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Old 08-24-2011, 05:41 PM   #61
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tthe way i use my buckets they differ from a traditional AA in these ways.

the major difference is the structured well defined time frames of money..

the way investments are handled such as dividends are not used directly to fund safe money buckets but only re-invested .

the biggest difference is rebalancing . traditional aa rebalances by performance or date . the buckets are rebalanced by years of money needed.

if my buckets are pretty full and markets take off i can let them run . a traditional system usually has a performance based number that triggers a rebalance or a date.
you sell equities at a loss to replinish fixed if the time frame requires?
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Old 08-24-2011, 05:51 PM   #62
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never never never. , thats why the time frames are set to carry you through 15 years. we never ever had a time where we didnt hit a high in a 15 year period where you couldnt refill. refill any chance you can when your up.

could it happen where are down longer ? sure it could ,but so far never did.

that 15 year time frame was selected just for that reason. thats why i said the buckets give you very defined time frames of money unlike a traditional aa.

i believe in planning around what was,what is and what stands a reasonable chance of continuing rather than the what ifs.
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Old 08-24-2011, 06:18 PM   #63
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Current age = 52.9

Bucket 1: Immediate income = COLA'd survivor pension and immediate fixed annuity, keeping on a modest budget from age 48 to 56. Still contributing to/reinvesting into retirement portfolio (AA 32/65/3).
Backup plan for involuntary COL increases between age 48 and age 56 = 30 day dividend generating muni bond fund, EE bonds, and cash reserves.

Bucket 2: Future income= modest deferred FERS pension at age 56. A lot of this will go into retirement portfolio minus a small skim for fun.

Bucket 3: Distant future income= SS at age 62, I bonds maturing, and retirement portfolio gradual drawdown at a rate dependent upon what is covered by whatever SS benefit exists,
a little more than 9 years hence from today.
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Old 08-24-2011, 06:28 PM   #64
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never never never. , thats why the time frames are set to carry you through 15 years. we never ever had a time where we didnt hit a high in a 15 year period where you couldnt refill. refill any chance you can when your up.

could it happen where are down longer ? sure it could ,but so far never did.

that 15 year time frame was selected just for that reason. thats why i said the buckets give you very defined time frames of money unlike a traditional aa.

i believe in planning around what was,what is and what stands a reasonable chance of continuing rather than the what ifs.
So the time frames are only fixed for the first day? After that you might sell eqities, and change the time frame, at any time depending on market performance? Or the market may drop leaving you short of 15 yrs of equities? Your fixed time frames are totally flexible. Sell anytime the market is up to refill? Or watch the number of years you have in equities drop if the market falls. Have I got it now?
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Old 08-24-2011, 06:36 PM   #65
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It works the other way, simplified version:
  • Figure out how much you need, say 40K/yr
  • 40K*7 years = $280 in B1. (for simplicity we'll assume inflation rate=CD rate)
  • 40K + 7 years of inflation, assume its now 50K/yr
  • 50K*8yrs = 400K, but you assume you will have some growth (dividends, etc), the number required today will be less, ie it will grow to 400K, so you may put in 300K into B2 if you think you will conservatively get 33% return over next 8 years
  • The rest goes into B3
That's basically it, again you start with how much you need to withdrawal and work from there. I have a spreadsheet that does it but Ray likes to sue anybody who even mentions the word bucket , so I won't post it.
TJ
Thanks TJ, I have asked multiple times over 3 years how this system works and your the first person to actually provides some numbers. (For you bucket fans, this is money forum and numbers matter!).


So lets set the way back machine to July 1999. The internet is really hot, the unemployment is low, inflation is moderate but there are fears of it rising. People are debating if oral sex is really sex, and Texas governor is looking like the favorite to win the GOP nomination. (See not everything has changed).

B1=280K
(I think historically a 7 year CD ladder probably exceeds inflation by roughly 1% however for those wanting to set up a bucket system today the situation is different. A 7 year CD ladder at Penfed is 1.8% while in inflation is 3.6%. This means that if you were setting up a 40K inflation adjusted bucket 1 today for 7 years you'd need $300K. The good news is with rates so low you really can ignore taxes..)
B2= 275K
Back in 1999, the ten year bill was around 5.5-6.0 for planning purposes I assumed a 5.5% return but I will stick Bucket 2 in the Vanguard Total Bond Market
B3= 445K (1 million - B1 - B2)
I'll stick this in Vanguard Total Stock Market.

Fast forward to July 2006. The economy is doing ok. The stock market is recovering from the 2000 crash. B1 is needs to be refilled,roughly 10K remains due to CD returns exceeding inflation during this time.

As predicted our 275K in bucket 2 has grown to almost exactly 400K, 398 actually. The good news is inflation is slightly lower than predicted we now need $48,400 to keep purchasing power constant. After refilling Bucket 1 with (7 * 48,400) B2 has only 70K left.

Bucket 3 has grown just under 11% and now contains $493K. I guess the main rule with bucket 3 is to not sell at loss. So I can see selling 50K from Bucket 3 to refill bucket 2. However, this only leaves 120K in Bucket 2.
The 10 year T-Bond was yielding 5% back in summer 2006. So in order to refill bucket 1 in 7 years we need to have 340K. However, refilling bucket 2 completely only leave 225K in Bucket 3.

I think this is my main problem with the system. Over 7 years our assets have decreased by 10% and spending needs have increased 20%. I am struggling to understand what the average early retiree is suppose to do in 2006. Refill bucket 2 and leave only a small amount for inflation protection/growth, or short change Bucket 2 and risk running out of money to refill bucket 1 in 7 years? Now with the benefit of 20/20 hindsight it is obvious sell bucket 3 to refill Bucket 2. But how would you know to do this back in Summer 2006.

Now lets move to July 2011. Bucket 3 is up 20% and Bucket 2 is up 100%! Bucket 1 is probably doing better than projected because inflation has been low, you probably have 3 years (150K) left in bucket 1 but the Penfed 6% are a thing of the past 7 year ones are 2.75% today. If you refilled bucket 2 back in 2006 you've done very well total assets near $1.1 million (you are 12 years older and probably able to collect SS now or very soon). If on the other hand you didn't refill bucket 2 your total assets are around 900K, your retirement is still probably ok. However, your buckets seem all screwed up.

So Ray Lucia fans help me fill my buckets.
Bucket 1 is 160K spend rate is 52K/year. 50K in 5% CD due in 2012, 45K in 6% CD in 2013, 40K in a 4% in 2014K, 15K in MM/Checking earning 0%
Bucket 2: 240K total, 50K in Penfed 5% CD in 2021, the rest in Total Bond Market
Bucket 3: 500K total stock market.

What would you do?
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Old 08-24-2011, 06:41 PM   #66
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the concept is you have the ability to go out as long as 15 years to refill your buckets.

it all depends how conservative you want to be.

i can spend down for 2 years from bucket one as an example. the following year is an up year. if im really chicken hearted i can sell a little equities and refill bucket 1. if im a more game hearted i may decided to let it run another year or 2 and see if i get another chance.

if i dont then i can start to fill bucket one from 2 and keep going waiting for an up moment to refill.

worst case is i can go up to 15 years and rebalance. some may even choose to do that.

let it all deplete, let the equities grow with out any selling along the way and hope the rule still applys and we arent down in year 15.


ill dig out my real numbers tomorrow if i have time.
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Old 08-24-2011, 06:52 PM   #67
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Sorry mathjak, but there's just nothing special about what you're doing. Everything you've mentioned might be done by someone who is thinking in terms of AA during the withdrawal phase. You start with a 15yr/8yr/7yr balance. I start with a 50/27/23 balance. Same thing. You spend cash first. I could chose to spend cash first. You "refill" bucket one from the other buckets if opportunities arise. I rebalance towards cash from equities and fixed if the opportunity arises.

I don't get it. What's so special about starting with a 50/27/23 AA, spending cash first and rebalancing (refilling "buckets") opportunistically?

Oh, I know! It makes Ray Lucia wealthy and gives his devotees the pleasure of using his jargon like insiders of a secret club.
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Old 08-24-2011, 06:57 PM   #68
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blah blah blah


ill dig out my real numbers tomorrow if i have time.
Look I get the concept. I explained the operations in way more detail than you have in the last 50 posts.

I am asking simple question. What would you do with the buckets that I derived from tracking real performance, real CD rates and real inflation going back from 1999.

Acceptable answer are I'd sell $X dollars in Bucket 3 or 2 and put it in Bucket 1 or 2. If X is 0, then tell me what would your criteria be in 2014 when the last CD matures I'd sell Bucket 3 if the S&P was what value.?
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Old 08-24-2011, 07:29 PM   #69
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I don't get it. What's so special about starting with a 50/27/23 AA, spending cash first and rebalancing (refilling "buckets") opportunistically?
Its simply a way of calculating how much money you should have in cash, balance funds, equities. As oppose to 100 - age, 60/40, etc.

I don't understand why this is so difficult? And why some people are so hostile to a different idea?
TJ
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Old 08-24-2011, 07:38 PM   #70
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Its simply a way of calculating how much money you should have in cash, balance funds, equities. As oppose to 100 - age, 60/40, etc.

I don't understand why this is so difficult? And why some people are so hostile to a different idea?
I don't know that the hostility is to the buckets concept themselves but with the idea of paying someone like Lucia a lot of money to perform it.

After all, using buckets is a form of AA much like the more conventional form of AA we discuss here. The main difference is that the allocations are in terms of years of income instead of percentages of the portfolio and that the "rebalancing" is more like replenishing the "safer" buckets from the "riskier" buckets.

To me the concept is appealing except that I can see a situation where your "safe" bucket is running low on cash even while the equities bucket is still pretty depressed, forcing you to "sell low" in order to keep the safe bucket from drying up. Sort of feels like we'll be in that mode soon, if not already.
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Old 08-24-2011, 08:04 PM   #71
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Its simply a way of calculating how much money you should have in cash, balance funds, equities. As oppose to 100 - age, 60/40, etc.

I don't understand why this is so difficult? And why some people are so hostile to a different idea?
TJ
I also don't think anyone is being hostile - they are simply trying to understand how this works. Skepticism has served me well over the years.

Also, I'm not even thinking in terms of 100-age for my AA. I've done plenty of FIRECALC runs, and they were all with a fixed AA.

For me, the "litmus test" is: Would the bucket strategy provide a higher portfolio value than a fixed AA after a particularly bad run of years, the 'scary dips' in portfolio balance that we see in the squiggly lines on a FIRECALC run? Everything else is personal preference, comfort and such - I want to see the numbers, that's what helps me sleep at night.

If buckets accomplish that, then I want to start filling my buckets! But yes, I'm skeptical.


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Old 08-24-2011, 08:07 PM   #72
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I don't know that the hostility is to the buckets concept themselves but with the idea of paying someone like Lucia a lot of money to perform it.

After all, using buckets is a form of AA much like the more conventional form of AA we discuss here. The main difference is that the allocations are in terms of years of income instead of percentages of the portfolio and that the "rebalancing" is more like replenishing the "safer" buckets from the "riskier" buckets.

Conceptually I don't have a problem with buckets. In fact, I like the concept quite a bit. Mathjack's insistence that using dividends as form of income is crazy risky is annoying but not that important.

In truth, the fact that my favorite investing strategy dividend income, has gained a bit of a cult following in the last couple of years has me worried.
To the point that I'm thinking there is a bit of bubble in dividend stocks. I always want to be a contrarion investor. Clearly if I had loaded up on treasury bonds the last few months when all the smart money hated them, I would be richer. I can't quite convince myself to buy Treasury bonds.

However, it is possible for me to switch from a dividend investor to a growth stock or even total return investor, for example both GOOG and AAPL are looking pretty cheap despite (or maybe because) of no dividend. However, if I do this I need to develop a withdrawal strategy. (The beauty of dividend investing is you spend a bit less than your dividends) Buckets is certainly a viable candidate for withdrawals.

But before I switch from doing what I currently doing to something else. I need to subject the new strategies, like buckets, to some serious scrutiny. Ideally somebody who has been retired using buckets for the last 10-20 years would be great. Baring that I am trying to get past the handwaving stage where people says well you sell stocks when they are up, and over 15 years they will almost always be up. This is almost useless info for a portfolio retiree.

Oh ya what ERD said also.
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Old 08-24-2011, 08:16 PM   #73
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In truth, the fact that my favorite investing strategy dividend income, has gained a bit of a cult following in the last couple of years has me worried.
To the point that I'm thinking there is a bit of bubble in dividend stocks.
Yeah, this worries me too. There's a desperate search for yield out there, and thus many stocks with juicy dividends are being bid up. I mean, if a stock was paying a 5% dividend and the price rises by 25%, it will still be yielding 4% -- still attractive in a yield-starved world and better than most highest quality bonds of moderate duration. Lather, rinse, repeat.

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Baring that I am trying to get past the handwaving stage where people says well you sell stocks when they are up, and over 15 years they will almost always be up. This is almost useless info for a portfolio retiree.
This is the main sticking point for me. With traditional AA you have well defined dates and/or events that trigger a rebalance -- when your AA is 5% off the target, for example, or every 12 months. AA with buckets doesn't really have that fixed strategy that takes the guesswork, fear and greed out of the picture.
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Old 08-24-2011, 08:21 PM   #74
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I suppose that if one sells only their short-term assets while trying to ride out a market decline, that they are actually changing their asset allocation to the riskier more equities, less fixed income. That may be OK for some, but a standard rebalancing approach would not have you increasing your risk (as measured by your stock:bond ratio) in a market decline while still letting you hold onto to your equities.
How would that be done? The money must come from somewhere. If it comes from fixed assets, the allocation becomes skewed toward equities. If it comes equally from all asset classes, you have the reverse cost averaging method.

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Old 08-24-2011, 08:37 PM   #75
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But before I switch from doing what I currently doing to something else. I need to subject the new strategies, like buckets, to some serious scrutiny.
There is almost no chance that the concept of buckets brings anything new to the table. It is just clever marketing, and retired investors are always half scared and looking for anything that will reduce anxiety.

Buckets are just a way to keep from going all in, which is very often a good idea however it is pitched. Anyway, I am sure that mathjak will make some new converts since he is very confident.

Re: your point about a dividend stock bubble, I think that one must be careful as most times, but for example Walmart is on many measures selling cheaper than in March 2009. A really good way to get a historical look at your stocks of interest is their price/sales ratios.

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I think that is a nice way to go. I suspect some folks couldn't stand the volatility, but something tells me you will be rewarded (just don't panic the next time they drop 40% like they did back in 2008).
If you had been around here you would realize that he was retired then, and no, he did not panic. He did not even get nervous.


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Old 08-24-2011, 09:15 PM   #76
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Here's some interesting historical perspective from a self-professed 'bucketeer' (Sherman, set the way-back machine for 02-12-2009, 08:25 PM):



Are Ray's Buckets of Money fatally flawed?

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Some of you know I'm a fan of Lucia's buckets of money for the most part.

But if I were, say 11 years into it as of 2 years ago I would have been some 75-80% in equities going into the recession (assuming moderate withdrawal rate of 4%, usual returns til that time, modest inflation). I would be eating Alpo now and quite close to selling low in the near future.

Ray tap dances around this possibility in his books and on his show, but says maybe you should rebalance a little bit along the way only when stocks are well higher than their presumed returns, etc. Of course the more you do so, the less you are adhering to the principle of leaving your stocks to grow for 14 years or more.
I can sense the frustration of some here, when we see phrases like - ' rebalance a little bit along the way only when stocks are well higher than their presumed returns,' - that is just too vague and 'hand-wavy' to be taken seriously. I might as well say that AA works a lot better if you just adjust your target AA a little bit along the way only when stocks are well higher than their presumed returns,'. Hey, how can anyone argue with that?

Buy low, sell high; when your stock goes up - sell it, if it doesn't go up, don't buy it.....

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Old 08-24-2011, 09:17 PM   #77
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Sorry mathjak, but there's just nothing special about what you're doing. Everything you've mentioned might be done by someone who is thinking in terms of AA during the withdrawal phase. You start with a 15yr/8yr/7yr balance. I start with a 50/27/23 balance. Same thing. You spend cash first. I could chose to spend cash first. You "refill" bucket one from the other buckets if opportunities arise. I rebalance towards cash from equities and fixed if the opportunity arises.

I don't get it. What's so special about starting with a 50/27/23 AA, spending cash first and rebalancing (refilling "buckets") opportunistically?

Oh, I know! It makes Ray Lucia wealthy and gives his devotees the pleasure of using his jargon like insiders of a secret club.

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I don't know that the hostility is to the buckets concept themselves but with the idea of paying someone like Lucia a lot of money to perform it.

After all, using buckets is a form of AA much like the more conventional form of AA we discuss here. The main difference is that the allocations are in terms of years of income instead of percentages of the portfolio and that the "rebalancing" is more like replenishing the "safer" buckets from the "riskier" buckets.
it seems to me the difference between the usually talked about here AA approach and the bucket approach is that the usual AA approach has specific percentages of the portfolio in stocks, bonds, cash, etc that stay relatively constant by rebalancing the portfolio on a yearly basis. however the buckets approach doesnt maintain specific percentages of portfolio in stocks, bonds, cash, etc via annual rebalancing but the percentages can vary widely from year to year depending on how the investments are doing. the main emphasis seems to be dont sell stocks when they are down, even if the portfolio is getting heavily weighted with stocks. (of course if you get to the point where you have to sell stocks when they are down to get the money to live then you do)

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To me the concept is appealing except that I can see a situation where your "safe" bucket is running low on cash even while the equities bucket is still pretty depressed, forcing you to "sell low" in order to keep the safe bucket from drying up. Sort of feels like we'll be in that mode soon, if not already.
this can happen with the more common approach to AA too. if equities are depressed long enough that you have to sell some equities in the bucket approach i'm sure you would have already sold some in the more common AA approach
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Old 08-24-2011, 09:56 PM   #78
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Baring that I am trying to get past the handwaving stage where people says well you sell stocks when they are up, and over 15 years they will almost always be up. This is almost useless info for a portfolio retiree.
This is the main sticking point for me. With traditional AA you have well defined dates and/or events that trigger a rebalance -- when your AA is 5% off the target, for example, or every 12 months. AA with buckets doesn't really have that fixed strategy that takes the guesswork, fear and greed out of the picture.
Aeowyn already explained 1 method for accomplishing this


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I have a minimum and maximum on each of my buckets. Money flows between my buckets in different ways.

Starting with my conservative buckets, if one of them falls below it's minimum amount it will pull money from the next bucket up until it is also at it's minimum amount. If I need to I'll keep going up each bucket level to fund my lower buckets. If I manage to have all my buckets at the minimum level, I'll start spending down my lower buckets completely.

Coming from a more positive angle, when my more aggressive buckets exceed their maximums, they spill over into the buckets beneath them. If all my buckets are maxed out, I have the choice to either stash the extra in my more aggressive bucket, increase my draw rate (this will increase the min and max on the buckets), put the money aside for a major purchase or an opportunity, or find a good cause to give the money to.
again, i think the point is to not sell equities when they are down. wouldnt any reasonable method of determining when equities are up make buckets work better than a method that doesnt make it a point to not sell equities when they are down?
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Old 08-24-2011, 10:02 PM   #79
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I don't see a single thing here that's different from an AA system, other than the jargon.

You may be incorrectly assuming that using some sort of AA system during retirement (ie., not using Lucia's bucket system) requires using the age suggestion to determine your percentage of fixed allocation. Not true at all. Here's a thread for your review where we discuss various methods people use to come up with a fixed allocation and also some critique of the age suggestion. Note that no one mentions that you must either use the age suggestion or Lucia's bucket system. There is a world of other possibilities.

how do most of you determine your bond allocation?

edit: I note you participated in that thread. Your comments there don't seem congruent with you being a "buckets" fan. Especially your comfort with having relatively low cash and high equity allocations. Ray would roll over in his grave (wishful thinking) if he saw that kind of high equity percentage in a FIRE portfolio beginning retirement.
Agreed - having a specified asset allocation doesn't have to be age based.

Actually I'm fairly consistent with my post in the referenced thread. I have made some modifications and clarifications in my strategy since then though. At the time of the referenced thread, I wasn't really familiar with "buckets" and I was trying to fit my "bucket" like strategy into the AA mold. But even then you can see that I have buckets, I just called them "Cash", "Conservative portfolio", and "Aggressive portfolio". I didn't go into details in this thread, but there were a few different layers in my conservative portfolio (it included all my current bucket 1 and 2 portfolios) and a couple layers in my aggressive portfolio (my current buckets 3a and 3b).

One of the changes I made since then was instead of holding Cash for my emergency fund, I've now changed that to short term bonds. Also I've gone from 1-2 years cash to half that - but I've added more in way of conservative bonds to back it up. I guess as I'm getting close to pulling the trigger on leaving my J.O.B., I can't stand the thought of having that much money just sitting in cash - but short term bonds are not that far off from cash.

As far as Lucia rolling over in his grave - I don't thinks so. I agree that Lucia's bucket recommendations and time lines for the buckets are way more conservative than mine. But it seemed to me in his book that he had a lot of flexibility in the buckets so that you could customize them to your personal risk tolerances. He also gave some suggestions on moving money between buckets - but again there was a lot of flexibility on how to do this. I've only read one of his books and I've never heard his radio show - so I'm not expert on his suggestions and I'm certainly not a loyal follower, but my strategy seems to be lined up with his "bucket" way of thinking.

As far as the "buckets" being different than AA as far as the end result, you are partially right, that's why I tried to fit my buckets into the an AA range in the referenced thread. But even then I couldn't nail down an exact AA - just a range. And to do that I also had to assume a withdrawal rate.

Buckets are a different way of thinking. It's hard for me to tell you what I want my asset allocation to bonds to be for my entire portfolio. I can tell you for money I intend to use in the long term (10+ years) - I want 100% equities. And I can tell you that money I want to use for the next couple years I want all in Cash/ conservative Bonds. For the in between times, I'm comfortable with a mix of more aggressive (general) bonds, balanced funds, and conservative large cap stocks.

A bucket approach will have a variable allocation to bonds. In a really bad/long down stock market, the bond buckets could get spent down completely before dipping in the stock buckets.

Mathjak had some excellent points. I plan to rebalance once a year within each of my buckets, but moving money between the buckets is quite different.
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Old 08-24-2011, 11:02 PM   #80
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Another 'Blast from the Past':

buckets in FIRECalc ?



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Originally Posted by youbet View Post
Quote:
Originally Posted by JohnEyles View Post
Ok.... since
what we're really doing is writing the "rules" of buckets, and the performance
will depend on how good those rules are.
I think what would really, really be neat would be if Ray Lucia would write the "rules" of buckets!
-ERD50
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