Retirement planning is a crucial part of financial planning, and generating income that sustains a retiree’s livelihood is paramount. One approach to ensure a secure retirement is to invest in a disciplined and consistent way. Systematic Investment Plan (SIP) is a strategy that helps here. It allows investors to invest a fixed amount at regular intervals in their chosen mutual fund scheme. However, investing in a single SIP may not fulfil all financial goals. This is why, many financial planners suggest the bucketing strategy.
The bucketing strategy involves classifying assets into different categories based on investment goals. This approach helps manage the risk better and allows retirees to allocate their funds strategically for short-term and long-term goals while maintaining liquidity for emergencies.
Understanding the bucketing strategy in more detail
The bucketing strategy involves dividing the retirement portfolio into different “buckets,” each designated for a particular financial goal. The goals can be categorised into short-term, medium-term, and long-term. This segmentation helps retirees allocate their funds effectively and provides a psychological sense of security, knowing that goals are being catered to regardless of market fluctuations.
Bucket 1: Short-term goals and emergency savings | Cash and liquid investments
The first bucket focuses on holding funds that cover expenses for the next two to three years. This bucket plays an important role in providing immediate financial support during emergencies or unexpected expenses. Investments within this bucket should be highly liquid and easily accessible. This can include low-risk options like money market funds, liquid funds, and short-term bonds. The main objective here is to preserve capital while maintaining the availability of funds when required.
Bucket 2: Medium-term holdings | Conservative investments with higher returns
Retirement doesn’t mean losing on aspirations and dreams. This bucket serves as a means to fund short and medium-term goals, such as a dream vacation or exploring newfound hobbies. The investments within this bucket can have a slightly higher risk profile than the first bucket, as the time horizon is relatively longer. Conservative investments that offer higher returns than regular savings accounts could be considered here.
Balanced mutual funds, bank Fixed Deposits, and short-to-medium-term government bonds are examples of investments that can find a place in this bucket.
Bucket 3: Long-term investments | High-risk holdings
Retirees need to think about the long-term as well. This bucket is dedicated to funding expenses that may arise a decade or more into retirement. Given the long horizon, the objective here is to prioritise growth and higher returns. High returns come with high risk, but retirees, with a long-term approach, can allocate a portion of their portfolio to more aggressive investments like equities, growth-oriented mutual funds, and even limited exposure to investments such as real estate or commodities.
One way to efficiently manage long-term objectives is by initiating a systematic investment plan online. This way, investors can invest in mutual funds consistently and get a diversified portfolio. Every SIP instalment payment automatically diversifies the money across various securities, depending on the chosen scheme.
To sum up
SIP benefits are numerous when it comes to retirement planning. However, initiating SIPs for different goals can be difficult and confusing to some. Bucketing strategies can simplify this process by dividing the investments into separate buckets. This will help retirees make calculative financial decisions for their golden years.
The two most common bucketing strategies are time-based bucketing and asset-based bucketing. Time-based bucketing helps investors manage risk and liquidity according to their goals and timelines. Asset-based bucketing is another useful strategy for retirees, helping them manage risk and liquidity by prioritising asset classes relevant to their retirement objectives.