Plan Your Retirement the Right Way

Everyone knows that they will be building a sizeable corpus if the start investing early. But, few know how they are going to manage that during their retirement. There is very few information on how to manage your funds during retirement. This article will help you to do that, and make sure that you don’t run out of money during your retirement. Let’s take a look at this using some examples.

Planning Your Retirement

Abu & Babu are close friends who have been working together and are on verge of their retirement. They both received their retirement benefits worth ₹1.5 crores, including their PPF, company benefits etc. Both of them have monthly expenses of ₹50,000, setting up for a perfect 4% rule. Abu knows that he needs to invest in equity since the interest rates of traditional investments like fixed deposits are barely beating inflation. He invests 100% of his corpus into equities — all lump sump, and decides to withdraw 4% from here.

Babu on the other hand, knows the importance of having equity in one’s retirement portfolio, but also knows the risks assciated with equity markets. He knows that no one knows what the markets might do, and it is not worth risking his retirement portfolio for a couple of percentage points of extra returns. So what can he do?

The Bucket Strategy

He decides to take out the amount that he will require for the next 4 years and puts that in liquid funds. Since these liquid funds give around 4-6% returns, this amout would be around ₹25 lakhs. Now, he invests the remaining ₹1.25 crores in debt funds, and starts a Systematic Transfer Plan (STP) into equity funds. This way, some part of his debt funds will be sold off and that amount will go to equity funds.

Now, Babu has nothing to fear about market crashes because he is investing in equity every single month. Let’s say he starts an STP of ₹50,000 per month, which is ₹6 lakh annually. This amount is little less than 5% of his remaining corpus (deducting the ₹25 lakh in liquid funds), which is well below the returns that he gets from the debt funds (conservatively 7-8%). This means he won’t be drawing down his principal amount of ₹1.25 crore. Babu is a smart man. He has planned this very well.

What Babu has done here is used the step-up equity allocation. This means after year 1, he has just 5% in equity as a percentage of his portfolio (not considering liquid funds). This restricts his downside. Even if the market were to tank 50% from here, his portfolio would be just 2.5% down — hardly nothing. But, let’s say the market were to rally 100% here, Babu would be losing out on the upside. Abu, in this case, would go laughing all the way to the bank. But, remember one thing:

You can't plan your retirement based on hope. Click To Tweet

You must understand the requirement based on that individual. In this case, we are looking are retirement planning. Our focus should not be on generating higher returns, but on preservation of capital. Once you get through the first few years, your worries of running out of capital become negligible. That is the reason for using the bucket strategy together with the increasing step up allocation to equity.


The bucket strategy is a retirement strategy that will restrict your downside and make the 4% rule relatively safe for withdrawal, no matter what the market conditions are. To sum the strategy up, we take out some portion of our portfolio in liquid funds and withdraw from that. The remaining portfolio will be put into debt funds and gradully step up our equity allocation from the debt fund portfolio. When your liquid fund gets extinguished, you will replenish that again from the debt bucket.

This will continue for till your liquid and debt buckets get extinguished. Till that time, the equity bucket would have sufficient time to grow, and you would then begin withdrawals from this bucket. This way you limit the downside and make sure that your capital lasts for a lifetime.


Till next time.

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