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How to plan for retirement using the bucket approach?

21 Jun 2021 - Contact Sayan Sircar
6 mins read

Use the bucket theory of asset allocation to create a simple and stress-free retirement portfolio.

Bucket theory for retirement

Table of Contents


There are a lot of theories and complexities around retirement portfolio construction that involves complexities around debt to equity allocation, inflation assumptions and safe withdrawal rates (SWR). We have tackled some of these in a simplified manner in this post on retirement portfolio construction using Excel.

This post simplifies the problem further for someone ready to enter retirement by creating just three buckets of cash, bonds and equity for the construction of a retirement portfolio. This post is targeted at someone entering retirement anytime between today to a year from now. Anyone with retirement expected to start more than 1 year from now should simply follow this post instead. Please note that at all times, there should be adequate emergency fund and health insurance over and above the retirement portfolio. Ensure that the yearly budget includes health insurance premium. Once the buckets have been created then periodic review and rebalance must be done to ensure that risk is being managed. The Rebalance column in the Excel calculator will show how rebalancing is to be done. See this detailed post on how and when to do rebalancing.

Bucket composition

The amounts allocated to each bucket is calculated on the basis of appropriate asset allocation for each year of retirement and each year has its own glide-path and plan for rebalancing. The aggregate view for each year for cash, income and growth assets is summed up to create the buckets.

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Bucket 1: Cash

The purpose of this bucket will be to hold living expenses for the next 5 years. These living expenses are inflation-adjusted and will be based on the yearly expenses in the first year of retirement. Any interest payments, rents, pension income or dividends (all post-tax values) should be excluded from the value of the yearly expenses before finding out the amount to be saved in this bucket. Over time, these income sources are expected to grow at the after tax cost of debt.

For example, if living expenses in the first year of retirement is 60,000/month (7.2 lakhs/year) and post-tax pension, rent and interest payments of 3.2 lakhs/year are expected to be received yearly then we need to keep 29 lakhs in this bucket. Keep the money in big banks like SBI/HDFC/ICICI that are considered “too-big-to-fail” by RBI. This bucket, will also contain the emergency fund equal to 12 months of living expenses (7.2 lakhs in the example). Estimation of the expenses in retirement is covered in more detail here.

The cash bucket gives the peace of mind that a 2008 style crash in the equity markets will not require a fire sale of stock portfolio to fund regular expenses.

Bucket 2: Income assets

The purpose of this bucket is to hold assets that generate income via

  • interest payment (like government savings schemes like SCSS, PMVVY, Post Office MIS)
  • fixed deposits
  • coupon paying instruments like RBI Bonds
  • payments like annuities/pension

This income feeds down to bucket 1. This post has more details on the suitable debt instruments during retirement.

This bucket will have around 35-50% of the total retirement corpus.

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Bucket 3: Growth assets

This bucket will have everything that is not there in buckets 1 and 2 above. This bucket exists to provide growth that beats inflation over time. This is very important given the interest rates in India have been falling in line with global trends. Going forward, as India becomes more and more developed as an economy, interest rates are expected to remain low and investing in equity remains the only way to beat inflation. Choose equity funds from this framework. High dividend-paying stocks can be also included here however their price appreciation will not be as much as growth stocks.

Rebalancing between various buckets

In retirement, you do not need a salary but you need money for monthly expenses which will always come from Bucket 1. Instead of running an SWP (Systematic Withdrawal from mutual fund) from any of your buckets, you should withdraw as and when required.

A regular review process will need to be conducted every year to move money between the three buckets as per requirement. This is due to market movements in debt and equity funds as well as changing interest rates. Each rebalancing is handled first for each year in retirement and summed up to get the aggregate change at the bucket level.

If an asset is sold that gives rent or interest, it will impact bucket 1 value. So in that case, allocate like this: Asset value > Cash, Cash > other buckets. For example, when land is sold then add the post-tax sale value to cash and set the land value to 0. Then the sheet will again show you how much to sell from Bucket 1 to move into other buckets.

Walk-through of the example

Buckets example

We give a walk-through of the worked-out example in this Excel workbook.


The annual expenses in the first year of retirement are assumed to be 7.2 lakhs with 7% overall inflation and equity/debt returns (after-tax) to be 11% and 4% respectively. The tax rate is assumed to be 10% (assets split between spouses to lower taxable income)

Assets table

Here all the existing assets (total 1.5 crores) are entered along with their market value, interest rate and applicable tax rate. Please note that

  • Rate for PPF is market-linked and will change
  • Rates for government savings schemes and FD will be different at the time of renewal
  • Debt and equity MFs do not give any guaranteed returns
  • Stock dividends are not guaranteed
  • The house gives rental income but needs to be sold to invest in equities

Results section

Retirement portfolio

This shows the current value in each of the three buckets (Have column). The “Should Be” column shows the value which should be as per the right asset allocation. The Rebalance column shows the amounts to be moved in and out of each bucket to maintain the correct asset allocation. After that, the “Retirement Should be Funded for” value shows how many years the corpus is expected to last. There is another alternative in constructing this portfolio using a pension plan. This post deals with retirement with pension.

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