Sharp market swings can make retirement planning stressful. Many retirees depend on systematic withdrawals from their investment corpus to fund their monthly expenses. But when markets turn volatile, this strategy can create anxiety about exhausting savings too early.
Recent market movements highlight this risk. The Nifty 50 has corrected more than 8 percent over the past month amid geopolitical tensions and the ongoing US-Israel-Iran conflict. Such declines can significantly affect retirees who depend heavily on equity investments.
Financial planners say the solution is not to completely exit equities or shift everything into fixed-income instruments. Instead, a balanced approach such as the three-bucket retirement strategy can help retirees manage withdrawals while protecting long-term wealth.
Retirees typically adopt one of two extreme approaches.
• Move the entire retirement corpus to fixed-income instruments and withdraw from it regularly.
• Keep most of the corpus invested in equities and withdraw directly from equity funds.
Both approaches have drawbacks.
Fixed-income strategy
• Provides safety of capital
• But returns may struggle to beat inflation
• Tax efficiency can also be limited
Equity-heavy strategy
• Offers higher long-term growth potential
• But market corrections can erode the corpus
• Falling markets may force redemption of more units at lower prices
If markets fall in the early years of retirement, retirees could end up redeeming significantly more mutual fund units, raising the risk of outliving their savings.
To address this problem, financial planners recommend splitting the retirement corpus into three different investment buckets.
This structure allows retirees to meet short-term needs while still keeping a portion of their portfolio invested for long-term growth.
This bucket is designed to meet immediate expenses.
It typically holds one to three years of living expenses.
Possible investment options include:
• Savings accounts
• Liquid mutual funds
The key objective here is liquidity and easy access, not high returns.
Funds in this bucket can be used for:
• Monthly expenses
• Medical bills
• Travel or family events
• Home repairs and emergencies
Investors can review this bucket annually and replenish it from the savings bucket if necessary.
This bucket holds money that can remain invested for three to seven years.
Suitable options include:
• Balanced hybrid funds
• Dynamic asset allocation funds
• Multi-asset allocation funds
This segment aims to provide a balance between stability and moderate growth.
The savings bucket can serve two purposes:
• Replenishing the safety bucket periodically
• Funding larger one-time expenses such as vacations or home renovations
The wealth bucket is designed for long-term growth.
Funds here typically remain invested for more than seven years.
Investment options may include:
• Large-cap, mid-cap and small-cap mutual funds
• Flexi-cap or multi-cap funds
• Limited exposure to sectoral or international funds
Because the investment horizon is long, investors can ride out short-term market volatility and benefit from compounding.
Funds from this bucket can later replenish the savings bucket.
The three-bucket strategy addresses three key retirement needs:
• Safety – covering regular expenses
• Stability – maintaining a medium-term cushion
• Growth – ensuring long-term wealth creation
By separating short-term spending from long-term investments, retirees can avoid panic withdrawals during market corrections and maintain financial stability throughout their retirement years.
