A bucket strategy for retirement

By Morningstar |  12-11-20 | 

I am 60-years of age. My corpus is Rs 1.5 crores.

I want to construct a retirement portfolio of index and debt funds, with a 50:50 allotment to each.

I would also consider regular withdrawals from the debt funds for living and other expenses. As well as capital appreciation from the index funds over a 5-7 year horizon.

A reader wrote in with this question. We approached P V Subramanyam, author of Retire Rich, who detailed a strategy for him.

An assumption.

While the question is straightforward, there are a lot of details that go unmentioned.

Where is the money currently invested? Do you have medical insurance? Do you have an annuity plan? What are your monthly expenses? Any other source of income? Any loan? Any dependents?

As none of these questions are answered, I will suggest a plan based ONLY on what has been revealed.

I will assume that your annual expense is in the region of Rs 4 lakhs. While you will be paying society outgoings, there is no rental cost or servicing of a home loan. (Rs 4 lakhs x 30 = Rs 1.2 crore).

Put aside some money in assured products.

Invest Rs 15 lakh in Senior Citizens Savings Scheme, and 15 lakh in Varishta Bima Yojana. These will give you an income stream of about Rs 2 lakh.

Create 3 buckets of investments.

  • Bucket 1: 5 years expenses (Rs 10 lakh). The investments can be an ultra-short bond fund, bank fixed deposit, savings account, short-term income fund.
  • Bucket 2: 5 years expenses (Rs 10 lakh). The investments can be a long-term bond fund, multi-asset fund, balanced fund.
  • Bucket 3: As is evident, Rs 50 lakh has been largely invested in debt products. The balance Rs 80 lakh must be invested in equity, an asset class we cannot ignore. The investments can be in a large-cap index fund such as the Sensex or Nifty (Rs 40 lakh), mid-cap index fund (Rs 25 lakh), small-cap fund (Rs 15 lakh).

All withdrawals will happen from Bucket 1. Whenever the equity market does well and gives a good return – of say 20%, remove Rs 2 lakh from Bucket 3 and transfer it to Bucket 1. In this way, Bucket 1 will always be in surplus. Since these are all ‘growth’ options, Buckets 1 and 2 will perhaps NEVER go down to zero.

Looking ahead.

Let’s look at giving you some amount of pension.

At the age of 68, buy one more annuity. You can use Bucket 3 to purchase a Rs 20 lakh annuity. Repeat this at the age of 80 but with Rs 50 lakh.

This will give you an assured return and simplify things as you age.

Suggestions:

  • Ensure you have medical insurance.
  • Find a younger person you trust to help in managing your investments.
  • All your investments must be in your name alone. Do not include anyone, even a family member as a second holder.
  • As and when the government increases the limits on Senior Citizens Savings Scheme or Varishta Bima Yojana, utilize those higher limits.
  • Selection of the right mutual funds is critical. The mutual fund distributor (MFD) or Registered Investment Advisers (RIA) will be able to guide you as to the exact funds to invest in.
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SATISH DABHOLKAR
Nov 19 2020 05:05 PM
 The logic of all investment should be in your name and not to be joined with any family member as second holder.
Pl elaborate the reason as this will complicate the passing of investment to heirs.
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