Buying a car, owning a home, saving for your children's higher education and marriage, and going on a foreign vacation - these are some of the common financial goals we hear from most people, right??
But nowadays, millennials and GenZ-ers are quickly adding one more.?Early retirement.?
While retirement in itself is a goal that often takes a backseat in most people's financial lives while they continue their quest to achieve other financial goals, early retirement sounds even more difficult.
Here it is also noteworthy that you may get a home loan, car loan, travel loan, education loan, etc for most life goals, you won't get any loan to build your retirement corpus, right?
At the simplest level, retirement planning involves estimating your expenses during retirement, accumulating a sufficient corpus, and investing it in such a way that it covers the expenses and makes your retirement corpus last your life expectancy.?
But wait, before you get anxious about your retirement, what if we tell you that there is a three-bucket strategy that can help reduce your anxiety around retirement corpus and give you a financially comfortable retired life? Let's find out more about it.
Also Read:?How To Calculate Your?Retirement?Corpus Amount?
This strategy advocates asset allocation of your retirement corpus into three different ¡°buckets¡± based on the time horizons you would withdraw from each of these.?The first bucket meant to cover the initial years (say 3-5 years) of retirement would primarily invest in safer instruments such as short-term debt.
The second bucket, meant for the intermediate term (say 10-12 years) can invest in a mix of medium-term debt and equities.
The third bucket, which one would withdraw from after 15+ years, can invest in equities. This approach aims to balance market volatility and spread corpus availability over a longer period.?
1. Short-term/cash/liquidity bucket
2. Medium-term/safety bucket
3. Long-term/wealth creation Bucket
What is the goal?
To provide for daily expenses. To take care of possible emergencies. For major expenses in the short-term (2-3 years).
What sort of assets does it contain?
Cash, money in savings accounts, short-term FDs, debt funds (liquid/ultra short term/short term), short-term bonds.
What amount of financial assets are needed in this bucket?
It is recommended to keep 2 to 4 years of expenses in this bucket.
What sort of returns should be targeted from this bucket?
The focus here is on liquidity. There is no need to bother too much about returns.
What is the goal?
To generate some cash flow so that your liquidity bucket can last longer. In the case of a long bear market, it will help to avoid selling assets that are in the long-term bucket.
What sort of assets does it contain?
Long-term bonds, debt funds (long term/GILT), REITs, balanced funds, dividend stocks.
What amount of financial assets are needed in this bucket?
It is recommended to keep 4 to 6 years of expenses in this bucket.
What sort of returns should be targeted from this bucket?
As per Money control, the returns from this bucket should match inflation. Suppose you retire in 2025 and your annual expenses are Rs 10 lakh. You add Rs 50 lakh to this bucket. The assets in this bucket should grow at such a rate that they will be able to last you any five-year period in your retirement. It might be 2030-35 or 2045-50.
What is the goal?
To create wealth over the long term so that you don¡¯t run out of money in later years. Also, to ensure that you pass something on to the next generation.
What sort of assets does this bucket contain?
The bulk should be in equity (via mutual funds or direct), real estate, and gold. There should also be a debt/cash component that can be used to make use of any opportunity that arises.
What amount of financial assets are needed in this bucket?
The more the merrier. Most experts suggest 20 to 30 times of your annual expenses for early retirees.
What sort of returns should be targeted from this bucket?
It should beat inflation by a decent margin. The goal would be to beat inflation by 4 percent over the long term. However, be prepared for a 2 percent margin as well.
Once the buckets are created, you need to frame rules on how and when to rebalance the buckets. You take money out from the cash bucket as and when you spend. Most people refill the cash bucket every six months by selling something from the wealth creation bucket.
The assumption here is that the markets are doing well. In case the markets are not doing well or there is a bear market, you do not refill the cash bucket. Now, bear markets can last long. In most cases, a bear market lasts for a few months but it could very well extend to a decade.
The report mentioned that the bucket strategy protects you in such scenarios. You can first spend from your cash bucket and then from your safety bucket before you are forced to sell your equity. The key idea that makes the bucket strategy successful is that you always sell equity, in small quantities, in bull markets when equity is doing well. In bear markets, you are not forced to sell equity because you have enough cash and bonds in the short-term and medium-term buckets.
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