Buckets & Buffers

[Mysto]

Hi youbet

I honestly think there is a difference "but it is small"

First - because the fixed income ladder is in stone the constant draw down would have no effect on the investment portfolio (at least until the time span - in this case 10 years when it is reloaded)

Secondly, there is some evidence that it will allow a slightly larger withdrawal rate. *I just played with a few numbers for an example: *Let's say I need an additional 3800 mo. and I have 1080000 to invest. Using firecalc starting at year one with 40/60 "conservative" equity / tips (I figured 2.0 rate) would have a success rate of 97%. *Take out 370K for a fixed income ladder (I used a 9 year ladder - that would be the current rate for a 3800 - 3% bumped annunity) and start the 3800 mo. adj for inflation at year 10 ... it rises to 100% success. *

I've already mentioned the sleep effect - I think for me it might allow a better equity allocation because of the insulated effect (you don't withdraw from a potentially hurt portfolio) but that is only a "mind game" and not finance. *

Having said all of that - I'm not fixed in my mind about the best and that's why I'm enjoying hearing about the various methods that the board is using to decrease risk and withdraw safely. You and many others have made a lot of good points to consider and have offered alternatives that I am considering. *All the while, I'm moving my assets into Vanguard with some already invested in a diversafied portfolio - more are being liquidated and moved this week.

[Bailer]

I have been lurking on this board for about a year, and it's time to delurk! I am in my late forties and RE'd about five years ago, with the 4% withdrawal rate and a vague idea about a self-annuity in mind. A site that has helped me quite a bit with the next five (and more) years is www.bucketsofmoney.com. The idea is to divide assets into three "buckets", short-term (the self-annuity), medium and long term. In essence, you spend down the buffer or bucket money in the asset class and let the mid- and long-term money keep up with inflation.

As a caveat, because I know how people on this site feel about financial advisors (sales dudes) the website is used to garner listeners for a radio show and to line up new customers for financial planners. But the demo is a good
illustration that helped me.

[donheff]

Originally Posted by audreyh1

Some of us learned the "Seven year rule" - always have 7 years of needs in cash and short-term cash equivalents...
If you used the 7 year rule, you could still rebalance your portfolio if equities declined precipitously (thus take advantage of a good buying opportunity as asset allocation seeks to do), as long as you never let your cash/bond allocation drop below 7 years of needs.

It seems to me that, if the purpose of the 7 years of cash is to wait out a bad equities market, you would have to let the cash fund dwindle in a prolonged bear. Thus, if the bear went 5 years and then turned up you would start replenishing your cash accounts after 5 years. That would mean that in a bad market you would fall below 7 years of cash on hand. A form of market timing to be sure, but consistent with the purpose of the cash fund.

If you replenish the cash regardless the market why bother with 7 years. It would seem two or three would lead to the same end result.

Don

[audreyh1]

Originally Posted by donheff

If you replenish the cash regardless the market why bother with 7 years.* It would seem two or three would lead to the same end result.

Don

The seven years is just to hold out on a really bad equity bear market that lasts seven years. And yes during a prolonged bear market, your cash bucket will go way down - you'll have less and less years of expenses covered as you use it up. But you WON'T be drawing on your depressed equities. And you have UP TO seven years to let your equities recover before being forced to draw them down. That's the whole point.

You just have to come up with however long of a bear market you want to be able to survive. Armstrong picked 7 based on historical data (I don't remember the odds of a 7 year period being negative), 10 is even more conservative.

Audrey

[audreyh1]

Originally Posted by youbet

What's the difference between this and* "buffering"* other than apparently "buffering" uses some rules regarding how much cash or short term money to carry?

That's it! It helps you establish you how much cash or short term money to carry.

Also in a prolonged bear market you will have your equity allocation down. After a few years you will also have your cash/short-term being drawn down since you are withdrawing from that bucket. But this method prevents you from selling your equities in a bear market even though you have drawn your cash/short-term down far enough to need to rebalance. This is a significant difference from straight annual rebalancing.

Audrey

[Texas Proud]

Originally Posted by audreyh1

The seven years is just to hold out on a really bad equity bear market that lasts seven years.* And yes during a prolonged bear market, your cash bucket will go way down - you'll have less and less years of expenses covered as you use it up.* But you WON'T be drawing on your depressed equities.* And you have UP TO seven years to let your equities recover before being forced to draw them down.* That's the whole point.

You just have to come up with however long of a bear market you want to be able to survive.* Armstrong picked 7 based on historical data (I don't remember the odds of a 7 year period being negative), 10 is even more conservative.

Audrey

I am going to be like a few others on this.... you are either market timing OR rebalancing every 7 years... but there are times where you percentages are very screwed up...

So, you are in a 10 year down market and you stock portfolio is down X%... you are in year 7.. so you cash level is LOW, what are you going to do WORRY LIKE HELL. You only have the current year of cash and maybe 90 plus percent of your investments in stock. But, since you do not know you have three more bad years you will need to get some cash... so you convert stock to cash at a low level....

Now, if you rebalanced every year, you did not have as high a percent in stock to lose the last 6 years, then 5, 4, etc... and MAYBE you earned more on your bond side so that after 7 years you are still at a 60 / 40 but with more money and less worry...

Just my thoughts.....

[Nords]

Originally Posted by Texas Proud

So, you are in a 10 year down market and you stock portfolio is down X%... you are in year 7..* so you cash level is LOW, what are you going to do* WORRY LIKE HELL.* You only have the current year of cash and maybe 90 plus percent of your investments in stock.* But, since you do not know you have three more bad years you will need to get some cash... so you convert stock to cash at a low level....

Rebalancing every year from 2000-2003 would have guaranteed additional purchases at lower levels-- an ER's version of DCA. Nothing wrong with that-- most of the DCA benefit comes from the discipline of putting away something every month, and rebalancing's benefit in retirement keeps the portfolio volatility from exceeding one's tolerance.

However there are other ways to handle the issue. What if it was a 16-year bleagh market? At the beginning of year eight she'd just sell whatever lost the least while she was consuming cash, and she'd keep up that approach for another eight years. That's another way of rebalancing by harvesting your winners and letting your losers recover.

Another way to get through 1966-1982 was to live off dividends (hopefully never toching the principal) or re-investing them. Siegel says the two best things in "The Future For Investors" are reinvested dividends and bear markets.

[db]

I haven't read the book, but we adopted 10 years of future income in fixed income securities as our fixed income asset allocation some time ago. *By future income needs I mean after social security and pension income has been subtracted. *We use a combination of Vanguard's total bond, short-term investment-grade securities, TIPS, and prime money market funds.

I will be 70 next week and I am in my 14th year of retirement. *I can still hop, skip, and jump, so life is fun.

db

[donheff]

Originally Posted by Nords

Rebalancing every year from 2000-2003 would have guaranteed additional purchases at lower levels-- an ER's version of DCA.

Not if you were simply spending your cash account. You wouldn't have anything to buy low with. Unless, that is, you took a real gamble and figured in year two of the bear that the time was ripe for buying equities. That is pure market timimg. In this bear that would have worked well, but what if it was a prolonged bear?.

If you *really* rebalanced according to the preset 7 year formula, you would have to sell depressed equities to convert to cash to keep your 7 year stash in place. I like the idea of a cash cushion for a down turn, and will probably use it - but it is a form of market timing if used to correct advantage.

Now, once the bear lasts long enough to eat all of your cash and you are starting into the equities, you would sell what is doing well and rebalance --- you might very well buy low at this point.

It's all scary as hell. Let's just hope that if/when Max's collapse comes to pass it is isn't worse than 1929 so our SWRs carry us through.

[Nords]

Originally Posted by donheff

Not if you were simply spending your cash account.* You wouldn't have anything to buy low with.

Spending the cash account is paying the bills.* When it's gone after seven years, it's done its job. You'd have to sell depressed stocks to raise cash for another years' living expenses, but in the meantime you've put off that defeat by seven years.

Separate from depleting the cash, rebalancing the portfolio is selling parts of the portfolio that have grown too big to buy parts of the portfolio that have shrunk too small. Maybe raising the eighth years' cash would accomplish the rebalancing, but maybe not.

Because rebalancing might not always be done with cash.* I retired in 2002 and started buying with both hands (and in retrospect those same big cojones) in late 2002 & early 2003.* We already had enough cash for another year of expenses but our portfolio percentages were skewed like crazy after waiting out the bear market, and in our opinion they were skewed far enough. Selling Tweedy, Browne Global Value to buy QQQs at 20 was admittedly not that straightforward a proposal on the fundamentals but it made sense in a rebalancing context.* TBGVX had lost less than the QQQs had, so it brought the portfolio ratios back into balance.* It made a lot of money, too- having the QQQs go up 60% over the subsequent year was a much more pleasant rebalancing decision.

At whatever time you rebalance-- annually, quarterly, whenever-- your portfolio would have a lot of losers and few (if any) winners.* Some parts would lose more than others, becoming a smaller portion of the total.* Some parts would lose less than others, becoming a larger portion of the total just by not losing so much.* Selling the larger portion (admittedly at a loss) to buy the smaller portion would result in selling equities at depressed prices, but it would also result in buying equities that were even more depressed.* If a rebound doesn't come then you're going to wait another year and do the same thing again.* When the seemingly inevitable reversion to the mean occurs, however, the overall result is a portfolio that rebounds faster with bigger gains.* It also beats buying & hoping holding.

[Ed_The_Gypsy]

It strikes me that these are different ways of looking at the same thing. The effect is to smooth out the bumps. At some point the shock absorber is going to bottom out once in a while.

Since I have nothing original to say, I will just point out a few of my favorite references:

Bill Schultheis has a nice little graph in the first edition of his little book that shows that the S&P has never been negative more than ten years in a row. Add diversification and you add protection. His web site:

http://www.coffeehouseinvestor.com/

A few years ago, on his board, Less Antman claimed that a 50/50 portfolio of US/international equities had never been “under water” for more than 5 years in a row. Early this decade, that stretched to about 5.5 years, but a good point anyway. His web site:

http://www.simplyrich.com/board.htm

Pual Merriman shows here how a 50/50 US/int'l equities portfolio would have weathered the period of 1970-2005, covering three memorable down periods.

http://www.fundadvice.com/articles/r...llocation.html

Retire at the Pie Shop shows a conservative withdrawal strategy using the Coffeehouse Portfolio from 2000 to 2005. (Whoever showed us this link, thanks again!)

http://bobsfiles.home.att.net/retireCH.html

I like Galeno's CD ladder.

From his post of Nov 20, 2002:

Yes I am following the same mechanical withdrawal plan. In short, it goes like this:

FI = 25%
2y living expenses in MMF
2y living expenses in 2y CD (maturing in 1y)
2y living expenses in 2y CD (maturing in 2y)

Stocks = 75%

At the end of the year I sell 4% of the value of my stock portfolio and buy a 2y CD. I let half of the maturing 2y CDs go to MMF and I buy another 2y CD with the other half. I then divide the entire FI balance by 72 and that's my monthly draw for the year. At year end, I repeat the process.

Even with this three year bear market, my monthly FIRE income fluctuates very little thanks to my FI buffer. It's a similar approach to intercst's inflation adjusted withdrawals but slightly different in that I let the long term growth of my stock portfolio indirectly take care of any inflation or deflation in the economy.

Ed

[mathjak107]

i use a 3 portfolio system....i use money markets,cd's short term bond funds for immeadite up to 3 years worth
i use growth and income funds and when rates are better for 3-7 years worth of money
8 years plus my long term money is still as aggressivly invested as if i was 20 years old

[youbet]

I do almost the same thing, only inside of a single portfolio.

[mathjak107]

i just saw ray lucia buckets of money seminar...very interesting....i like the idea of the 3 buckets as i have been doing it for years only my three until now were geared more for growing money without loosing my kids college funds or our house money.....i find rays refining for retirement interesting...as we get closer to er its more about shifting from getting rich to not getting poor...basically he uses 2 conservative buckets with 7 years in each and a long term bucket....why the 3 instead of just 1 big one?* for me i find i get to conservative with just 1 pile..the ole 50/50 or 60/40 ..the 3rd bucket lets me invest with a 14 year horizon and do so like im 20 years old again.....

[youbet]

Originally Posted by mathjak107

why the 3 instead of just 1 big one?* for me i find i get to conservative with just 1 pile..the ole 50/50 or 60/40 ..the 3rd bucket lets me invest with a 14 year horizon and do so like im 20 years old again.....

I haven't been to a Ray Lucia seminar, but did visit the web site and read all the posts here.* I'm drawing the conclusion that the only real difference between Ray's "buckets" and "asset allocation classes" is the name.* And that's not necessarily a bad thing!

For you mathjak, if when using a* single portfolio approach you would be comfortable with an asset allocation of 50% eq and 50% fixed, what are the percentages, of your aggregate portfolio, when you do the allocation by calling the categories buckets?* Might it make you feel comfortable being as aggressive as 80%/20%?* I'm just wondering how much the impact of having your investments categorized by "buckets" instead of "asset classes" has on your personal risk/volativity comfort level.

If having a different name, a different way of looking at the same thing, makes one more comfortable, what the heck?* I've got no problem with it as long as Ray isn't charging $$$ beyond the cost of a book.* Glad its working for ya........

[mathjak107]

well the overall balance is about a 60% equities/15% bonds/20% cash/5% commodities when taken as a whole including every dime i own.....by preparing to enter retirement with about 7 years worth of money in bucket 1 including intrest from cd's/annuties etc.....bucket 2 will have another 7 years of investments that should keep up with inflation ,bond funds,conservative growth and income funds,reits etc.......knowing im covered for 14 years is a warm and cozy feeling...that represents about 1/3 of total assets...the other 2/3 are in bucket 3...thats where the action is...basically we never had a 14 year period where the market hasnt been up alot....as long as i invest and dont speculate theres a certain amount of comfort in watching the down days knowing it dont mean a thing to my retirement...i never had that secure feeling when all the assets were in one big 60/40 pool.......i cringed at every down turn..........remember retirement is not about getting rich,,,its about not getting poor

[Ed_The_Gypsy]

mathjak,

I like your approach.

remember retirement is not about getting rich,,,its about not getting poor

Right on .

Ed

[marpea]

Longtime lurker who decided to decloak after reading all the wonderful information shared in this thread.* Thanks to all of you that posted here.

I retired in 2000 at 58 but DH has continued working as he is still enjoying what he is doing (craftsman working with wood, metal, marble, etc.).

We are FI so when he decides to stop work will implement one of the approaches shared here.* So many good ideas have been shared it will be hard to decide which one is best for us but I have some time to think about it.* This is a topic I have been pondering for some time but now have lots of new input.*

Being a retired systems analyst, I still use all those analytical skills to manage our investments as DH isn't too interested in the details.*