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Otar has a new article on bucket strategies
Old 10-27-2013, 06:52 PM   #1
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Otar has a new article on bucket strategies

For those that do not frequent the bogleheads forum, Jim C. Otar, author of "Unveiling the Retirement Myth", has posted a link to an article about bucket strategies:

Quote:
I have recently written a CEU course article for a financial magazine. If you are interested, here is the link:
Kicking the bucket strategy | Advisor.ca

cotar@rogers.com
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Old 10-27-2013, 08:58 PM   #2
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Still no strategy tested that I would use, though the static approach is close to what I have done before. The dynamic strategy of filling buckets if equities rise by more than 8% doesn't make sense if you end up refilling a bucket before it is empty right after the first 8% increase after a big market downdraft. Up 8% could be still down 42%! I presume they refill only once a year, so probably not that bad, but it could be. I'd continue spending the cash until equities were higher, hopefully recovered.
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Old 10-27-2013, 10:04 PM   #3
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I had the same thought as Animorph: use the cash bucket during equity downturns, refill it after recovery. I'd like to have seen that approach tested.
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Old 10-28-2013, 08:31 AM   #4
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Originally Posted by LOL! View Post
link to an article about bucket strategies
Thanks for the link. Bucket strategies seem to be a way to placate advisory clients with an illusion.
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Old 10-28-2013, 03:03 PM   #5
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Thanks for the link. Bucket strategies seem to be a way to placate advisory clients with an illusion.
Here's an article that likes cash buckets:

The Benefits of a Cash Reserve Strategy in Retirement Distribution Planning

"
Results suggest that cash reserve distribution strategies improve the likelihood of realizing adequate real income when the reduction in the risk of having to sell investments at depressed prices, taxes, and transaction costs outweighs the opportunity cost of lower expected returns.
Results indicate that plan survival rates of the CFR strategy are up to as much as 6 percentage points higher than the plan survival rates for the RDCA strategy at the 30-year mark in retirement. The survival advantage of the CFR strategy is complemented by potential behavioral advantages, such as the clients’ increased willingness to tolerate volatility associated with the investment portfolio (IP). "

I think they helped things along by comparing a once a year bucket fill to a monthly sell for expenses without buckets that both charge $30 transaction fees.

"
This study is closely related to Bengen (1997), and Woerheide and Nanigian (2012). These two studies explored the efficacy of including cash in IP distribution strategies where distributions are made in tax-deferred and non-taxable environments, respectively. These prior studies used historical returns to assess the efficacy of cash reserves in distribution planning. In most cases, both studies found that cash is not beneficial to the SWR. This study examines the efficacy of distribution strategies that include a separate cash reserve when distributions are made in a lower return environment where taxes and transaction costs are accounted for."
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Old 10-29-2013, 09:39 AM   #6
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I'm amused to see that Otar assumes 2% in costs to manage the portfolio....that's a big drag on SWR right from the start. The best strategy would be to sack the advisor and move everything to a low cost brokerage company. Voila you just increased your annual return by at least 1.5%.
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Old 10-29-2013, 10:28 AM   #7
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Quote:
Originally Posted by nun View Post
I'm amused to see that Otar assumes 2% in costs to manage the portfolio....that's a big drag on SWR right from the start. The best strategy would be to sack the advisor and move everything to a low cost brokerage company. Voila you just increased your annual return by at least 1.5%.
That jumped out, didn't it? Mr. Otar must sell annuities.

I did like his presentation.

I also liked his pizza simile.

I did NOT like the 2% fee.
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Old 10-29-2013, 10:56 AM   #8
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I'm amused to see that Otar assumes 2% in costs to manage the portfolio....that's a big drag on SWR right from the start. ....
I noticed that too, but if the average investor has an FA charging 1% and is putting you in 1% ER funds, there you are.

As you say, adding 1.5% or more to those WR numbers with a DIY portfolio sure makes things look better. And how many of those FA selected funds actually outperform a couch potato style AA?

-ERD50
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Old 10-29-2013, 01:23 PM   #9
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All the buckets stuff is pretty much a load of guff IMHO. KISS has always been my motto so I'm going with a 50/50 AA. To take care of the possibility that I'll run out of money before I die inherent in all these plans I'll use a TIAA Traditional deferred annuity. That sounds a lot simpler than 6 buckets.

Having said that I am using a sort of bucket strategy in ER in that I've put enough money in a penalty free accessible stable value fund to cover my expenses from 52.5 years old to 59.5
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Old 10-29-2013, 05:40 PM   #10
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The "buckets strategy" has always seemed like a complicated way to express an easy solution.
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Old 10-29-2013, 08:16 PM   #11
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Executive summary: no strategy will overcome a situation where the available financial resources are simply inadequate to meet the required/desired withdrawls

Detail #1: the right strategy can may help to reduce risk/increase the potential success rate to a moderate extent

Detail #2: 2% costs sucks (as others have noted)

Detail #3: pizza is good
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Old 10-29-2013, 08:19 PM   #12
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Quote:
Originally Posted by nun View Post
I'm amused to see that Otar assumes 2% in costs to manage the portfolio....that's a big drag on SWR right from the start. The best strategy would be to sack the advisor and move everything to a low cost brokerage company. Voila you just increased your annual return by at least 1.5%.
Otar lives in Canada, where the average MER in 2010 was 2.05%. I do not believe he sells annuities. He's an engineer.

ETF and mutual fund fees compared | Toronto Star
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