2-bucket strategy: A plan that makes your retirement savings safer

When you’re working, retirement may seem like a distant point in time. However, it comes more quickly than you expect. After retirement, you often experience market volatility, which can cause you stress. The 2- bucket strategy helps you to set aside money based on how soon you will need it. This provides you with greater clarity and less stress during your early years of retirement.

How does the 2-bucket strategy work?

The 2-bucket strategy splits retirement savings into 2 sections.

The initial bucket consists of anticipated near-term income. The intent is to use these funds relatively quickly, within 2-5 years. These funds will be invested in instruments that do not rely on market volatility, such as deposits, PFs, retirement accounts, and various forms of stable, secure investments. In the event of market declines, you can withdraw cash from this bucket instead of selling equities.

The second type of investment is called the long-term growth bucket. This bucket will grow over time and help your money grow faster than inflation. The types of investments that can be placed in this bucket include buying equities or investing in mutual funds. According to financial experts, this bucket has greater potential for growth over an extended period of time.

How can you create a 2-bucket strategy for a stress-free retirement?

-To create the 2-bucket strategy, start by estimating how much you'll spend each year.

-Then, find the amount of income you will receive through pensions or other means. The difference between the two numbers will be funded from your savings.

-From there, determine how many years of expenses to have in the secure bucket.

- Once that amount is set aside, invest the rest for growth.

Important tips to keep in mind:

You should never change all allocations at once. Instead, make small, incremental changes every year. In addition, when you start to add new investments to your ‘safer’ asset class, you should also do some reallocation or rebalancing with existing accounts.

Review your strategy at the conclusion of each year. Your expenses, sources of income, and market conditions have undoubtedly experienced some fluctuation. Remember, creating the 2-bucket strategy is not a one-time task. It requires periodic assessments.

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