But your risk tolerance and needs will change with time. You should carefully assess your life expectancy and retirement age when deciding on the time horizon for each bucket.
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
Mutual Fund investments are subject to market risk. Please read all scheme-related documents carefully. Axis Bank Ltd. is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Any purchase of Mutual Funds by Axis Bank’s customer(s) is purely voluntary and not linked to availment of any other facility from the Bank. This content is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future returns. Readers are advised to consult a qualified financial advisor before making any investment decisions. Terms and Conditions apply.
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