Bucketing Strategy for Doctors Post Retirement Income flow?

Bucketing Strategy

Post-retirement money management can be tricky. The average retiree has another 25-30 years after retiring and investing in the wrong assets could cause them to lose their savings, with no regular income to cover the shortfall. 

Aside from this, mis-selling is also rampant, and retirees are more prone to fall victim to it and end up buying products not suitable for their overall needs.

When the money needed is spread over more than a year, a distribution strategy comes in handy.

Let us take an example to understand this. Fifty-eight-year-old Rakesh Rao will be retiring this year and expects to receive Rs 30 lakh in retirement benefits, comprising EPF, GPF, Gratuity, and leave encashment. 

His pension will also be Rs 15,000 per month. Some of the investments in his personal portfolio include fixed deposits, endowment LIC policies, and debt mutual funds. 

His investment portfolio is conservative, and he does not hold any equity. He expects to have around Rs 25,000 in monthly expenses following retirement, for which his retirement pension is not adequate. 

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To supplement his pension income, Rao is seeking advice on how to invest his retirement corpus. Furthermore, he is looking for a strategy for investing that can handle possible future inflation and uncertain expenses.

Mr. Rao has the option of parking his entire portfolio in safe investment instruments, such as bank fixed deposits. 

However, FDs don’t provide inflation protection and they aren’t tax-efficient because interest is added to the income, which is taxed at the individual slab rate. (Also Read: New or Old tax regime- what a doctor should choose?)

Other options include investing in debt mutual funds. Compared to bank FDs, this is a better option, but may be a bit volatile in the short term. If the money is kept for less than three years, debt mutual funds are taxed exactly like bank fixed deposits.

Rao must, therefore, devise a strategy that uses the right mix of equity and debt.

In his case, the best strategy would be ‘Bucketing’, where the total amount of investment would be divided among several buckets. 

For each of these buckets, there are different investment products assigned. All retirement portfolios can be customized using this strategy. (Read: Retirement Planning for Doctors – Why it should be the Most important Goal?)

The first bucket is to manage the immediate needs of the investor.

In this bucket, you will find bank FDs and post office schemes, since volatile products simply don’t fit here. Even the Liquid, Floater funds may be explored here, which needs SWP strategy for generating payouts.

In Rao’s case, the earnings from this bucket are meant to supplement his pension income. 

In addition to his pension, Mr. Rao needs Rs 10,000 per month. To fund his requirement, he may opt for a bank FD with a monthly interest payout.

Investing Rs 15 lakh at an FD rate of 8 percent will earn him Rs 1.20 lakh per year, or Rs 10,000 a month. FDs could have a three-year duration.

For emergency needs, a separate bucket would be required. One could park ten percent of one’s retirement funds in a safe and liquid instrument to accomplish this.

A month’s salary of Rs 25,000 generates an annual income of Rs 3 lakh for Mr. Rao. 

Fortunately, his tax slab permits him to save another Rs 1 lakh in interest by parking Rs. 12.50 lakh in another bank fixed deposit and saving the interest (of Rs 1 lakh) into a product under section 80C. (Read: Which expenses and investments qualify under section 80C?)

As a result, his total taxable income from bank interest and monthly pension will be tax-free and his liquidity will be maintained.

Bucket 2 is meant to refill the bucket 1

whenever required or it can supplement the monthly income in a more tax-efficient manner. 

You can use instruments such as medium-term debt or debt-oriented hybrid mutual funds such as conservative asset allocation funds. In some cases, Balanced advantage funds also get fit in. 

A Systematic Withdrawal Plan (SWP) can be used when the monthly payment needs to be increased. SWP will not result in the withdrawal of all units at once, so the tax liability is not significant. 

Money can be kept in the growth option if there is no monthly requirement of funds, as in the case of Rao. The tax liability on capital gains booked will fall further if the SWP starts after three years of holding fund units.

Bucket 3 is meant to provide the necessary growth impetus to the complete portfolio. 

In the first two buckets, investments are made with safety and tax efficiency in mind. Investing in bucket 3 will take inflation and tax efficiency into account. 

In this bucket, funds will be allocated to equity funds or equity-oriented hybrid funds. Short-term volatility in equity prices shouldn’t worry investors since the first two buckets are covering investors’ short- and medium-term needs. 

Furthermore, this bucket will have a longer investment horizon than eight years. Bucket 1 can be financed with dividends from bucket 3. Likewise, capital gains can be booked and used to fund bucket 2. Keeping in mind the taxation aspect, of course.

There is no thumb rule for how much money goes into each bucket, but generally, you should put 40 percent in Bucket 1, 10 percent in an emergency bucket, 30 percent in Bucket 2, and 20 percent in Bucket 3. 

Depending on the situation, the actual strategy may vary. As well as the duration for each bucket, it will vary according to inflation and income requirements.

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