Retirement planning often comes down to one question – where should you keep your money after you stop earning? For many retirees, the answer is fixed deposits. They are simple, familiar and offer predictable returns. But retirement can last 20, 25 or even 30 years. That makes the question more complicated.
The money you need next month does not need the same investment strategy as the money you may not touch for another 15 years.
This is where the three-bucket approach can help. Instead of treating the entire retirement corpus as one pool, retirees can divide it based on when the money will be needed: immediate expenses, regular income and long-term growth.
The exact allocation will depend on factors such as age, expenses, health, other sources of income and risk tolerance. But the basic idea is simple – give different parts of your retirement corpus different jobs.
The first bucket is for money you may need soon
The first bucket should be the most conservative one. Its job is not to generate high returns. It is to ensure that you have money available when you need it.
This can include your emergency corpus and expenses that are likely to arise over the next few years. The money should therefore be kept in instruments that are relatively stable and easy to access.
Hrishikesh Palve, Director, Anand Rathi Wealth Ltd, suggests keeping the immediate-needs bucket entirely in debt so that liquidity is not compromised.
Gibin John, Senior Investment Strategist, Geojit Investments Ltd, suggests setting aside at least three years of essential expenses in low-risk and highly liquid investments.
The number of years is not necessarily the same for every retiree. Someone with a pension and other regular income may need a smaller immediate buffer than someone who depends entirely on the retirement corpus.
The important point is that this bucket should not be dependent on market conditions.
If the stock market falls sharply, you should still be able to pay your electricity bill, medical expenses, groceries and other essential costs without having to sell equity investments at a loss.
| Bucket | Main purpose | What it needs to do |
| Immediate needs | Near term expenses and emergencies | Stay liquid and relatively stable |
| Regular income | Fund living expenses over the coming years | Generate predictable cash flow |
| Long-term growth | Fund later-life expenses and preserve purchasing power | Grow over the long term |
The second bucket has to keep the cash flowing
The next challenge is regular income.
Once a person retires, the salary stops but expenses do not. The second bucket is meant to bridge that gap.
This is where fixed-income products can play an important role. FDs, SCSS and other income-generating investments can be used to create a pool from which regular expenses are funded.
But the size of this bucket should be linked to actual spending needs rather than a fixed percentage of the corpus.
Adhil Shetty, CEO, BankBazaar, suggests keeping around five to seven years of expenses in fixed-income investments. This bucket can then be used to refill the first bucket as the money there gets spent.
Gibin John takes a more conservative approach and suggests that funds required for the next 10 years of expenses can be allocated to the regular-income bucket.
That difference is important. There is no universal rule that says every retiree must keep exactly five years or exactly 10 years of expenses in fixed income. The right amount depends on how much of your expenses are already covered by pension, annuity or other income.
For example, a retiree who receives a pension covering most monthly expenses may not need the same fixed-income cushion as someone who has no regular income after retirement.
The idea is to make sure that the money required for the next several years is not forced to depend on equity market returns.
But the third bucket is the one many retirees overlook
This is where retirement planning becomes different from simply keeping money safe.
A 60-year-old could potentially have another 25 to 30 years to fund. If the entire corpus is kept in fixed-income products, the money may remain relatively stable in nominal terms, but its purchasing power can still fall over time.
Food, healthcare, insurance and other expenses are unlikely to remain where they are today.
That is the reason for the third bucket.
This money is meant for expenses that are further away. It can also be used for large future expenses, legacy or other long-term goals.
Palve describes this as a long-term growth bucket that can be used for “aspirational goals like generational wealth, leaving legacy, funding large future expenses and philanthropic goals.”
Because the money is not required immediately, it has more time to absorb market fluctuations.
Palve suggests an 80:20 equity-debt allocation for this bucket, with the aim of combining long-term growth with some stability.
John, however, takes a relatively more conservative route. He suggests considering hybrid equity or balanced funds and large-cap mutual funds for the long-term bucket.
As with the earlier buckets, these numbers are not a template. The purpose is not to maximise returns. It is to give a part of the corpus enough time to grow and potentially stay ahead of inflation.
So, should retirees move beyond FDs and SCSS?
FDs and SCSS still have an important role in retirement planning.
They can provide predictable interest income and are easier for many retirees to understand than market-linked investments.
Shetty says SCSS and bank FDs can form the core of the second bucket because they provide “income and stability”. He suggests that, as a broad guide, 40% to 50% of the retirement corpus could be held in this bucket, depending on income needs, liquidity requirements and other sources of income.
The purpose of the bucket strategy is to allocate money according to when it will be required, not to fix every retiree at the same percentage.
Palve also cautions against putting an excessive portion of the corpus into FDs simply because they are perceived to be safer. He suggests that the allocation should be based on cash-flow requirements rather than a fixed percentage.
He also points out that retirees in higher tax slabs may consider alternatives such as arbitrage funds for the debt portion, depending on their circumstances, because of potential tax efficiency.
SCSS, meanwhile, can be useful for eligible senior citizens who value predictable income, but the lock-in and withdrawal conditions need to be considered before investing.
The bigger point is that safety and growth are not competing objectives for the entire retirement corpus. Different portions of the money can be used for different purposes.
Why equity still has a place after retirement
The word “equity” can make retirees uncomfortable. After years of saving, the idea of exposing retirement money to market volatility can seem risky.
But the bigger risk may be ignoring inflation over a retirement that lasts two or three decades.
John says retirees should maintain some equity exposure because retirement can last 15 to 20 years or more. His approach is to invest in equity only with money that will not be needed for at least the next 10 years.
He says retirees may consider investing up to half of the amount earmarked for expenses beyond the first 10 years in diversified equity mutual funds.
That gives the equity portion time to withstand short-term market fluctuations.
Palve also makes the case for equity when the investment horizon is longer than five to seven years. He suggests active diversified equity funds and gives a market-cap mix of 55:23:22 across large, mid and small caps for the equity portion.
Shetty’s approach is simpler: equity can form part of the long-term bucket, but the allocation should reflect the retiree’s ability to withstand volatility and the income available from other sources.
The important distinction is this: you don’t need equity to pay next month’s expenses. You may need it to fund expenses 15 or 20 years from now.
Expert recommendations at a glance
| Bucket | Palve (Anand Rathi Wealth) | John (Geojit Investments) | Shetty (BankBazaar) |
| Immediate needs | Entirely in debt | At least 3 years of essential expenses in low-risk, highly liquid investments | Not specified |
| Regular income | Not specified | 10 years of expenses | 5 to 7 years of expenses; SCSS and FDs can form 40% to 50% of the corpus |
| Long-term growth | 80:20 equity-debt; 55:23:22 across large, mid and small cap for the equity portion | Hybrid equity, balanced funds and large-cap funds; up to half of post-10-year money in diversified equity | Allocation should reflect the retiree’s ability to withstand volatility |
What happens when the market crashes?
This is where the three-bucket strategy can make a practical difference.
Suppose the stock market falls sharply just when a retiree needs money. If the entire retirement corpus is invested across market-linked assets, the person may have no choice but to sell at depressed prices.
The first two buckets are meant to reduce that risk.
Palve suggests continuing to withdraw regular expenses from the debt portion of the income bucket during a market correction and allowing the equity portion time to recover.
One way to do this, he says, is to shift the money required for the coming year’s expenses from equity to debt before the expense is due.
This creates a withdrawal buffer.
Shetty makes a similar point. The first two buckets should provide enough money for near-term expenses while the long-term bucket gets time to recover.
The strategy is therefore not about predicting when the market will fall or rise. It is about making sure you do not have to react to every market movement.
And then comes inflation and healthcare
A retirement plan that works today may not work 10 years later if expenses rise faster than expected.
Healthcare is an obvious example. A medical procedure, insurance premium or long-term care requirement can significantly change the amount a retiree needs to withdraw from the corpus.
This is why the three buckets cannot be created once and then ignored.
Shetty suggests reviewing the buckets at least once a year. If healthcare costs rise, retirees should first check whether health insurance or a separate medical reserve can cover the additional requirement before dipping into long-term investments.
Palve also suggests periodically reviewing expenses and increasing the regular-income bucket if actual spending starts rising faster than expected.
This does not mean constantly moving money around. The idea is to make small adjustments as circumstances change while keeping the long-term growth bucket focused on its original purpose.
Retirement planning is not about finding one perfect product
A retirement corpus has to do several jobs at the same time.
Some money has to be available immediately. Some has to generate regular income. And some has to keep growing because retirement itself could last another 20 or 30 years.
That is why the question should not simply be, “How much of my retirement money should I put in FDs?”
A better question is: When will I need this money?
Once that is clear, the role of FDs, SCSS, debt and equity becomes easier to understand.
The first bucket protects near-term expenses. The second creates an income bridge. The third gives the remaining corpus time to grow.
The aim is not to replace FDs with equity or chase higher returns after retirement. It is to make sure that every part of the retirement corpus is working for a different stage of retirement.
Disclaimer: The views and investment approaches mentioned in this story are based on inputs from the experts quoted. Investment decisions should be made after considering individual financial goals, risk tolerance, income needs, tax implications and investment horizon. Readers should consult a SEBI-registered investment adviser or other qualified financial professional before making investment decisions.
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