Many Thais today may be less likely to plan for retirement, or some retirees find that they do not have enough money to meet their intended goals. This is partly due to economic volatility, which has increased the risk of retirees not having enough money in the long run. Today, we will introduce you to the Bucket Strategy, a method of dividing your money into 3 buckets according to risk and time frame. We'll also help you create peace of mind for your family with "retirement insurance".
What is the Bucket Strategy?
The Bucket Strategy is a money management concept designed to help retirees manage income and expenses effectively by dividing money into 3 buckets based on risk and time frame: a liquidity bucket (short-term spending), a low-to-medium risk bucket (for medium-term expenses), and a high-risk bucket (for long-term investment). This method eliminates worries about running out of money or lacking liquidity in unexpected events. It also helps large sums of money grow systematically in the long run.
Benefits of the Bucket Strategy
Planning for retirement with the Bucket Strategy offers a robust framework for managing your finances. Its advantages extend beyond clarity in planning, offering flexibility to adapt to market conditions or unforeseen events. Here's a breakdown:
● Reduces Anxiety About Market Volatility: A key strength of the Bucket Strategy is its ability to alleviate worries during market fluctuations. By having a short-term bucket readily available, you can navigate periods of market downturns with greater peace of mind. For instance, if the stock market experiences a sharp decline, you can draw from your short-term bucket containing cash or low-risk assets instead of selling assets at a loss. This approach reduces financial pressure and allows your retirement plan to stay on track without the fear of investment losses. Having this reserve provides confidence in covering daily expenses without relying on potentially volatile markets.
● Simple and Clear Planning: Another advantage is the ease of financial planning it provides. Dividing your money into buckets for different time horizons allows for clearer financial goals. The short-term bucket focuses on cash for daily expenses, while the mid-term bucket caters to goals within the next 5-10 years. This structured approach promotes systematic spending habits, leading to more effective long-term financial management.
● Adaptability to Market Conditions: The Bucket Strategy allows for flexible adjustments based on market conditions. For example, during a bull market, you might choose to sell assets from your long-term bucket to realize profits and allocate them to the short or mid-term buckets for added stability. Conversely, in favourable market conditions, investing in high-yield assets can accelerate the growth of your retirement plan. This adaptability helps balance capital growth with risk mitigation.
Bucket Strategy: Dividing your money into 3 buckets
The Bucket Strategy can help you plan your spending to cover all periods and adjust for risk. Each bucket has its saving principles:
Bucket 1: Liquidity Bucket
The first bucket in the Bucket Strategy is the liquidity bucket, which is money for short-term or emergency spending. This bucket should have at least 12 months of readily available funds to cover daily living expenses. This way, you won't have to worry about selling assets from other, higher-risk buckets if you need money immediately. Keeping cash or a savings account in this bucket allows for smooth short-term living and immediate access to funds for unexpected events, such as health issues or unforeseen circumstances. Suitable assets for this bucket include cash, savings accounts, or money market funds, which offer high liquidity and low risk.
Bucket 2: Low-to-Medium Risk Bucket
The second bucket involves investing in low-to-medium risk assets with an investment horizon of around 3-5 years. The main purpose of this bucket is to generate returns from relatively stable investments with acceptable risk, such as fixed deposits, government bonds, or bond funds. These assets have the potential to generate income over the long term while remaining stable and not overly risky. Investing in this bucket enhances financial stability and can serve as a source to replenish the liquidity bucket over the long term.
Bucket 3: High-Risk Bucket
The third bucket allows for investment in high-risk assets, suitable for a long-term horizon of 5 years or more. The goal of this bucket is to achieve high returns by investing in assets with high growth potential, such as stocks with strong fundamentals, equity funds, or assets with future growth prospects, such as new technologies. Investments in this bucket carry higher risk but offer the potential for rapid growth over the long term. However, it's important to regularly monitor your investment portfolio and adjust it to suit market conditions, ensuring that returns remain in line with your goals and minimizing long-term risk.
Retirement Insurance: Low Risk, High Peace of Mind for Your Family
From the 3-bucket money division strategy, it can be seen that if we want higher returns, we may have to invest long-term in assets that may be high risk. But actually, there is another way that we can invest for the long term until retirement age, with low risk and definite returns, by taking out retirement insurance in conjunction with the Bucket Strategy. This helps reduce investment risk and generate long-term returns. In addition, retirement insurance is also suitable for those who want peace of mind in the future. If something unexpected happens, the insured can be confident that their family will be taken care of as well.
However, the Bucket Strategy is a financial plan that can help retirees have financial stability and liquidity for spending. However, we should regularly review and adjust our financial plan to suit the changing economic climate and meet the needs that arise at each period to ensure a smooth retirement.