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Planning for retirement can seem daunting, but with the right strategy, it becomes much more manageable. One effective approach is the bucket strategy, which helps individuals organize their retirement savings efficiently. Let’s break it down into simpler terms.
The bucket strategy divides your retirement savings into three distinct buckets based on when you’ll need the money: immediate, medium-term, and long-term.
Here’s how it works:
The bucket strategy divides your retirement savings into three distinct buckets based on when you’ll need the money: immediate, medium-term, and long-term.
Here’s how it works:
- Immediate Bucket: This bucket contains funds in liquid assets, readily available for any short-term needs or emergencies. These could include cash reserves, savings accounts, fixed deposits, liquid funds. The aim is to ensure easy access to cash without having to worry about
market fluctuations . - Medium-Term Bucket: Money in this bucket is allocated to
income-generating assets. These assets will give moderate returns and give a slow but steady rise to your savings. The goal here is to generate a steady stream of income to cover mid-range expenses during retirement. - Long-Term Bucket: The long-term bucket consists of growth assets, which have the potential to increase in value over time. These assets typically include stocks and equity funds. By investing for the long term, you aim to build wealth and counteract the effects of inflation.
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How does the bucket strategy benefit you?
By segregating your retirement savings into different buckets, you’re better prepared to weather market fluctuations. For instance, if the stock market experiences a downturn, you can rely on your immediate and medium-term buckets without having to sell off long-term investments at an inopportune time.
To make the most of the bucket strategy, consider these additional tips:
- Asset allocation: Determine the right mix of assets for each bucket based on your risk tolerance and financial goals. For example, you may opt for a more conservative approach with your immediate bucket and a more aggressive approach with your long-term bucket.
- Rebalancing: Regularly review and rebalance your portfolio to maintain your desired asset allocation. As market conditions change, your asset allocation may drift from its original targets, so it’s essential to realign periodically.
With inputs from Centre for Investment Education and Learning content which appeared in Economic Times
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