🧺 The three‑bucket strategy: never run out of money in retirement

⚡ You’ve saved diligently, built a solid mutual fund corpus, and now retirement is here. But how do you withdraw money every month without fearing that you’ll outlive your savings? The three‑bucket strategy is your answer — a time‑tested method to weather market ups and downs and ensure your money lasts as long as you do.

🧠 Why a withdrawal strategy matters

Retirement isn’t just about accumulating wealth; it’s about orchestrating a steady income stream that adjusts to life expectancy, inflation, and market turbulence. Without a plan, you risk either spending too conservatively (and depriving yourself) or withdrawing aggressively during a market downturn — permanently damaging your corpus (the dreaded sequence of returns risk). The three‑bucket approach creates a natural buffer, letting your investments recover while you spend from safer accounts.

🔍 What is the three‑bucket strategy?

Imagine dividing your retirement savings into three “buckets” based on when you’ll need the money:

⚙️ How the three buckets work together (the flow)

Let’s walk through a realistic example. Suppose you need ₹12 lakh per year after retirement (post‑tax). Your total corpus is ₹2.4 crore.

📐 Step 1 – size your buckets

• ✅ Bucket 1 (1.5 years): ₹18 lakh in cash / liquid funds. This covers a year and a half of expenses without any market volatility.
• ✅ Bucket 2 (4 years): ₹48 lakh in short‑term bond funds, balanced advantage, or conservative hybrid funds. These offer slightly higher returns than cash but remain relatively safe.
• ✅ Bucket 3 (the rest): ₹1.74 crore in equity mutual funds. This portion stays invested for the long haul (15–25+ years) and provides growth to beat inflation.

🔄 The annual rebalancing ritual

Every year (or every 6‑12 months) you “refill” bucket 1 from bucket 2, and bucket 2 from bucket 3 — but only when markets allow. Here’s the discipline:

⚠️ Important details to fine‑tune

Inflation adjustment: Your bucket 1 should increase each year to cover rising costs. If inflation is 5%, next year you’ll need ₹12.6 lakh. So when you refill buckets, increase the size of bucket 1 accordingly. Bucket 3 (equities) is your inflation fighter — it should grow faster than inflation over long periods.

Withdrawal rate: The classic 4% rule suggests you can safely withdraw ~4% of your initial corpus, adjusted for inflation. The bucket strategy supports a similar or even slightly higher withdrawal rate because of the disciplined buffer. For a ₹2.4 Cr corpus, 4% is ₹9.6 lakh — but your need is ₹12 lakh (5%). With a well‑structured bucket and some flexibility in years with poor returns, 5% can be sustainable.

🧾 Step‑by‑step to set up your own three‑bucket system

• Calculate your annual retirement expenses — include taxes, health costs, travel, everything. Be realistic.
• Decide on the size of bucket 1 — usually 1.5 to 2 years of expenses. Keep this in a high‑yield savings account or liquid fund.
• Choose bucket 2 duration — 3 to 5 years of expenses. Use low‑duration debt funds, target maturity funds, or balanced funds with moderate risk.
• The rest goes into bucket 3 — equity mutual funds with diversification across caps and styles.
• Set up automatic sweeps or calendar reminders to review buckets every 6‑12 months. Rebalance only when bucket 1 falls below 1 year of expenses.
• In a bull market, take profits from bucket 3 to top up bucket 2 and 1. In a bear market, let bucket 2 deplete (it has enough buffer) and avoid selling equities.

🌦️ Real‑world scenario: weathering a market crash

Imagine you retired in 2007 with a three‑bucket portfolio. In 2008‑09, equities crashed 40‑50%. Because you had 2 years in cash (bucket 1) and another 4 years in conservative funds (bucket 2), you did not sell a single equity fund during the crash. You spent from bucket 1 and then bucket 2. By 2010, markets had recovered, and you resumed topping up bucket 1 from bucket 3. Your equity holdings never got liquidated at the bottom — that’s the magic of the buffer.

➕ Advanced considerations (for fine‑print lovers)

Bucket 2 composition: Some retirees use a mix of floating‑rate funds, short‑term bond funds, and even a small allocation to gold ETFs (5‑10% of bucket 2) for extra stability. The key is liquidity and low volatility.

Bucket 3 management: As you age, you might gradually reduce equity exposure. At 75, you could shrink bucket 3 and enlarge bucket 2. The three‑bucket method is dynamic — you can adjust the percentages every 5‑10 years.

Legacy desire: If leaving an inheritance is important, you can keep bucket 3 untouched as long as possible, or even refill it from bucket 2 in extremely good years.

🔁 Frequently asked question

“Isn’t keeping 1‑2 years in cash dragging down my returns?” Yes, but it’s not about maximising returns in retirement — it’s about maximising sustainable spending. That cash drag is your insurance policy. In the long run, the equities in bucket 3 will more than compensate for the low yield on bucket 1.

✅ Conclusion: retire with confidence

The three‑bucket strategy transforms a daunting pile of mutual funds into a self‑replenishing income stream. By separating money by time horizon, you eliminate the anxiety of market volatility and ensure you never have to sell equities at a loss to pay your bills. It’s simple, intuitive, and backed by decades of retirement research. Set up your buckets today, sleep peacefully tomorrow.

📊 summary snapshot