Retirement seems to be a long way off when one is working, but it can come sooner than you expect. Most people build their retirement plans by thinking of strategies that can give them a tidy nest egg when they stop working: systematic investment plans, fixed deposits, and other investment options. People expect to increase their SIPs when salaries rise and accumulate wealth gradually.
But these ideas are dependent on the aspect that the market works in your favour. There are no plan B's if the market suddenly turns volatile or if unexpected events lead to lower returns on mutual funds. In this case, investors could be forced to reduce their expected lifestyle, use their savings more or alter retirement plans and keep working longer. However, a simple solution can help reduce risk: the 2-bucket strategy.
What Is The 2-Bucket Strategy?
The idea involves dividing retirement money into investment categories. Most people just invest their money based on each investment option, like stocks and bonds, but they do not have a clear idea of how much their corpus is at risk.
The 2-Bucket plan divides the money into growth and safe categories. The investments in the first section include the equity component of the National Pension System and equity mutual funds. The safe category features FDs, Employee Provident Fund and Public Provident Fund.
Your investments will depend on a glide path or a plan that changes how your investments are split as you get closer to retirement. The plan must be tied to the number of years until you stop working, not current events or news.
Tips To Keep In Mind
Using a glide path means creating a series of planned shifts in asset allocation to reduce your risk gradually as you inch closer to retirement. An aggressive allocation strategy for 20 years, followed by a drastic change closer to retirement, will leave you more vulnerable to market fluctuations. Small annual adjustments to the plan are essential to keep your investment goals on track.
Some people may think that allocating new SIPs to less risky ventures will create a natural glide path, but that does not happen. This idea will not lead to a lower risk for your portfolio. In order to actually mitigate the risks, you need to make changes in your present funds, not just future ones.
Keep a small portion of funds in the growth bucket even when you retire, as it can help beat inflation.
Following a 2-bucket strategy can help you reduce portfolio risk, reduce financial stress, tackle inflation, support long-term goals and offer protection against market volatility.
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