The big number | Safeguarding retirement

You have spent your lifetime working hard, diligently saving and investing money to secure your financial future. Retirement can be an exciting next chapter in your life, offering new beginnings and opportunities. Thanks to employment-linked retirement savings, such as the provident fund (PF) and, in recent years, the National Pension Scheme (NPS), there is greater awareness of the need to accumulate for retirement. However, that is just the first part; what you need is a plan that lets you use the hard-earned sum to see you through your senior years without compromising on your lifestyle and health.

Retirement brings with it many uncertainties—from how long you will live to how the cost of living may evolve over the next two or three decades. What makes it even more daunting is that once the income stream from a job or business stops, your savings become your primary financial cushion. Going by the alarming figures often cited these days, it can be unnerving to imagine running short of money at a stage in life when you may no longer be employable. This phase is not just about distributing wealth wisely, but also about preserving it over the long term.

THE RISKS TO YOUR RETIREMENT

Increasing longevity, advances in healthcare, and the changing nature of financial markets and the broader economy have created a new anxiety among the elderly—the risk of outliving their retirement savings. While these external factors are beyond anyone’s control, what can be managed is a financial strategy designed to account for such risks.

High inflation: It is par for the course, and any sound retirement plan factors it in. However, just as expected returns can be unpredictable, inflation, too, can derail carefully laid plans if it remains significantly above estimates for a few years. Another way to understand the impact of inflation is to track the rise in monthly withdrawals from your retirement corpus, as this directly affects how long your savings will last through retirement (see How Long Does...). Inflation should never be taken lightly, especially when estimating post-retirement withdrawals.

Market volatility: As a seasoned investor, you would know that markets inevitably go through cycles of ups and downs. However, sharp volatility or a prolonged market downturn can be especially unsettling when you are approaching or are already in retirement. Such phases may force you to question whether you have saved enough and can complicate income planning because of sequence-of-returns risk. That is, the risk of running out of money if your portfolio is unable to sustain regular withdrawals after suffering market downturns in the early years of retirement.

Remember, you may have spent decades building a sizeable retirement corpus, but its real test begins once you retire and start drawing from it. Ultimately, it is the returns generated by that corpus that will determine how comfortably it supports you through your retirement years.

RETIREMENT BUCKET STRATEGY

Fire protection systems depend on a stable and reliable water supply; in many ways, your retirement corpus is no different. A closer look at how fire safety works in large buildings offers a useful analogy. When firefighters arrive at the scene, their vehicles carry an in-built water tank that allows them to begin tackling the fire immediately. Simultaneously, other firefighters connect hoses to the building’s fire hydrant system to ensure a continuous supply of water. These hydrant tanks are critical because they provide a dedicated and uninterrupted flow of water for as long as the firefighting operation continues. The retirement bucket strategy works on a similar principle. Under this approach, your accumulated retirement corpus is divided into different “buckets” to ensure that your money lasts throughout retirement. Typically, the savings are split into three buckets, although additional ones can be created depending on individual comfort levels and financial needs. The buckets are structured in a way that ensures a steady flow of money from one to another, so that the bucket you rely on for current expenses is continually replenished, helping sustain a comfortable retirement.

THE FIRST AND IMMEDIATE BUCKET

This bucket holds cash and other safe investments to cover the first few years of retirement income needs, typically the first two years. The money is parked in predictable, low-volatility instruments such as bank FDs or savings accounts. It acts as a safety cushion during market downturns or periods of high volatility. Depending on your risk-taking ability, you can build the safety net you are comfortable with.

THE SECOND, MEDIUM-TERM BUCKET

This bucket invests in assets aimed at balancing income generation with capital preservation, while seeking higher returns than cash. It may include fixed-income investments with a higher return and risk profile than the near-term bucket, but lower risk than the long-term bucket. Its primary purpose is to periodically replenish the first bucket. At regular intervals, money flows from this bucket into the near-term bucket, ensuring that it never runs dry. The investments here could also take the form of dividends that are channelled into the first bucket.

THE THIRD, LONG-TERM BUCKET

Most of the savings in this bucket are invested in long-term growth assets, primarily equities. This is the bucket designed to help beat inflation over time. Unlike the first two buckets, the focus here is less on capital preservation and more on long-term growth within a level of risk you can comfortably withstand. To maintain your dignity in retirement, consider limiting discretionary spending during market downturns and in years of uncertainty. Remember, the purpose of the retirement corpus is to see you through retirement without any hiccups. By following a conservative withdrawal approach early in retirement and planning for temporary adjustments later, you may be able to weather market fluctuations, changes in tax laws and inflation.