Bucket Strategy + SWP(Systematic Withdrawal Plan) is also known as 3-Bucket SWP Squirreling Strategy. It's is a retirement execution strategy or drawdown method. This combination is considered a best-practice retirement execution strategy by many financial planners, especially for mitigating Sequence of Returns Risk (the risk of suffering market losses early in retirement).
The strategy works by using the Bucket Strategy for ASSET ALLOCATION and the SWP for SYSTEMATIC CASH FLOW, ensuring your monthly income is secure regardless of daily market movements. The key step is that SWP is only set up on the Bucket-1 investments. By withdrawing your monthly income only from the highly stable, low-risk Bucket 1, you insulate your living expenses from stock market volatility. If the stock market (Bucket 3) crashes, you don't have to sell low because your immediate cash needs are already covered for the next few years.
Retirement Bucket Strategy:
The Retirement Bucket Strategy (also known as the "three-bucket strategy" or "bucket approach") is a form of asset allocation investing, specifically tailored for retirement portfolio management and income withdrawal planning. It involves dividing your savings into separate "buckets" based on time horizons - typically short-term (cash or low-risk assets for immediate needs), medium-term (balanced investments), and long-term (growth-oriented assets like stocks) - to balance liquidity, stability, and growth while mitigating sequence-of-returns risk during retirement.
In India, this strategy is particularly relevant due to factors like high healthcare costs (e.g., post-60 expenses can surge 20-30% annually), family dependencies, volatile equity markets (Sensex/Nifty fluctuations). The strategy can be customized (e.g., 3-5 buckets based on risk appetite), but a standard three-bucket model works for most middle-class retirees.
Aim for a corpus of 25-30x annual expenses (e.g., Rs 5 lakh/year needs Rs 1.25-1.5 crore), assuming 4-5% safe withdrawal rate adjusted for inflation.
The Three Buckets: Structure and Indian Investment Options:
| Bucket | Time Horizon | Purpose | Risk Level | Suggested Allocation (for a Rs 2 Crore Corpus) | Indian Investment Examples |
|---|---|---|---|---|---|
| Liquidity/Safety Bucket | 3 years expenses (immediate needs) | Covers daily expenses, emergencies, and healthcare; ultra-safe to avoid selling assets in downturns. | Low (focus on capital preservation) | 20-30% (Rs 40-60 lakh) | Bank Fixed Deposits, SCSS (Senior Citizens Savings Scheme) |
| Income/Stability Bucket | 3-8 years (medium-term bridge) | Generates steady income to beat mild inflation; balances liquidity with moderate returns. | Medium (some volatility tolerated) | 30-40% (Rs 60-80 lakh) | Hybrid/Balanced mutual funds. PPF extensions or NPS Tier |
| Growth/Wealth Creation Bucket | 8+ years (long-term) | Builds corpus to combat 6-7% inflation and fund later years; higher risk for compounding. | High (market-linked) | 30-50% (Rs 60-100 lakh) | Equity Mutual Funds/Stocks |
Real-World Examples in Indian Retirement Planning:
- Middle-Class Retiree in India (Age 62, Rs 1.5 Crore Corpus): Rajesh, a former IT engineer, retires with Rs 1.5 crore from EPF/NPS contributions. He needs Rs 50,000/month (Rs 6 lakh/year) for rent, groceries, and his wife's diabetes treatment, plus Rs 5 lakh emergency buffer. Inflation at 6% means expenses could hit Rs 8 lakh/year in 5 years.
- Liquidity Bucket (25%, Rs 37.5 lakh): Rs 30 lakh in SBI senior FDs (8% interest = Rs 2.4 lakh/year income) + Rs 7.5 lakh in liquid funds for emergencies. Covers 3 years' expenses without touching principal.
- Stability Bucket (35%, Rs 52.5 lakh): Rs 40 lakh in NPS debt (tax-free withdrawals) + Rs 12.5 lakh in hybrid funds for 7-8% returns, yielding Rs 3.5-4 lakh/year.
- Growth Bucket (40%, Rs 60 lakh): Rs 50 lakh in equity MFs (e.g., Mirae Asset Large Cap) + Rs 10 lakh in gold ETFs. Outcome: In 2023 market crash, Rajesh avoided panic-selling equities by drawing from FDs. By 2025 (bull run), he shifts Rs 10 lakh gains to liquidity, sustaining 4% withdrawal rate for 35 years. This beats full-FD reliance (eroded by inflation) and reduces sequence risk.
Systematic Withdrawal Plan (SWP):
A Systematic Withdrawal Plan (SWP) is a facility offered by mutual funds in India that allows investors to withdraw a fixed amount (or a percentage) at regular intervals - typically monthly, quarterly, or annually - from their investment corpus. Unlike lump-sum redemptions, SWP sells only the required units to meet the withdrawal, leaving the remaining portfolio invested and potentially growing. This makes it an ideal tool for retirees seeking a steady, predictable income stream without fully liquidating assets, akin to a "pay-as-you-go" pension from your own savings.
How SWP Works: Step-by-Step
- Invest a Lump Sum: Park your retirement corpus (e.g., from EPF, NPS, or provident fund) in a mutual fund - equity for growth, debt/hybrid for stability.
- Set Parameters: Choose amount (fixed, e.g., ₹50,000/month) or rate (e.g., 5% of corpus), frequency, and fund type(hybrid, growth, value).
- Automated Withdrawals: Units are redeemed proportionally; gains are credited to your bank, principal remains invested.
- Rebalancing: Monitor annually; switch to conservative funds as you age to mitigate volatility.
- Tax Calculation: Per withdrawal, cost basis (your original investment per unit) is deducted; only gains are taxed.
Bucket Strategy + Systematic Withdrawal Plan (SWP):
The Bucket Strategy (dividing your corpus into time-based "buckets" for liquidity, income, and growth) paired with Systematic Withdrawal Plans (SWP) emerges as a powerhouse duo for self-funded retirees.
Core Integration: How Bucket Strategy + SWP Work Together
The Bucket Strategy segments your corpus (target: 25-30x annual expenses, e.g., ₹6 lakh/year needs ₹1.5-1.8 crore) into 3-5 buckets by horizon/risk. SWP then operationalizes withdrawals: automated unit redemptions from bucket-specific funds, preserving principal and compounding the rest. Key synergy:
- Short-term Bucket: SWP from Fixed Deposits/liquid funds for 3 years' expenses - no volatility.
- Medium-term Bucket: SWP from hybrids/bonds for inflation-adjusted income (4-7 years).
- Long-term Bucket: No SWP initially; let equities compound, then SWP gains to refill earlier buckets during bull runs.
- Dynamic Rebalancing: Annually (or every 3 years), shift 5-10% from growth to safety. Always rebalance from Bucket-3 to Bucket-1 when Equity markets are good. Think of rebalancing from Bucket-2 to Bucket-1 only when equity markets are in bad shape.
This mitigates sequence risk by drawing from safe buckets first.
