Buckets of Money Strategy

[AlanS]

I recently read the book Buckets of Money by Ray Lucia and wondered what some of the forum members think of his approach to retirement withdrawals. He suggests that at the beginning of retirement you create 3 buckets from your funds available for investment. The first is to cover expenses for the first 7 years of retirement he recommends things such as immediate annuities or laddered CDs. The second bucket is for the time frame of 7 to 14 years and contains income-generating vehicles such as fixed annuities and bonds. The third bucket contains stocks and other long-term growth vehicles. The idea is to live off the safe income from bucket 1 for 7 years, then convert bucket 2 to bucket 1 for the second 7 years and after 14 years start all over using the growth from bucket 3. Assuming that your initial funds are sufficient to put quite a bit into bucket 3, it sounds like a reasonable approach. Any thoughts?

Thanks,
Alan

Yup, It sounds like asset allocation to me. A very reasonable approach!

[Ted]

It strikes me as an unecessarily complicated (and therefore probably less effective) alternative to the approach of considering all of your financial assets as one portfolio and periodically rebalancing them accordingly.

Having assets divided between taxable accounts and retirement accounts (as most retirees necessarily do)tends to complicate things enough already. Just yesterday (Sunday Oct 19) Jonathan Clements had a good article in the Sunday edition Wall Street Journal about how to handle the dilemma of maintaining a target asset allocation within an overall portfolio that is distributed between taxable and retirement accounts (and perhaps also distributed between the accounts of a husband and wife.)

[unclemick]

Complicated is right. 3 adults - 3 pensions, 1 SS(2 coming), 2-IRA, 1 401k, 3-taxable AND looking at Roth conversion for some of it.

Keeping it simple is complicated enough!

[haha]

Quote:

Complicated is right. 3 adults -

Also sounds interesting. A three adult household, who share income? I would be interested in reading anything you might share about this. Definitely there is security in a group, as well as the opportunity to spread some expenses over a larger base.

Something I notice about the Mexican families that live here. Nobody ever seems lonesome. Always a few guys out on the patio, or fixing a car. ot typical US suburb (yet!) but it has its attractions.

Mikey

[haha]

Quote:

Complicated is right. 3 adults -

Also sounds interesting. A three adult household, who share income? I would be interested in reading anything you might share about this. Definitely there is security in a group, as well as the opportunity to spread some expenses over a larger base.

Something I notice about the Mexican families that live here. Nobody ever seems lonesome. Always a few guys out on the patio, or fixing a car. Not a typical US suburb (yet!) but it has its attractions.

Mikey

[unclemick]

The old sandwich gen. widowed mom, girlfreind(for 27 years) and me - technically single - equals three. She eschewed marriage number to and felt I be apt to stay around as a boyfreind - 27 yrs. and counting. But I do get to tell her how to invest.

[renferme]

sounds similar to the Grangarrd Strategy created by Paul Grangarrd. Basically, split your retirement savings into two pots: (1) 50% into stocks and (2) 50% into laddered investments (10 steps or years in the ladder).
Live off the ladders while your stocks have 10 years to appreciate and grow at the average rate of, say, 9% or higher if put into index funds. He says the average of the S&P500 for the last 75 years is 11% per year (that's from 1926 to 2000). By keeping the money in stocks or funds, you have 10 years to overcome bad years. And, then after the first 10 years, you do it all over again. Seems like a pretty good theory to me.

That's an awful lot of confidence to have in the stock market!

[renferme]

Steve,
Grangaard's book goes into much detail analyzing every 10 year period from 1926 thru 2000 showing the reader exactly how each period performed. And the results are good! As far as the 50-50 split, it's not etched in concrete. You can make it 30-70 or 70-30 or whatever you want. But the idea, as I understand it, is that after 10 years you want more total money that you started with 10 years prior. That way, you can give yourself a 'pay increase'. And, you set up the ladders in such a way, that each year you get out more money to allow for inflation. Laddered investments are fixed income investments; his example in the book used bonds that matured in 1 thru 9 years. If you use 50-50, then 50 % goes into stocks and 50% into fixed.
Ben

Well, I'm not really arguing with Grangarrd or Lucia. I'm sure they've done their research and I haven't detailed it to death as , I hope, they have. BUT.. how about 1929-1939? Or 1973-1983? I dont think the stock market did that well expescially on a real return basis during those 10 yr periods.'

And you'd need to make enough to clear inflation and fund the next 10 yrs PLUS have enough to keep in the market to do the same thing 10 yrs hence.

In fact I did something like this after having read a Scott Burns article called "The Omega Portfolio". Yes, it worked. But some runs left the remaining "dry powder" very thin. And since the future can't be relied upon to be JUST like the past, it was just too scary to "allocate-buy-hold-rebucket-rinse-repeat" . But yes, the basic premise was encouraging and appealed to my own tendency towards simplcity and "fewer moving parts". But , alas, I still feel it's a little too subject to the whims of fate and reality will require more baby-sitting of funds

[renferme]

Of course there were 10 year periods that did poorly.
The worst 10 year period did a -.9% ; that's 9/10's of 1 percent negative. Only 3 periods were negative. The vast majority did > 6%. Investing the the stock market is risky, but the biggest risk is inflation. Sure it's scary, but read the book ! I'm very soon to retire myself and this philosophy, if I implement, will require me to become more aggressive than I've been the past 3 years. We'll see if I can put my money where Grangaard's Strategy is.

There was actually a 18.7% deflation from 1929 to 1939, so I'm not sure keeping your investments in pace with inflation was really one of the major concerns (or all that desirable) that decade.

Theo

[AlanS]

I believe that Lucias method is more conservative than Grangarrds since you do not get to Lucias third bucket where the stocks are for 14 years. Using Lucias method, I would be putting about 60 percent in the stock bucket and hopefully just watching it grow. Nearly all of my funds are in pretax accounts so I will not be involved in tax balancing. Thanks for the good feedback on my original question. The method still feels basically pretty good.

Alan

[renferme]

Grangaard's strategy allows for the flexibility of increasing or decreasing the number of years in the ladders, but he thinks that 10 years is the optimum.

If I use his method, part of my ladder will be income paying stocks, even though he wants fixed securities in the ladders.

The scary part for me is, say I use his 50-50 example, putting 50% into stocks for the stock part of the system.
For that part of the system, I would be using my 401k.
So the money would be in Vanguard funds, probably the Institutional Index and Windsor funds. Could also use their Explorer fund, but have never liked it.
I have control over my income paying stocks, but have no control over the Vanguard funds.

Would like to read Lucia's book, but it's $30 !!! Maybe the library has it.

[Ted]

Any plan that commits a person to a particular asset allocation for an arbitrary number of years (be it 10 or whatever) is a gimmick that has much less chance of supporting a predictable withdrawl rate than periodic rebalancing between stocks and bonds. The first approach relies too rigidly on past market performance; the second also relies on past market performance as a guide, but provides more flexibility in adjusting to future market performance.

[renferme]

Ted, Enlighten me more, i guess i'm just stupid. are you criticising the Grangaard Strategy ? Are you saying that you cannot rebalance ? But, you CAN rebalance inside the stock portion of your savings. Of course the ladder portion should not be re-balanced as it contains, in his example, bonds that have been purchased to mature each year of the ladder. You live for 10 years on the matured bonds and the interest from the bonds that have yet to be matured. That way, you have 10 years (more or less depending on how you set it up) for the stock half of the plan to work for you (hopefully in a positive manner). The stocks portion can be mutual funds or stocks themselves.

I'm looking for some understandable reasons why this system is not good.

[renferme]

more of my previous reply:

suppose a person had retired in 2000 with a portfolio of 60% stocks and 40% bonds, 300000 in stocks , and decided to withdraw 5% per year of the previous year ending balance.
After the first year, he withdraws 15000 and the market goes down 20 %. Now he has about 228000.
Second year, he withdraws 5% or 11400 and the market goes down another 20%. Now he has 173280.
Then third year (2002) he withdraws 8664 and the market goes down another 20%. Now he has 131692.
Wow, what a loss of income and his portfolio value is now next to nothing. He will never recover and has to un-retire !

But, if the 300000 was in stock using the Grangaard System, he would not be tapping directly into stocks.
He would be living off the ladder portion of the system.
So, after the first year, the value of his stock portfolio would be 240000, after the 2nd year 192000, and after the 3rd year 153600.

That's 21,908 more ! And since no money is taken out of the Grangaard stock portion, he has 7 years to recover. Assuming a 20% rise for 2003, he would be up to 184,320 at the end of year 2003. That's opposed to 150128 for the other example.

[Bob_Smith]

Hi bennevis,

Have you checked Gummy's site? I haven't put his "Sensible Withdrawal" strategy into practice yet, but so far it makes the most sense to me:

http://home.golden.net/~pjponzo/sens...ithdrawals.htm

I haven't read the Grangarrd Strategy. Does it call for buying stocks when prices are down? If not, that could be a flaw.

[Ted]

Bennevis,

There are a couple of potential problems with the Graangard system, although its not necessarily "bad."
Essentially, it involves re-balancing, except that the rebalancing is done every 10 years. *During that time, a person's portfolio starts out with some fraction in (laddred) bonds that will have an average duration of about 4 years -- pretty short term which may not offer much return. *As time goes by, the entire portfolio shifts to stocks, such that in 10 years the person has to liquidate a large amount of stock and incur possible higher taxes as the result.

If I were going to use that plan, a couple of things that I would do would be (1) use TIPs for the "laddered bonds" to protect against possible inflation during the first 10 years and (2) include some bonds, REITs, and/or high yield bond funds with the stock portion of the portfolio, and if the stock values rise, shift some of that value to those other assets. *In other words, do more of what conventional portfolio rebalancing would have you do.

If you want to really compare these approaches, you can't selectively pick a period when stocks were at a peak at the start and then crashed. *You also need to consider other scenarios like the inflation and stock market underperfomance of the 1970's. In fact, you had best carry the analysis into the following 15 or 20 years to see what would happen then.