Question on Bucket Strategy and Withdrawls

[Marketwatcher]

I'm 52 and will be retiring in March. At that time, I'll start receiving my pension of 62k per year, nonCOLA. I'll also withdraw 25k per year, so my total annual amount will be 87k to cover expenses.

The 62k pension is my floor. I plan to have 50k in savings, which is effectively 2 years of expenses, as my first bucket. I plan to have another 25k in bond funds (for another 1 year of funds) and the rest of my portfolio in stock funds. I have a high risk tolerance and prefer to have most of my portfolio in equities, for capital appreciation. The pension gives me a floor, and is basically a $1.2 million bond investment, so I need the inflation protection and diversification of stocks.

How should I replenish the cash portfolio, and how often should I do it?

Should I transfer funds from my savings account to my checking account quarterly, and then sell funds to replenish the savings account? So, for example, transfer 12.5k to checking, and then replenish the savings account with proceeds from stock or bond fund sales (depending on which is more highly valued at the time)?

Is quarterly too often, or not frequent enough?

Is there anything else I should be aware of for this bucketing strategy?

Thanks is advance.

 

[pb4uski]

I do it annually when I rebalance. I target 6% in cash (0.95% online savings account) when I rebalance which covers us for 2-3 years when combined with dividends from taxable accounts. Then I have an automatic transfer a fixed amount per month from the online savings to my local checking account that I use to pay my bills.

Mine is all rolled up on my rebalancing so whether it comes from bonds or stocks sort of takes care of itself. Usually, I sell stocks in my taxable account to bring my cash back up to 6% and then buy/sell stocks/bonds as needed to rebalance in my tax-deferred accounts.

I don't necessarily bucket... but having a healthy cash component as part of my fixed income allocation is effectively the same thing.

 

[LOL!]

For me, a lot would depend on whether my funds were in Roth IRAs, taxable accounts, or tax-deferred accounts. Also, it would depend on the sizes of these accounts.

That, and I wouldn't worry about buckets anyways. Search on "Kitces and buckets" without the quotes and read away. For instance: https://www.kitces.com/blog/managin...egies-vs-a-total-return-rebalancing-approach/

 

[Marketwatcher]

Thank you both. Yes, the bucketing strategy is really asset allocation in disguise. And it makes sense to have a decision rule to determine which assets to sell.

Thanks again for the input.

 

[papadad111]

Are you in a state that taxes your annual pension as ordinary income ? That might sway your decision from which account to replenish the 25k depending on portfolio performance. Over time and dividend payout etc.

 

[Cobra9777]

I keep 2-3 months cash in a Fidelity cash management account (CMA), which functions like a regular bank. Pension payments, rent checks, and dividends from the taxable account are automatically deposited there. That's our "paycheck" and covers roughly 80% of spending.

The rest of our cash allocation is held at Ally earning 1.0%. When the Fidelity CMA falls below a specific threshold, I replenish it from Ally. Likewise, when Ally falls below a specific threshold, I sell stock in the taxable account and transfer the proceeds to Ally. If needed, I then rebalance by moving between stocks and bonds in the tax-deferred account.

I don't follow any specific schedule. It's strictly as-needed... usually in conjunction with some large expenditure, like year-end property tax, international travel, home improvement project, etc. Typically once or twice per year. Our cashflow tends to be "lumpy" and our gap is relatively small, so this procedure has worked well.

I've recently reduced the cash allocation from 5% to 3%, which more closely aligns with 2-3 years need. 5% was too much. But even at 3%, I often wonder what purpose is really served by holding cash. I could easily skip the Ally step and just sell stock when the Fidelity CMA hits its threshold. But the performance drag is fairly small and I get some irrational sense of calmness by having cash sitting there. It also reduces the frequency of selling.

 

[Marketwatcher]

Are you in a state that taxes your annual pension as ordinary income ? That might sway your decision from which account to replenish the 25k depending on portfolio performance. Over time and dividend payout etc.

I'm currently in a state that taxes, but will be moving to a state with no taxes shortly after I quit working (FL).

I'll be drawing funds from my $325K aftertax portfolio until I'm 59.5. After that, my bigger pretax portfolio will kick in. My tax rate will definitely be lower after I retire, so I'm not concerned with Roth conversions.

 

[pb4uski]

Roth conversions are to take advantage of lower tax rates from when you ER until your SS and RMDs start and those kick you into a higher tax bracket. My conversions the last 3 years have been at about 8% compared to over 25% avoided when I deferred the income and probably 25% or 15% when I'm in my 70s.

 

[samclem]

Thank you both. Yes, the bucketing strategy is really asset allocation in disguise. And it makes sense to have a decision rule to determine which assets to sell.

Thanks again for the input.

If you are sticking to a fixed allocation and rebalancing, then it doesn't matter which assets you sell to meet your spending requirements. Once you rebalance after your withdrawal, you've negated any impact of selling from a particular bucket. I think Kitces does a good job of explaining this in the article LOL linked. Did you see that article differently?

 

[hnzw_rui]

If you are sticking to a fixed allocation and rebalancing, then it doesn't matter which assets you sell to meet your spending requirements. Once you rebalance after your withdrawal, you've negated any impact of selling from a particular bucket. I think Kitces does a good job of explaining this in the article LOL linked.

+1. This was already in my mind conceptually but his graphs showing overlap between bucket+rebalance strategy and AA strategy just makes it even clearer. It's made me realize that going the all-in-one fund route works just as well considering all I have are tax deferred and Roth accounts anyway. Granted, balanced funds tend to have slightly higher ER but just seeing the total portfolio performance and not seeing the volatility of the stock portion does a lot for my peace of mind.

 

[Turn_the_Page]

For me, I made up a worksheet to use annually for rebalancing. I haven't actually RE'ed yet, but I've been thinking about this a LOT. First I'll see how the checking/savings balance looks. Then sell whatever asset is needed to replenish this account, while considering whatever rebalancing needs to occur. I'll move this amount into the savings once per year. Then transfer monthly from the savings to checking.

I find the Fidelity CMA with checking to be very interesting. I need to think about that more.

For me, I don't include our checking/savings in the asset allocation calcs. This is the only part of the 'bucketing' that I ascribe to. As others have already explained, the buckets are really just a different way to look at asset allocation. There's nothing wrong with the approach, if it works for you.

 

[Marketwatcher]

Roth conversions are to take advantage of lower tax rates from when you ER until your SS and RMDs start and those kick you into a higher tax bracket. My conversions the last 3 years have been at about 8% compared to over 25% avoided when I deferred the income and probably 25% or 15% when I'm in my 70s.

My pension stops me from getting into a very low tax bracket immediately after I retire, unless there's some way I can get around that.

 

[Marketwatcher]

If you are sticking to a fixed allocation and rebalancing, then it doesn't matter which assets you sell to meet your spending requirements. Once you rebalance after your withdrawal, you've negated any impact of selling from a particular bucket. I think Kitces does a good job of explaining this in the article LOL linked. Did you see that article differently?

No, that was the way I read it. Maybe I just didn't express myself well.

 

[pb4uski]

My pension stops me from getting into a very low tax bracket immediately after I retire, unless there's some way I can get around that.

Since my pension was not with my last employer, in effect my pension is deferred until I start it... the benefit grows each year that I defer like social security does.

Could you opt to defer collecting your pension to do Roth conversions? If you have taxable account funds you can live on, are in good health and the pension benefit grows if you defer it then it might be something to consider. YMMV.

 

[jazz4cash]

My pension stops me from getting into a very low tax bracket immediately after I retire, unless there's some way I can get around that.

Is there an option for a lump (or partial lump) sum payment that you could rollover to an IRA?

 

[Marketwatcher]

I have very nice pension. On a present value basis, it makes sense for me to take the pension as soon as I retire. I only gain 1.5% a year for each year I wait until 65. So I'll get about 82% of what I would have gotten at 65, 13 years earlier. The lump sum I'm offered is quite a bit less than an equivalent annuity valued on the open market. It makes sense for me to take the pension as soon as possible. In this case, paying taxes isn't such a bad thing.

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[audreyh1]

I take a years annual withdrawal in January, and move it into a high yield savings account yielding around 1% give or take a little.*

Then I make monthly transfers from the high yield savings account to a bank checking account. These are automatic, though it's easy to go in and change the amount any given month.

I also make quarterly transfers to for estimated tax payments. If you are withholding taxes from a pension, this step may not be necessary.

I don't like dealing with selling funds and rebalancing more than once a year. That is often enough, and Jan happens to coincide with distributions paid out in Dec, and the start of a new tax year.

*American Express Bank is yielding 0.90%, and Synchrony Bank is yielding 1.05%.

 

[pb4uski]

I have very nice pension. On a present value basis, it makes sense for me to take the pension as soon as I retire. I only gain 1.5% a year for each year I wait until 65. So I'll get about 82% of what I would have gotten at 65, 13 years earlier. The lump sum I'm offered is quite a bit less than an equivalent annuity valued on the open market. It makes sense for me to take the pension as soon as possible. In this case, paying taxes isn't such a bad thing.

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Actually, that 1.5% a year increase is about the same as SPIAs pay according to immediateannuities.com so you're getting a market increase in your pension and if you defer, an opportunity to save on taxes by doing Roth conversions. Sort of like eating your cake and having it too.

52 yo female.................5.37%
53 yo female.................5.42%..... 0.9% increase from 52
54 yo female.................5.47%..... 0.9% increase from 53
65 yo female.................6.41%......average 1.5% increase from 52-65

 

[mathjak107]

interesting article on withdrawal methods . interesting how poorly rebalancing did compared to systematic equal withdrawals .

Best Retirement Withdrawal Strategies

 

[hnzw_rui]

interesting article on withdrawal methods . interesting how poorly rebalancing did compared to systematic equal withdrawals .

Best Retirement Withdrawal Strategies

In terms of median ending portfolio, sure. Success rate of rebalancing wasn't bad though. It was only lower to equal withdrawals by 1.8% (likely failing in scenarios with unusually high inflation).

How Portfolio Rebalancing Usually Reduces Long-Term Returns (But Is Good Risk Management Anyway)

Indeed, the equal withdrawals strategy likely ends up being unintentionally similar to rising equity glidepath.

 

[samclem]

interesting article on withdrawal methods . interesting how poorly rebalancing did compared to systematic equal withdrawals .

Best Retirement Withdrawal Strategies

Sorry, but it is very poorly written. Regardless of his withdrawal strategy, did this guy ever rebalance his portfolio to a desired asset allocation? He never tells us. The closest we get is this:

The strategies themselves are each quite simple, but vary significantly in their philosophy and results. Note these are pure withdrawal strategies. They never buy or sell, or change the asset allocation, by any amount other than to generate the required withdrawal in a given year:

So apparently he's not actually doing any rebalancing as we know it beyond taking the annual withdrawal from the most out-of-balance asset.

In terms of median ending portfolio, sure. Success rate of rebalancing wasn't bad though. It was only lower to equal withdrawals by 1.8% (likely failing in scenarios with unusually high inflation).

How Portfolio Rebalancing Usually Reduces Long-Term Returns (But Is Good Risk Management Anyway)

Indeed, the equal withdrawals strategy likely ends up being unintentionally similar to rising equity glidepath.

+1. The "equal withdrawals" method simply results in higher equity allocations over time, which produce higher average returns. But if a retiree wanted that higher return (and volatility) he could have simply started with the higher equity allocation.

The finding that the CAPE (aka PE10)-based withdrawal strategy had the highest value and survival (even better than his "equal withdrawals" strategy) at least hints at the value of using PE10 (whether for withdrawals or for adjusting AAs).

 

[Mulligan]

I have very nice pension. On a present value basis, it makes sense for me to take the pension as soon as I retire. I only gain 1.5% a year for each year I wait until 65. So I'll get about 82% of what I would have gotten at 65, 13 years earlier. The lump sum I'm offered is quite a bit less than an equivalent annuity valued on the open market. It makes sense for me to take the pension as soon as possible. In this case, paying taxes isn't such a bad thing.

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Forget the math stuff, its just plain more enjoyable spending 82% of something for 13 years, instead of 100% later.


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[hnzw_rui]

Forget the math stuff, its just plain more enjoyable spending 82% of something for 13 years, instead of 100% later.

+1. Hedonic tilt.

https://assetbuilder.com/knowledge-center/articles/-how-to-spend-more-now-less-later