How 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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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
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!
Bimal, Good to hear that this article was useful to you.
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…
Good to hear that this post has helped you. Pls share this on your facebook which might be useful to your friends or relatives too.
Suresh Ji,
Really a good idea you have share in this article . I was thinking about this how we can get earning while we do not want to do job. Really a amazing article you have shared with us. And the excel sheet is a great tool with this article to make every one clear complete logic and idea .
Thanks Munish
Hi Suresh,
This is very good . It is more helpful as you set example up to 2nd stage along with excel.
Thank you for that.
To parity with your set example , I have entered simple calculation(taking your set data) for Bucket-1 Outflow per month at every set. So that I just change main amount(i.e. 1,20,00000 to 2,40,000 etc.)
1> at 1st ‘Bucket-1 Outflow per month’ entered calculation =(741000*C2/4000000)/12
2> at 2nd ‘Bucket-1 Outflow per month’ entered calculation =(960000*I2/5196579)/12
So I do not need to entered again at those field.
(yes maybe one withdrawn amount will be vary man to man, but these will be keep similarity with your set example)
Thank you
Hello Mr. Suresh…as usual like all your content, this article was also full of knowledge. It is specially beneficial for people who has created the corpus and want to retire early.
Can you please share the excel sheet so that once can change the corpus value and see the results.
Thanks
Hello Vishal, Thank you. I have added the excel calculator down link in the article itself. You can download from there.
Thanks. Downloaded the excel file. One more query. How can you withdraw 61,800 per month or 741600 in 1st year and get the interest on 40 lakhs? You will get interest amount on (40lakhs -741600).
Thanks. You are not withdrawing 7.41 Lakhs on day-1 nor waiting till end of the year-1. Hence this would get average out. This is sample, in actuals, there could be small fluctuations.
Thankyou for the excel
Where are the instruments for 7 or 8% post tax return for the first 40 L in your example?
One can invest in short term funds / ultra short term funds / Fixed deposits (e.g. RBL Bank or Indusind bank).
Suresh….Thanks…but none of them will give 7-8% post tax, esp for the highest bracket
Kalyan, All these nos are pre-tax. Post tax returns would depend on which tax slab one would belong to.
I did not understand tha calculation of withdrawing 740600 and then you are calculating interest on 40lakhs? Can you please explain.
Idea is good but one should have good corpus to start with and good control over spend and inflation to be taken in to account in long run of 7 to 10 years and more where inflation any ones imagination wherein in other countries inflation is below 1.5 percent even after 10 years thanks
This article is not about creating wealth. You can refer my earlier article if you want to create wealth.
This strategy is to invest a already created corpus and get regular income + balance corpus, invest efficiently and grow it.