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How you live your life during your retirement years would largely depend on how well you planned your finances for those golden years during your working life. The earlier you start setting aside some money for your retirement corpus, the better you will be prepared given that compounding will ensure that your kitty grows larger with the passage of time.

Get the priorities right

Retirement planning is becoming crucial with increased longevity resulting in people living longer and rising inflation slowly eroding the purchasing power of the corpus you are creating. Along with this there are risks such as the ever-rising medical costs that could deal a huge blow on your finances during old age and the possible lowering of interest rates resulting in lower returns from your fixed income.

Opt for diversified approach

Since you have long period of time on hand to prepare for your retirement, you should be very careful and be disciplined in your approach. As you go about creating your retirement kitty, you should try to keep your money invested in a mix of instruments with varying degrees of risk. “Always be invested with a view to create an all-embracing mix of portfolios that work together that would generate income and grow,” Ankit Agarwal, Managing Director, Alankit Ltd said.

When you invest across asset classes and keep rebalancing your portfolio in line with your superannuation age and changing risk profile, you build a corpus which is present across asset classes and across instruments.

Bucket your corpus

You have to allocate your retirement corpus to each of your needs in golden years. Arvind Rao, Founder, Arvind Rao and Associates, suggests adopting the ‘retirement-bucket strategy’. “One tried and tested method available to counter the financial risks during retirement is to follow the Retirement-Bucket strategy,” Rao said.

So, what does the bucket strategy entail? Under this strategy, an investor needs to organise their investments in different buckets like living costs, holidays, hobbies, medical corpus and growth corpus.

“Bucketing money for different purposes helps to organise money needs and accordingly deploy in different maturity instruments aligned as per the buckets,” Rao said.

Define the buckets well

When you are enjoying your golden years, you tend to use your money for varying purposes. For example, you need some regular cash flow for monthly living costs. You may have plans to go for vacations once in a year. You may want to also keep some money for medical emergencies in addition to your health insurance.

While monthly income scheme of post office and monthly interest paying fixed deposits can chip in with your pension and annuities to arrange for your monthly cash needs, you can use some bond funds to keep your medical emergency funds. These are tax efficient investment options.

While most buckets would primarily have safer, less risky investments, the growth corpus can allow room for the investor to look at riskier asset-classes like equity though diversified equity funds and index funds. “In the absence of the bucketing strategy, retired people tend to focus only on fixed-income investments, which might not yield them any growth on their portfolio,” Rao said.

How does it help?

When you have bucket within your retirement fund, you keep a tab on your expenses. For example, if you have some investment earmarked for vacations then you won’t go overboard while spending on your overseas vacations. If you have a charity bucket in place, then you stay course to your financial goal. You do spend that money on charitable purposes but do not spend so much that it will hurt your daily living. Equity funds in growth bucket helps you ignore volatility and build another small corpus. This can be of immense help when you live longer. Though inflation eats into your purchasing power when you have cash and fixed income instruments in your portfolio, the growth bucket of retirement funds can help you to supplement your expenses in the later years of your retirement.