Are Ray's Buckets of Money fatally flawed?

[unclemick]

according to the research done in jason zweigs book "your money your brain" we as humans hate loosing money more then we like making money.... many financial decisions were made by groups of people using brain scans and all had similiar reactions.

its human nature to panic on the drops.... funny thing the tests showed was once we expierenced the drop we were okay with it again and looking forward to the rise back..... but our fear of loosing still paralyzes most of us more

Precisely - forty years of er 'rational investing' and a prior career as a 'steely eyed rocketman' - got me to Target Retirement and full auto.

And don't even ask me how many deck chairs on the Titanic - aka Norwegian widow stocks I've shuffled last year and this to harvest tax losses and regroup into better stocks.

None.

I can just picture myself trying to follow the buckets of money approach with complete confidence.

heh heh heh - like POGO looking in the mirror - we have met the enemy and we is them. Or something .

 

[W2R]

I also do a modified version of this plan bypassing the savings account . On Jan.1 I write down my 4% allowance then monthly I transfer a small amount from my MM to my checking . The rest stays in my MM for taxes , travel,gifts and unexpected expenses .

That idea is just as good or better from the standpoint of interest (since my MM yield is slightly higher interest than my bank account). In my case, I don't include my bank account in rebalancing, so I think it might make rebalancing less confusing for me during my first year. I dunno. I might try your method once I "settle in" to the distribution phase of life.

 

[Moemg]

That idea is just as good or better from the standpoint of interest (since my MM yield is slightly higher interest than my bank account). In my case, I don't include my bank account in rebalancing, so I think it might make rebalancing less confusing for me during my first year. I dunno. I might try your method once I "settle in" to the distribution phase of life.

The thing that seems to be missing from your plan is extra money for large unexpected items ( Such as a new air conditioner which took $6,000 of my budget last year ) or will they come out of your monthly allowance ?

 

[Nords]

Would it make sense to put all dividends/distributions into a MM fund regardless of how the market is doing, then at year end use it for next year's living expenses--if there is extra, buy whatever asset class needs to be increased most in your allocation target. If more rebalancing is needed, sell whatever is above the target % and buy whatever is too low.
Doing this just once a year helps keep the emotion out of it for me. Also, it doesn't encourage me to check my balances often, which I think is a good thing. Finally, I'm a little lazy about these things, so it fits my personality.

Sure-- I think that's the essence of living off the dividends. It's a lot simpler too.

I'm still unclear on our concept of "taking some off the table", especially if refinancing has turned our cashflow positive. I'd happily reinvest dividends until we needed to sell (for whatever reason) and then pay cap-gains taxes. However that ends up making us front-row spectators for the occasional 40% meltdown. It's not that we can't handle banging our heads on a wall, it's just that it feels so good when we stop...

 

[dex]

That would work.

My plan is to put my dividends and LTCG in money market, and leave them there until the first week in January. Then, I'll withdraw my 4% (or less if required in order to have 4% in my savings account earmarked for that year's living expenses). After withdrawing I'll rebalance my portfolio (not counting the bank account). I also rebalance during the year if my AA gets more than X% off.

Will you only have 1 year of expenses in cash equivalents in Jan?

 

[W2R]

The thing that seems to be missing from your plan is extra money for large unexpected items ( Such as a new air conditioner which took $6,000 of my budget last year ) or will they come out of your monthly allowance ?

The large unexpected items will normally come out of my monthly allowance. If nothing like that comes up, I'll still spend less than the whole monthly allowance and save the rest for when something like that comes up. Life being as it is, something always seems to happen eventually. If something happens early in the year, I can take it out of savings, reduce my monthly "paycheck", and presumably still have plenty to live on for rest of the year. This is how I handle such expenses now, when I am working and get a paycheck.

Then there are years like one I had a few years back, when my TV cratered (and I had always wanted a plasma!), my computer cratered, my air conditioner cratered, I had two unexpected root canals, my car needed new tires, many other unexpected huge expenses, all within just a couple of months. At the time, I had enough in my savings account to cover it but with my ER withdrawal plan I might not have that much in savings at all times. If things get overwhelming like that, I can "borrow" from my emergency fund in Vanguard money market to pay for them. Then I can pay myself back. Sort of my own personal version of HFC, without the high interest rates.

Will you only have 1 year of expenses in cash equivalents in Jan?

I will always have an emergency fund of at least 1 more year of expenses in money market, maybe more. Right now I have 10 years' expenses in money market but that is temporary and due to the recent market collapse.

 

[loosehead]

For what it is worth, we adopted a modified bucket approach. We retired in August 2007, right into the maw of the recession. This has wrecked havoc with our bucket 3 portfolio of stocks, mutual funds, etfs, and some fixed income(designed to mitigate volatility of bucket 3).

It should be noted that we have the somewhat traditional 3 (keeping up with that motif) legged stool of pensions-current, savings and investments-current, and social security (in 5-6 years.)

We tapped into bucket 1, savings and cds 18 months ago, now expecting to have another 3 years worth. Bucket 2 has been pulling in 12%, although the return may decrease in the next year or so. That is expected to get us to social security around 2014-15, with some left over. So we estimate having another 7 or so years to weather the bear before needing to tap into bucket 3. It should be noted that #3 was 2/3 of our oringinal nest egg. We will soon be rebalancing # 3 for the 2'nd time since its inception.

To hedge our bets we are downsizing for the second time since 2007. But that is another story in and of itself!

"Live Free or Die"- from a slow agonizing demise within corporate America