For most savers, retirement marks a long-awaited reward for years of disciplined investing. But the real financial challenge often begins after the paycheques stop. This often-overlooked phase, known as decumulation, determines whether your hard-earned corpus sustains your lifestyle or runs dry prematurely. 

How you withdraw money — in what sequence and with what protection against taxes and market shocks — can make all the difference between long-term comfort and financial shortfall.

Read this | What makes Mirae Asset’s Swarup Mohanty paranoid about his retirement corpus

A well-designed decumulation strategy bridges your lifetime savings with a secure retirement. Without one, even a large corpus can be depleted surprisingly fast. Poor withdrawal planning leads to three major pitfalls:

• Withdrawals that drain your corpus too rapidly
• Excessive tax outflows that erode your savings
• Exposure to market volatility at vulnerable times

The way you withdraw money ultimately determines how long it lasts and how well it supports your lifestyle. A strategic plan safeguards against key retirement risks: market downturns, inflation, longevity, and unforeseen medical expenses.

The bucket strategy: A practical approach

While most investors understand the value of diversifying their investments, diversification in withdrawals is often overlooked. Many retirees follow the conventional approach of withdrawing 3-4% of their initial portfolio annually, adjusted for inflation. But this simple formula doesn’t fully account for complex factors such as tax optimization, sequencing of withdrawals, pension timing, guaranteed income products, or market volatility.

The bucket strategy offers a more robust solution by dividing your retirement corpus into three time-based segments:

Bucket 1: The safety net (1-2 years)

This bucket covers immediate living expenses, offering peace of mind during market downturns. It typically holds 12-24 months of essential expenses in cash, liquid funds, and short-term deposits to ensure easy access.

Bucket 2: The middle ground (3-10 years)

Designed for intermediate-term needs, this bucket balances moderate growth with stability. Investments include government securities, short-term debt funds, corporate bonds, hybrid funds, and large- or multi-cap equity funds. It periodically replenishes Bucket 1 as needed.

Bucket 3: The growth engine (10+ years)

This long-term bucket focuses on capital growth and inflation protection. Allocations here include equity mutual funds, dividend-paying stocks, and other growth assets. To preserve growth potential, this bucket should ideally remain untouched during market downturns.

The strength of the bucket strategy lies in its separation of immediate needs from long-term growth, reducing the need to sell depreciated assets during market corrections.

The importance of withdrawal sequencing

Withdrawal sequencing — deciding the order in which assets are tapped — plays a critical role in preserving wealth. The optimal sequence depends on tax considerations, market conditions, and personal financial goals.

Read this | Why historical data on withdrawal rate misleads Indian retirees

For example, withdrawing from equity holdings during market slumps can permanently impair a portfolio’s ability to recover. Every rupee withdrawn from a depressed equity position represents capital permanently lost to future gains. In such scenarios, it’s often better to draw from fixed-income instruments or cash reserves while allowing equities time to rebound.

Planning ahead: A timeline for decumulation strategy

Five years before retirement: Begin repositioning your portfolio to reduce volatility, build cash reserves, and align asset allocation with your anticipated withdrawal needs.

One year before retirement: Finalize your pension withdrawal strategy and secure health insurance. Prepare a detailed budget separating essential and discretionary expenses.

The first decade of retirement: This is often the most vulnerable period, as market downturns early in retirement have an outsized impact on portfolio longevity. Flexibility in spending and withdrawals is key during these years.

Later retirement years: Simplify your financial management. Consider consolidating accounts, reassessing guaranteed income sources, and reviewing estate plans to ensure alignment with inheritance laws and evolving needs.

Also read | Why more equities won’t save you from low withdrawal rates in retirement

The cost of neglecting decumulation

Even the most substantial retirement corpus can fail prematurely without a well-thought-out decumulation plan. Market volatility, tax inefficiencies, and poor withdrawal sequencing can erode savings faster than expected. In many ways, decumulation planning is as important — if not more so — than the accumulation phase that precedes it.

Atul Shinghal, Founder and CEO, Scripbox.