This article explains how retirees should allocate their investments between equity, debt and cash buckets for their post-retirement portfolio.

📚 Table of Contents

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• What is the concept of the bucket portfolio?
• What is the basis of asset allocation in retirement?
• What should be the split of buckets in retirement?
• How to review the retirement portfolio every year?

What is the concept of the bucket portfolio?

The concept of the 3-bucket retirement portfolio creates three risk-based asset pools or buckets out of the retirement portfolio:

• Bucket 1: cash for short-term expenses (3-5 years) and emergency fund (12 months of expenses)
• Bucket 2: debt assets for portfolio stability and income
• Bucket 3: inflation-beating assets like equity MF and direct equity stocks

In this article, we will discuss how retirees can split their assets between the three buckets based on the concepts of goal-based investing for retirement.

What is the basis of asset allocation in retirement?

We will use the “Medium” risk profile and apply the allocation to each year in retirement. Once we do that, using the Arthgyaan goal-based investing calculator, we will arrive at the split of equity, debt and cash budgets. The theory of breaking down the expenses as per retirement years is explained here: How do you get SIP amount for retirement: Part 3. You can also implement as per our model portfolios below:

What should be the split of buckets in retirement?

We will make the following assumptions:

• 3 years of expenses in the cash bucket plus one-year expenses as an emergency fund
• equity return in retirement is 11% post-tax
• debt return in retirement is 5% post-tax
• inflation is 7%

Running the model gives us the following chart:

We can read the chart like this:

• Determine how long your retirement corpus is expected to last. For most families, this figure will be the life expectancy of the younger spouse. Let’s say this figure is 40 years
• Locate this figure in the X-Axis, and you can see the allocation in the Y-axis. For 40 years, the equity to debt to cash allocation is 46.10%, 46.93% and 6.97%.

Once the asset allocation is determined, you can choose investments in each bucket per this guide: How to plan for retirement using the bucket approach?

How to review the retirement portfolio every year?

The process explained above is accurate as of today. A year later, you need to revisit the entire retirement portfolio since, in the X-Axis, you need to move one place to the left. In our example, the portfolio above, the passing of one year means 39 years are left. The asset allocation changes to a more conservative value of 45.75%, 47.13%, and 7.12%. The portfolio will need to be rebalanced by selling assets in the category which has excess and buying that category which has more to bring the allocation to the target figure.