How Two Bucket Strategy of Investment can help to get regular fixed income?

How Bucket Strategy can help to get regular fixed incomeHow Two Bucket Strategy can help to get regular fixed income?


Earlier, we have discussed how 3 bucket strategy can help to create wealth in long term. There is another way to look at bucket strategy where one can get regular income. If you have accumulated a corpus and want to effectively utilize them by investing in debt and equity, bucket strategy can help you. In this article, I would indicate how two bucket strategy can help you to get regular fixed income along with an example.

What is 2 Bucket Strategy used for fixed income?

Bucket strategy in simple terms is to split your investments either for short term/medium term/long term or to get regular inflow. Earlier we have discussed how 3 bucket strategy can help to create wealth in long term. Now, we would discuss on how effectively one can use two bucket strategy to get a fixed income / regular income for life long.

Who can use this Two Bucket Strategy to get a regular flow of income?

You might be a retired person and looking for fixed income post retirement. You might be an IT guy fed up with a job at 45 years and might be looking to have fixed inflow with your savings. You might be a businessman, earned good money, wanted to take a break now and looking for regular inflow. Whoever you might be, you can consider this bucket strategy to have fixed inflow for the rest of the life.

How Two Bucket Strategy can help to get regular fixed income?

Let me explain this strategy in simple terms

Bucket 1 – 33% of investments – Invest in simple FD / ultra short term funds and withdraw every month for 7 years. This bucket would generate 7% returns per annum. This corpus would be zero at the end of 7 years.

Bucket 2 – 67% of investments – Invest in a combination of equity and debt for 7+ years. This combination can generate 10% returns. You would not touch this corpus in 7 years time frame. Money invested in this bucket would almost get doubled in 7-8 years.

Repeat above process every 7-8 years.

The biggest advantage with this bucket strategy is that, while you get regular fixed income, your invested corpus would always be increasing though you are withdrawing every month. It would never go down (except for volatile stock markets in the short term).

Bucket Strategy for fixed income – Explained with an example

Let me take an example of an individual who created a corpus of Rs 1.2 Crores and looking for fixed inflow / regular income.

In regular method, one would invest in simple fixed deposit or SCSS or PMVVY (senior citizens) and get 7% returns = Rs 8.4 Lakhs i.e. 70,000 per month. But this Rs 1.2 Crores future value would go down due to inflation. Even in the future if you want to utilize some money, your corpus would go down.

1) In bucket strategy, one can invest 33% of a corpus of Rs 1.2 Crores i.e. Rs 40 Lakhs in simple FD / ultra short term funds and withdraw this entire corpus through systematic withdrawal plan (SWP) for 7 years time frame. It would provide Rs 61,800 per month / Rs 7.41 Lakhs per annum (approx.) as inflow. Balance of 67%, i.e. Rs 80 Lakhs can be invested in equity + debt (index funds + equity funds + debt funds combination) for 7+ years. If you consider 10% average returns with this combination, the amount would be almost doubled in 7 years. You can play with these numbers based on your need and also check how Thumb Rule 72 can help you to double your money.

Bucket 1 – Funds needed for 7 years
Year Year beginning balance Outflow Returns @ 7% on beginning balance Year end balance
1 4,000,000 -741,600 280,000 3,538,400
2 3,538,400 -741,600 247,688 3,044,488
3 3,044,488 -741,600 213,114 2,516,002
4 2,516,002 -741,600 176,120 1,950,522
5 1,950,522 -741,600 136,537 1,345,459
6 1,345,459 -741,600 94,182 698,041
7 698,041 -746,904 48,863 0

 

Bucket 2 – Funds not needed in 7 years
Year Year beginning balance Outflow Returns @ 10% on beginning balance Year end balance
1 8,000,000 800,000 8,800,000
2 8,800,000 880,000 9,680,000
3 9,680,000 968,000 10,648,000
4 10,648,000 1,064,800 11,712,800
5 11,712,800 1,171,280 12,884,080
6 12,884,080 1,288,408 14,172,488
7 14,172,488 1,417,249 15,589,737

2) Repeat the above bucket strategy and get 30% higher inflow. Now the corpus of Rs 1.55 Crores would be invested in bucket 1 and bucket 2. Instead of 61,800 per month, now one can withdraw Rs 80,300 per month / Rs 9.6 Lakhs per annum. Again at the end of 7 years, the corpus is increased from Rs 1.55 crores to Rs 2 Crores though you are withdrawing 80.3K per month.

Bucket 1 – Funds needed for 7 years
Year Year beginning balance Outflow Returns @ 7% on beginning balance Year end balance
1 5,196,579 -963,600 363,761 4,596,739
2 4,596,739 -963,600 321,772 3,954,911
3 3,954,911 -963,600 276,844 3,268,155
4 3,268,155 -963,600 228,771 2,533,326
5 2,533,326 -963,600 177,333 1,747,059
6 1,747,059 -963,600 122,294 905,753
7 905,753 -969,155 63,403 0

 

Bucket 2 – Funds not needed in 7 years
Year Year beginning balance Outflow Returns @ 10% on beginning balance Year end balance
1 10,393,158 1,039,316 11,432,474
2 11,432,474 1,143,247 12,575,721
3 12,575,721 1,257,572 13,833,293
4 13,833,293 1,383,329 15,216,622
5 15,216,622 1,521,662 16,738,285
6 16,738,285 1,673,828 18,412,113
7 18,412,113 1,841,211 20,253,324

I am attaching Excel Calculator (Sample) which you can use and play with these numbers based on your need. You can download Two Bucket regular income excel calculator here. This is just sample excel sheet. Use it at your own risk.

Negative Factors / Drawbacks in this two bucket strategy

Here are a few drawbacks / negative points in this strategy

1) Assumption of 10% annualised returns for 7 years investment in equity + debt. The assumption of 8% in debt funds and 12% in equity might be too high.

Suggestion: One can tone down their expectation and make this 9%. Use several thumb rules of investing if required.

2) Equity might generate 10% to 12% in the long term of 7 – 10 years, however not guaranteed.

Suggestion: There is no way to beat inflation except to invest in equity. If you do not want returns to beat inflation, avoid equity and use this strategy with 100% debt, but expect lower returns.

3) There is risk in equity investments (especially for senior citizens).

Suggestion: Two suggestions i) Can reduce the equity asset allocation and increase debt ii) Instead of 7 years frequency, use the 10 years frequency so that they don’t need to worry about equity fluctuations for next 10 years.

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20 comments

  • Arun

    Hi Suresh,
    I am regular visitor of this site.
    Thanks for sharing this. This is a good idea.
    Regarding the computation, I think it will be more realistic if inflation is also accounted for. Currently the yearly withdrawals are treated as fixed amount. But I guess each year withdrawal amount will be increasing.
    Thanks and Regards,
    Arun

  • BIMAL DAS

    Found very interesting and helpful. I ‘m going to retire soon and this strategy seems to very much applicable to me as I like to take some calculated risk. Thank you!

  • Priya Upendra Sarma

    Suresh Ji,

    Namaskaar,

    An awesome idea U have shared in this article,

    thanks to your amazing & informative articles which we have been following since last 12yrs,

    we are almost near our retirement goals & certainly implement this 2 BS.

    Wishing U long & healthy life…

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