How to invest your retirement corpus? 3-bucket strategy explained for retirees seeking regular income

Retirement planning does not end with building a retirement corpus. Once regular salary income stops, the bigger challenge is managing that corpus so it can meet day-to-day expenses, fund lifestyle goals and continue growing for the later years of retirement. A retirement bucket strategy is one approach that can help investors organise their money according to when they are likely to need it.

The strategy divides retirement investments into three broad buckets based on the time horizon and purpose of the money. The first is for immediate and essential expenses, the second for medium-term lifestyle requirements and the third for long-term or aspirational goals.

According to Rajan Sarkar, Director & Unit Head, Anand Rathi Wealth Limited, the objective is to align the investment strategy with the investor’s time horizon, liquidity requirements and risk appetite. This ensures that near-term expenses are not dependent on the performance of long-term investments.

What is a retirement bucket strategy and how does it work?

The first bucket is designed to meet regular and essential expenses such as household costs, healthcare, medical expenses and other recurring requirements. Since this money may be needed regularly, liquidity is an important consideration.

The second bucket is meant for medium-term goals that are not necessarily part of everyday spending. These could include travel, holidays, buying a vehicle, home renovation or other lifestyle expenses.

The third bucket is intended for long-term and aspirational objectives. This could include building a larger retirement corpus, leaving a legacy for children or creating generational wealth. Since the money in this bucket may not be required for many years, investors can take a longer-term view while choosing investments.

“The idea of having each bucket for each goal is to align investment strategy with the investor’s time horizon, liquidity requirements and risk appetite,” Sarkar said.

The strategy does not mean every retiree should maintain the same amount or investment mix in all three buckets. The appropriate allocation depends on factors such as retirement income, corpus size, financial goals and risk profile.

For example, a retiree with a regular pension covering most household expenses may not need as large a first bucket as someone who relies primarily on withdrawals from investments.

How much should you keep in each bucket and how should inflation be considered?

There is no universal amount that should be allocated to each bucket. Investors should first estimate their expenses and identify when the money will be required. The next step is to factor in inflation because retirement can last for two or three decades.

Sarkar said investors should not necessarily apply one inflation rate to the entire retirement corpus because different expenses can rise at different rates.

Essential expenses, particularly healthcare and medical costs, can experience relatively high inflation. Healthcare costs, in particular, have been rising at around 9–10%, according to Sarkar. This means retirees may need to build a larger buffer for healthcare-related expenses and account for higher future costs.

For medium-term goals such as travel and lifestyle expenses, investors could apply an inflation assumption of around 7–8%, depending on the nature of the expense.

For the long-term bucket, the objective should be to generate returns that can beat inflation over an extended period rather than simply preserve the current value of the corpus.

This makes it important to estimate each goal separately. A retiree should calculate how much an expense will cost when it actually occurs rather than simply setting aside today’s cost.

How does the bucket strategy protect against market crashes?

A major advantage of the bucket strategy is that it can help manage sequence-of-returns risk. This occurs when poor market returns happen early in retirement at the same time that the investor is withdrawing money from the portfolio.

Selling equity investments after a significant market fall can permanently reduce the amount of capital available for future growth. A bucket approach seeks to reduce this pressure by separating near-term withdrawals from long-term investments.

For instance, Sarkar suggested that the regular-expense bucket could have a 60:40 allocation between equity and debt. One year of expected expenses can be shifted from the equity portion into debt before the beginning of each year. Monthly expenses can then be withdrawn through a systematic withdrawal plan from the debt portion.

This approach can reduce the need to sell equity when markets are falling. If equity markets decline sharply, the retiree can continue meeting immediate expenses from the debt allocation instead of being forced to liquidate long-term growth assets at depressed prices.

The long-term bucket can meanwhile remain invested in growth-oriented assets and get time to recover when markets improve.

The strategy does not eliminate market risk, but it can provide a framework for managing withdrawals during volatile periods.

Which investments can retirees use across the three buckets?

The investments used for each bucket should reflect the corresponding time horizon, liquidity requirement and risk appetite.

For the near-term bucket, Sarkar suggested considering an allocation of around 60:40 between equity and debt, while maintaining sufficient liquidity for immediate withdrawals. The debt component could include debt mutual funds, fixed deposits and other relatively stable instruments. For very immediate requirements, liquid funds or fixed deposits may also be considered.

For the medium-term bucket, investors could consider a relatively higher equity allocation of around 70:30 between equity and debt. For the long-term or aspirational bucket, the allocation could be around 80:20, according to Sarkar.

Within the equity component, diversified equity mutual funds can be considered. The debt component could include debt mutual funds, fixed deposits and other relatively stable instruments, depending on the investor’s requirements.

Taxation should also be considered while selecting investments. Sarkar said investors in higher tax brackets could consider arbitrage funds over debt mutual funds or fixed deposits in appropriate circumstances, as these are taxed under equity capital gains rules and can offer debt-like liquidity and stability.

Ultimately, the bucket strategy is not about following a fixed formula. It is about matching each portion of the retirement corpus with a specific purpose and time horizon. Investors should periodically review the buckets as expenses, market conditions, income sources and financial goals change.

For retirees, the key objective is to ensure that money required in the near term remains accessible, while money meant for the distant future gets enough time to grow. This separation can make retirement withdrawals more structured and reduce the need to make rushed investment decisions during market downturns.