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Income for Life Buckets vs Lazy Portfolio Withdrawals
Old 05-21-2013, 06:12 AM   #1
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Income for Life Buckets vs Lazy Portfolio Withdrawals

My big day is coming up here in July and I'm on the fence as to whether just leave the investments in VG lazy portfolio or go to the Income for Life bucket allocation. Here is a good video of the Inc4Life concept.

The Income for Life Model

click on the play movie link on the left. it's about 10 minutes, but a good outline of the concept.

My lazy portfolio is as follows, i.e. Alex Greens gone fishing portfolio.

Vanguard Total Stock Market Index (VTSMX) – 15%
Vanguard Small-Cap Index (NAESX) – 15%
Vanguard European Stock Index (VEURX) – 10%
Vanguard Pacific Stock Index (VPACX) – 10%
Vanguard Emerging Markets Index (VEIEX) – 10%
Vanguard Short-term Bond Index (VFSTX) – 10%
Vanguard High-Yield Corporates Fund (VWEHX) – 10%
Vanguard Inflation-Protected Securities Fund (VIPSX) – 10%
Vanguard REIT Index (VGSIX) – 5%
Vanguard Precious Metals Fund (VGPMX) – 5%

My choice is either rebalance annually by withdrawing one years expenses to a VG money market and transfer to checking on monthly basis, or use the buckets outlined in the Inc4Life structure. Both methods seem reasonable to me.

My assets are split pretty much 50/50 in taxable/tax-deferred if that makes any difference on the tax efficiency scale.

Thoughts from the experts would be appreciated. This is the last decision I need to wrap up as I start ER.

Nano
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Old 05-21-2013, 06:27 AM   #2
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I've gone with something more similar to the lazy portfolio except I target 1-2 years of annual expenses in cash (online savings account earnings ~0.8%) and another 1-2 years of annual expenses in a short-term bond fund. Remaining investments are 60/40.

I found an article on the Income for Life (see Money for Life! | Wealth & Retirement ) and thought that the guy's target returns for the longer buckets seem pretty optimistic.
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Old 05-21-2013, 07:49 AM   #3
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I'd take a hard look at Europe and precious metals.......maybe heavy up a little in total stock or add some mid cap index......and, with taxes, depending on your tax bracket, you could take a look at a municipal bond fund as well. I hope I'm right.....those are funds that I have some money in. Good luck!
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Old 05-21-2013, 08:43 AM   #4
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Since junk bonds (aka high-yield corporates) have equity-like character (they drop a lot when equities drop), dpes anybody else think the lazy portfolio shown is quite aggressive with 20% bonds plus high-yield bonds for someone who will retire in July?

The break-up of international equities into 3 funds: European, Pacific, and Emerging is what was in many books about 10 years ago. This is probably because the newer Total International Index funds were not available until the past few years.

In other words, lazy portfolios in 2013 can be a whole lot lazier.
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Old 05-21-2013, 08:57 AM   #5
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In other words, lazy portfolios in 2013 can be a whole lot lazier.
I have to agree and am considering going to a 3 fund portfolio:

VTSAX Total Stock Market Admiral - 50%
VGTSX Total Intl Stock - 20
VBTLX Total Bond Market - 30%
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Old 05-21-2013, 11:38 AM   #6
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I'm going with 3 to 4 years of cash and stable value/short term bond assets and the rest in a lazy portfolio that I'll rebalance and use to top up the cash and short term bond buckets.

The issue I have with the buckets approach is that it pushes you into a more aggressive portfolio as you age which seems backwards to me.
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Old 05-21-2013, 12:19 PM   #7
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Originally Posted by NanoSour View Post
I have to agree and am considering going to a 3 fund portfolio:

VTSAX Total Stock Market Admiral - 50%
VGTSX Total Intl Stock - 20
VBTLX Total Bond Market - 30%
That's exactly what my portfolio consists of. I've been very pleased with it, and it's easy to rebalance annually with only three funds to keep track of. From an exposure standpoint, you have everything just about covered. The only thing perhaps missing is TIPS, and other exotics like precious metals or REITs. For me, I think the simplicity makes it worth it.
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Old 05-21-2013, 12:37 PM   #8
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I
The issue I have with the buckets approach is that it pushes you into a more aggressive portfolio as you age which seems backwards to me.
I believe you should shift the buckets with each set of 5 years. This way the next 5 years expense are in very conservative assets.

I could be wrong, but this is how I understanding it.
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Old 05-21-2013, 01:31 PM   #9
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Originally Posted by NanoSour View Post
I have to agree and am considering going to a 3 fund portfolio:

VTSAX Total Stock Market Admiral - 50%
VGTSX Total Intl Stock - 20
VBTLX Total Bond Market - 30%
Those are my historical "go to" funds. However, on the bond side due to interest rate risk and low yields of Total Bond I have gravitated to a combination of Investment-Grade and High-Yield Corporate funds. More recently, I have begun transitioning to Guggenheim Bulletshares.
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Old 05-21-2013, 01:53 PM   #10
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I believe you should shift the buckets with each set of 5 years. This way the next 5 years expense are in very conservative assets.

I could be wrong, but this is how I understanding it.
Sure, so after 20 years you have a 5 year CD ladder and everything else in aggressive equities.
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Here's Another Gone Fishin' Portfolio
Old 05-21-2013, 04:49 PM   #11
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Here's Another Gone Fishin' Portfolio

This article has a table with an age-based allocation and pointers to a bunch of VG funds or iShares to get you there: Marotta's 2012 Gone-Fishing Portfolio - Forbes
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Old 05-21-2013, 05:24 PM   #12
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Originally Posted by NanoSour View Post
My big day is coming up here in July and I'm on the fence as to whether just leave the investments in VG lazy portfolio or go to the Income for Life bucket allocation. Here is a good video of the Inc4Life concept.
I suffered through that whole video (luckily I had something else to do, so I was multitasking through it). The first 1/3 or more is all FUD (fear, uncertainty and doubt). They never come out and say that they offer annuities or that they are offering an insurance product. And they have really figured out how to manage the web search results (almost no "real" content in the results I got). They seem to use a lot of "buzz marketing". But I did find a Wall Street Journal quote:

Quote:
David Macchia, founder of Wealth2k Inc., which develops annuity "laddering" strategies. That way, you can lock in higher payments on annuities purchased in years when interest rates are higher, he says.
It sounds like they take all of your wealth and stick it into an asset allocation. But rather than rebalance, they spend out of each five year bucket, starting of course with the cash bucket. Then, when that runs out, they convert the next bucket into an immediate annuity for you (whoop de doo!). They never mention in the video the risk that at the point they convert to the annuity there might be an unfavorable interest rate environment, which locks you into a poor annuity for that five year block.
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Old 05-21-2013, 06:50 PM   #13
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They never mention in the video the risk that at the point they convert to the annuity there might be an unfavorable interest rate environment, which locks you into a poor annuity for that five year block.
But they do show the scheme failing when the aggressive equities fail to meet the projected returns.
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Old 05-21-2013, 09:39 PM   #14
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I've gone with something more similar to the lazy portfolio except I target 1-2 years of annual expenses in cash (online savings account earnings ~0.8%) and another 1-2 years of annual expenses in a short-term bond fund. Remaining investments are 60/40.
Do you include the money that you have in cash and in the short-term bond fund as part of the 40%?
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Old 05-21-2013, 10:10 PM   #15
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Do you include the money that you have in cash and in the short-term bond fund as part of the 40%?
No, I view the cash and short term bonds as a separate "liquidity bucket" that I replenish as needed when I rebalance my retirement nestegg which has a 60/40 target. If you blend the two funds together, my target AA is ~52 equities, 35 bonds and 13 cash/short term bonds.
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Old 05-22-2013, 02:20 AM   #16
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I have to agree and am considering going to a 3 fund portfolio:

VTSAX Total Stock Market Admiral - 50%
VGTSX Total Intl Stock - 20
VBTLX Total Bond Market - 30%

This is exactly the portfolio I'd have if I could start fresh and didn't enjoy picking stocks and fiddling with investments.

Today I'd make VGTSX 30% and VBTLX 20% but long term your AA is probably a bit better.
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Old 05-22-2013, 09:40 AM   #17
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Originally Posted by NanoSour View Post
My big day is coming up here in July and I'm on the fence as to whether just leave the investments in VG lazy portfolio or go to the Income for Life bucket allocation. Here is a good video of the Inc4Life concept.

The Income for Life Model

click on the play movie link on the left. it's about 10 minutes, but a good outline of the concept.
I don't have the patience for videos, so I downloaded the brochure instead.
Concept Overview

Two obvious concerns:
- Why buy an five year annuity? A CD or bond ladder does the job, but doesn't have the marketing expenses that are common with annuities.
- Do I want the market risk that, when the calendar tells me it's time to sell, the asset class that I'm selling just happens to be depressed? It looks to me like I'm significantly increasing risk by selling on so few dates.

With your portfolio, why not just sell a little bit every month? Since everything is at Vanguard, it's easy to look at your portfolio, find the fund that is the farthest over its target allocation, and sell a small chunk of it. If you want some cash, add a money market fund. You'll find that you're selling it when everything else is depressed, which seems to be the idea.
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Old 05-24-2013, 02:23 PM   #18
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Originally Posted by pb4uski

No, I view the cash and short term bonds as a separate "liquidity bucket" that I replenish as needed when I rebalance my retirement nestegg which has a 60/40 target. If you blend the two funds together, my target AA is ~52 equities, 35 bonds and 13 cash/short term bonds.
I have my retirement in two buckets; pre 59.5 and post 59.5. I'll keep my overall AA at 50/50 and rebalance when there's a 10% spread between equities and bonds/fixed income/cash, but keeping my cash bucket at $20k for liquidity.

My pre 59.5 bucket has to last for 7 years and consists of money that I can access without penalty before 59.5. It's similar to the first bucket of the "buckets" approach and has a conservative AA of 26% equities, 67% stable value and 9% cash so that I can survive any market crashes until I get access to my IRAs.

Once I reach 59.5 I will have access to a lot more capital and I'll do a total return approach keeping 4 to 5 years in cash and short term bonds or CDs. My WR should be 2.5% and I hope to get that, and more, from dividends, interest, and capital gains.
Once 66 comes around my pension and UK and US SS will begin and I should be able to to start saving again.

So I have a accumulation phase up to 52.5, an deccumulation phase from 52.5 to 59.5 funded from "non-penalty" accounts, a deccumulation phase from 59.5 to 66 funded from my entire portfolio, and an accumulation phase from 66 onwards. Even though I'll be taking money out of my accounts from 52 to 66 the WR is 2.5% so I hope that the portfolio will actually grow.
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Old 05-26-2013, 11:35 AM   #19
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Interesting article from Mike Kitces about using traditional AA to maintain an appropriate risk profile as you age, but that you can still present it to clients from a "buckets" point of view when they get nervous about recent market volatility.

Should Financial Planners Invest Using Bucket Strategies Or Just Report That Way? - Kitces | Nerd's Eye View

That's how I view my portfolio. I use the classic rebalancing AA approach, but at times I look at it from a bucket perspective - how many years of expenses to I have in cash + bonds in case I need to draw from that during a big equity downturn. It really helped me in early 2009 when I rebalanced (very scary), because I could see that even after rebalancing I still had X years of cash + bonds to draw on even if the market took a decade to recover.
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Old 05-26-2013, 12:57 PM   #20
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I like the idea of a bucket of cash/CDs and short term bonds to cover 5 years of spending, but after than it's just AA and total return. I don't like the possibility of a bucket growing out of proportion to the others and your AA getting skewed.
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