In earlier times, the four-ashram value system played a significant role in influencing the entire lifespan of the human life. According to the hindu view of human life, the first stage is dedicated to education and celibacy; second, for marriage and children; and once they grow up and are independent, the third stage is renunciation from material life for spiritual advancement; and lastly, when one gets old and feeble, it is to seek moksha by choosing the path of self-realization or sanyaas. In this give and take interplay, austerity and simplicity were the mantra. They thrived on scarcity, self-sufficiency and collective-aspirations for family and friends. Commodity money was used for its intrinsic value. That was then.

Gradually, the rules of reasoning changed. And, Money as a unit of exchange became the yardstick to measure value in all the economic transactions. The conveniences it brought along has made it impossible for anyone to think of a life without it. This is now.

Millions of educated people pursue their profession successfully, but later find themselves struggling financially. They work harder, but don't get ahead. What is missing from their education is not how to make money, but how to spend money - what you do after you make it.

- Robert Kiyosaki

There is also a notable change in how every individual remains engrossed in domesticity till the very end of his life. He has ambitions so high that he is desperate to want more than he has. In the contemporary society, he is bound by the new and changing ground rules, beliefs, values and assumptions, duties and obligations that not only cause stress but compel him to have a financial independence till the very end to meet his lifestyle spending habits.

I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.

- Warren Buffett

Therefore, he works hard and earns money, and he puts it in his store of value. This store holds on to the money before he spends it, and the store will hold its value until tomorrow, next week, next year or even continue to do so in many more years to come. In fact, holding money is a more effective way of storing value. Although it is an efficient store of value, money itself is not flawless. Because, inflation slowly erodes the purchasing power of his money over time.Here are some suggestions for combating inflation.

The Bucket Idea To Beat Inflation.

To generate inflation beating returns, let’s introduce this simplistic 4-Bucket concept. In the four buckets:

• Each bucket represents a different need or objective and aims to fulfill the same and one should evaluate it according to its objective
• Do not compare returns from each bucket in the same time frame as buckets would be for different time frames
• The buckets must consider your entire portfolio in all asset classes. Remember to plan your buckets with your financial adviser with proper disclosures.

4 Buckets

Bucket 1 is essentially your emergency fund for meeting any medical emergency or for upcoming or planned medical treatments, etc.

The emergency fund should also cover your upcoming expenses for few months, say 3 at least, at all times.

The emergency fund can be kept in bank or in cash though it is recommended that you keep only limited amount in cash if access to bank / ATM is convenient.

 

Bucket 2 is for generating returns / cash inflow for meeting your expenses. The objective here is to have regular flow of income ensured through interest earnings for the next 3-5 years at the upper end without facing any return/income fluctuations. This bucket is most important and must remain with you always such that projected cash inflow is always assured first.

Over the time, this bucket will lose value due to inflation and withdrawals, if any planned. With rising expenses, this bucket may need replenishment from time to time. Capital withdrawals should be avoided as far as possible especially if you are in the beginning years of retirement. Meeting expenses by withdrawals is recommended only when you are in later years of retirement / very old age as it comes at the cost of sacrificing future earnings.

On the other hand, in cases where there is good retirement kitty available, there can be a surplus cash generated over expenses. It is highly recommended to make proper use of this surplus and put it preferably in bucket 3 or 2, as may be required. Money can be withdrawn manually and with mutual funds, you can opt for Systematic Withdrawal Plans or SWPs with set frequency and amount.

Typically, fixed/regular interest paying debt instruments can be a part of this portfolio. It will predominantly be a debt portfolio and may comprise of PPF, Bank FD, NCD, Post Office Senior Citizen Savings Schemes, etc. In most cases, the size of this bucket would be the largest. Debt mutual funds are a very good match for bucket 2 as they offer great choice, comfort, features, liquidity, convenience and taxation advantages without any additional risks. There are products to match any investment horizon and one can choose from a wide variety of products to build a smart portfolio in debt mutual funds.

Bucket 3 is for replenishing and/or generating additional value to your portfolio. The idea is to not let your total portfolio value decrease but grow especially in the beginning to middle years of your retirement period. You must gain more in long term in bucket 3 from what you lose on bucket 1 or 2 in terms of 'real value' after accounting for inflation. The size of this bucket would perhaps be the largest at beginning of retirement when you should plan for 20+ years of retirement ahead of you and start decreasing when you approach old age.

Typically balance funds or preferably diversified equity mutual funds can easily be put into this bucket. You can also add some component of gold here. With a horizon of 5+ years horizon at the minimum, this bucket should ideally create inflation beating returns.

Putting regular surplus savings, if any, into bucket 3 is a very good option as wealth can be generated without any big portfolio risk or volatility. Doing a mutual fund equity SIP from any surplus earnings from bucket 2 can be a very smart idea. One can also plan for Systematic Transfer Plan or STP from bucket 2 to bucket 3 using mutual fund products in both. An STP has similar advantages as SIP with difference that it is from an MF fund to an MF fund while in SIP it is cash being invested.

Equity is something that has the potential to deliver superior returns to inflation but only in long run. Exposure should be taken after your needs are safe bucket 1 and 2. Further, one must not lose sleep by seeing volatility in bucket 3 and if you are the one to loose sleep/ grow impatient due to market fluctuations, perhaps it would be wise to instead opt for peace and avoid investing in bucket 3.

As the idea is to also replenish bucket 2 by using bucket 3, one can shift money at regular intervals with adequate surplus value being realized. This can be an outcome of what the financial advisers often term as 'portfolio rebalancing'. The quantum of withdrawal should be limited to matching the real value of bucket 2 and that which is essential to fulfill the objective of bucket 2.

Having the Bucket 4 is purely optional. This is a purely aggressive asset class portfolio with clear objective of capital growth in long to very long term, say 8+ years at minimum. This bucket makes sense to be chosen only at the beginning years of the retirement and it is something that the retiree feels free to forget and not use any time soon. We are planning for a long retirement so having this basket does carry some sense.

Diversified equity mutual funds, mid-cap / small-cap equity funds, etc. can be kept in this bucket. One can again have the option of investing small lump-sum at retirement and/or preferably start an SIP or an STP from bucket 2. At regular intervals after say 5-6 years, one can start shifting money /appreciation from this bucket to your bucket 2. The size of the bucket would obviously be small and smaller than bucket 2 and 3. Further, this bucket is not recommended in old age.

What Should Your Retirement Portfolio Look Like?

One can have any desired combination of buckets but the popular options can be as given below. The actual size and quantum of money can be determined only after proper financial planning and the asset allocation exercise.

• Buckets 1 and 2: An extra safe option but comes at sacrifice of real value of portfolio. In future, earnings from portfolio may not be adequate to meet rising expenses. Recommended when you have a very comfortable retirement kitty or other source of income  or support.
• Buckets 1, 2 and 3: A balanced portfolio that has some scope for preservation / growth of assets to compensate fall in real value. Generally recommended for all who do not have a very comfortable retirement kitty and have to rely on portfolio for meeting needs even in older age.
• Buckets 1, 2, 3 & 4: An aggressive portfolio. Recommended only if you do not have any sufficient retirement kitty and need to have good portfolio growth in long term to meet expenses in older age. Growth must never be opted at the cost of earnings safety in foreseeable future.

Going Beyond The Buckets!

• If you have not yet retired, try to get yourself health / medical insurance as soon as possible
• It is recommended that you keep all valuables /jewelry safe / in custody especially if staying alone. Take extra care of your physical security.
• One can enjoy retired life only if he/she is healthy and fit. Maintaining a good lifestyle with diet/yoga/walks/exercises can keep you fit and healthy and also keep those frequent medical bills away.
• One can look for extra income by way of paying guests / rent of property.
• Reverse mortgage can be looked at in absence of any financial support/income if you do not wish or need to give ownership of property to any dependents after you in inheritance.

Hi. I am an independent Financial Advisor and Authorised Distributor of Mutual Funds in Pune City. My job is to help create wealth for the investors. 

If you are a new investor, i will do the research, investment, and tracking of your investment to make the process smoother, and help you put your investment objectives in perspective. 

If you are a seasoned investor, I will help you in investing, switching from one mutual fund to another and redemption. I will also conduct analysis and brief on the latest developments affecting the mutual fund industry.

If you have me, fluctuating markets are never going to scare you!

If you like this blogpost and are interested to know more about investments, do call me or whatsapp me on +982 230 7712 or email me on smita@ginnsardonic.com. 

I HOPE YOU'LL LAY AN ADEQUATE GROUNDWORK FOR SATISFACTORY RETIREMENT INCOME. WISH YOU THE HAPPIEST AND RICHEST LIFE!