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Old 08-01-2013, 02:27 PM   #41
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I have never planned to use any bucket-based methodology. Sounds like a waste of time.
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Old 08-01-2013, 02:34 PM   #42
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Thanks rayvt,you are the spreadsheet guru!

I see that it takes a few years before the portfolios diverge. That suggests that a long term bucket strategy is a bad idea, but it doesn't convince me to empty my bucket during the crucial first years of ER, when I see it as insurance against the black swan.
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Old 08-01-2013, 02:34 PM   #43
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I have never planned to use any bucket-based methodology. Sounds like a waste of time.
Of course it's a waste of time if your cash bucket is 99%!
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Old 08-01-2013, 03:18 PM   #44
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I couldn't find your assumptions for annual returns on the S&P--was it by share price alone or did it include dividends?
That data came from another spreadsheet which very comprehensively computes the gains from the SPX monthly closing prices and the exact dividend yields by month. All dividends re-invested at the beginning of the next month. Note that I don't use Yahoo's "adjusted close" -- I compute the returns myself. Returns assume no commissions or taxes. Most brokers will DRIP for free. Taxes are an individual personal matter; inside an IRA there is of course no tax.
And in the comparison of CashBucket to standard SWR withdrawals it washes out -- the handling of dividends & costs is the same for both methods.

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I see that it takes a few years before the portfolios diverge. That suggests that a long term bucket strategy is a bad idea, but it doesn't convince me to empty my bucket during the crucial first years of ER, when I see it as insurance against the black swan.
The acid test is a 1973 start date. You get hit right off the bat with S&P500 losses of -15% and -27% in the first 2 years.

It's not such much the slow divergence in the early years, it's the hidden rot that happening inside the portfolio because of the large allocation to cash.

Look what's happening for a 1973 start (4% SWR, 5 years of cash). The first 2 years you leave the port alone and draw down the cash. The the 3rd year has a large gain and you transfer a very large amount from the portfolio to refill the cash bucket. The catchup amount is those 2 years of draw plus the accumulated inflation. What you are doing is selling a lot of stock just when the market starts to move off the bottom, instead of selling a little bit each year on the way down.[*]
Now going into the 4th year, the Buckets stock allocatio is $51K whereas the Standard stock allocation is $72K. The S&P return for the 4th year was 24%. 24% gain on $72K is a lot more money than 24% gain on $51K.

This happens over and over again. Each time the market dips you don't sell stocks -- thereby letting your losses run -- and draw from the cash bucket. Then when the market recovers you lickety-split pull money out of stocks -- thereby cutting off your winners -- to refill the cash bucket. This acts as a rachet pulling money out of stocks and moving it to cash. Which earns nothing.[*] I just realized that what you are doing is holding on during the drop and then selling on the way up. This is what amateurs do. The correct thing to do is the opposite -- buy on the way up and sell on the way down.
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Old 08-01-2013, 04:35 PM   #45
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I welcome any critique of the spreadsheet, or comments about any errors in it.
I had to put in 4 to get 5 years of cash...and starting in 73 (since its 1st down cycle) would make it a bit more favourable to bucket method, since its really to protect the downside, also, if you went back to 1929, the effect would be even more pronounced.
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Old 08-01-2013, 04:56 PM   #46
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I just realized that what you are doing is holding on during the drop and then selling on the way up. This is what amateurs do. The correct thing to do is the opposite -- buy on the way up and sell on the way down.
The "correct thing" sounds like trying to time(chase) the market, I'll pass.

Also you don't sell on the way up....you are basically waiting for the market to return to normal, so you sell AFTER the market recovers, for example if you retired in 2008, you lived off the cash, it's now 2013, good time to rebalance.

One more thing, as your portfolio grows, the 5 years of cash as a percentage gets smaller...unless you tied your expenses to the size of your portfolio.
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Old 08-01-2013, 05:34 PM   #47
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This whole thread reminds me of the great debate between Calvinists and Arminians over whether grace is prevenient or irresistible.

That is all. Please carry on.
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Old 08-01-2013, 07:00 PM   #48
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This whole thread reminds me of the great debate between Calvinists and Arminians over whether grace is prevenient or irresistible.

That is all. Please carry on.
I'll take grace anyway it shows up.

Same for good market returns
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Old 08-02-2013, 11:23 AM   #49
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Here is an interesting article on buckets maintenance from Morningstar.

A Bucket Portfolio Stress Test
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Old 08-09-2013, 07:40 PM   #50
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Interesting article. Unfortunately a "stress-test" that is only 6 years long, with 5 up years and only 1 down year isn't much of a test, let alone a stress test.

Anyway, I've updated the spreadsheet. It now shows better graphs, and allows you to select different ways to invest the cash. Same URL: https://www.dropbox.com/s/xf4ma5blug...cket_rules.xls
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Old 08-10-2013, 09:44 AM   #51
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June 2007 Journal of Financial Planning,’ Is rebalancing a Portfolio Necessary in Retirement’, by Spitzer and Singh
Executive Summary
This paper investigates the strategy of rebalancing the retirement portfolio during the withdrawal phase. The goal is to provide the largest number of equal (real) withdrawals from a given retirement portfolio.

The study investigates six different allocations of stock and five different harvesting rules, only one of which rebalances
the portfolio annually. The methods are tested using five different withdrawals rates (3-7 percent).The results look at shortfalls over 30 years, as well as shorter periods,

The study uses two analysis methods: bootstrap and historical inflation adjusted rates of return in their true temporal order. Both methods find that rebalancing provides no significant protection on portfolio longevity, and this holds for all withdrawal periods. In most portfolio management discussions,both for academics and practitioners. theimportance of the asset allocation decisionin the accumulation process of wealth iswidely agreed upon; consequently, most ofthe previous research has focused on thisaspect of portfolio management.With individuals living longer and withextended retirement periods, there is agreater need to study wealth management fact, in some cases, rebalancing increases the number of shortfalls.

Withdrawing bonds first, over stocks, performs the best of all the methods, though the resulting stock-heavy portfolio may make some investors uneasy, This method also is most apt to leave a larger remaining balance at the end of 30 years, while rebalancing leaves the smallest amount.

Withdrawing stocks first leaves more shortfalls than withdrawing low first or high first.

Confirming previous research, the larger the proportion of stocks to bonds, the longer the portfolio lasts; the higher the withdrawal rate, the more shortfalls. The results suggest that the use of lifecycle funds or a life-cycle strategy that decreases stock proportions as one grows older needs empirical justification.
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