Ray Lucia...Buckets of Money

[Rich_by_the_Bay]

OK assume rate of return is 4% and we have 6 years. Lucia's number is 63.9174

OK... so what do you do once you calculate the coefficient to get to how much goes in the bucket?

 

[Brat]

My read of the book is that you empty bucket 1 then fill it with what is in bucket 2.  In effect bucket 1 is your own short term immediate income annuity.  At that point you bucket-ize again. You don't adjust the bucket mix annually.  I see the bucket approach as separate from the issue of allocation.  Allocations should be reviewed at least annually.

After a comment I heard him make in one of his broadcasts I understand why he feels that investments outside an IRA should be tax efficient growth.  I think what I will do is to include the house proceeds in the total investable figure, fill bucket 1 with cash from the house, then invest the excess with bucket 3 mutual funds.  The IRAs then hold bucket 2 & 3 investments only. 

 

[hogwild]

OK... so what do you do once you calculate the coefficient to get to how much goes in the bucket?

Multiply the factor by your desired monthly income. This will give you your bucket #1 amount. Then apply an inflation factor to your desired monthly income. For example: say your desired monthly income is $1000 and you are bucketizing on 7 year periods and say you assume 3% inflation. Multiply $1000 X (1.03)^7. This would be about $1230/month. Then apply the coefficient factor you asked about again to get your bucket #2 amount. Bucket #3 would be the remainder of your invested assets after subtracting the bucket #1 and 2 amounts.

 

[modhatter]

I have read the book, and what doesn't make sence to me is this.  All work fine, if the market on a whole is in the Asending order (going up within the course of the first 7 years)  However, if that 7 year term turns out to be a flat or worse a downturn in the market, then your bucket #3 will either stay the same or worse lose money.  So now you have spent part of your principal and you are left with a non appreciating bucket #3 that was supposed to save the day. So now you have to decrease #3 bucket in order to fill #2 and #1 up again.
I think the whole thing is silly.  I don't see how it can help with a flat or declining market.  What am I missing?

 

[astromeria]

My read of the book is that you empty bucket 1 then fill it with what is in bucket 2. In effect bucket 1 is your own short term immediate income annuity. At that point you bucket-ize again. You don't adjust the bucket mix annually.

Yes. However, nothing is stopping you from taking advantage of opportunities like the one I just had to purchase CDs paying 6% for Bucket 1 (which is the expected return of bucket 2). In my case, I replaced expiring B1 CDs with them--I'm not living off my Bucket 1 "annuity" yet as DH is still working.

I see the bucket approach as separate from the issue of allocation. Allocations should be reviewed at least annually.

Agree.

The IRAs then hold bucket 2 & 3 investments only.

In my case, the total in all of our IRAs put together is too small to hold Bucket 2 or Bucket 3 alone, let alone both together. (But that's just us--not the norm.)

Are the podcasts worthwhile? I haven't been listeing to them. I just read the book, made some notes about how to get from where I was to the bucket system, and started plugging away.

 

[astromeria]

What am I missing?

Over a 14-year period, any terrible market should have recovered--it has in the past.

 

[razztazz]

I think the whole thing is silly.  I don't see how it can help with a flat or declining market.  What am I missing

The market always eventually goes up, just in the nick of time. Always has always will, ya know. Ya just gotta have faith

 

[Running_Man]

I have read the book, and what doesn't make sence to me is this.  All work fine, if the market on a whole is in the Asending order (going up within the course of the first 7 years)  However, if that 7 year term turns out to be a flat or worse a downturn in the market, then your bucket #3 will either stay the same or worse lose money.  So now you have spent part of your principal and you are left with a non appreciating bucket #3 that was supposed to save the day.  So now you have to decrease #3 bucket in order to fill #2 and #1 up again.
I think the whole thing is silly.  I don't see how it can help with a flat or declining market.  What am I missing?

Having not read the book but looking at the basic idea from Web site descriptions I think you are not missing anything, the idea appears to be as your retirement moves along allow your stock portion to increase with age as the idea is it will always go up. You ignore allocation method(s) with the belief that stocks will always save the day if given enough years.


Buckets of rain
Buckets of tears
Got all them buckets comin' out of my ears.

Life is sad
Life is a bust
All ya can do is do what you must.
You do what you must do and ya do it well

Bob Dylan - Buckets of Rain,

 

[wabmester]

Over a 14-year period, any terrible market should have recovered--it has in the past.

Somebody better tell that to the Japanese. It'll make them feel a lot better.

 

[Nords]

Are the podcasts worthwhile? I haven't been listeing to them.

I find that I can read the transcript faster than I can stand to listen to a podcast.

Kinda like the difference between DSL and a 300-baud modem.

Over a 14-year period, any terrible market should have recovered--it has in the past.

Except for during the Great Depression. Or 1966-1982. Or Japan in 1990-20??...

I think the key to surviving a 14-year bear market is to be either living off of or reinvesting dividends. Growth & value ain't gonna cut it.

 

[razztazz]

Except for during the Great Depression. Or 1966-1982. Or Japan in 1990-20??...

All ya gotta do is get some better statistics. Just look at things a different way then it can be easily proven that 1966-1982 was actually a good time to be invested.

 

[mathjak107]

Well if you empty bucket 1 and its seven years later and things are down ,use bucket 2.

You now have 7 more years before you liquidate stock. I have to admit you will be hard pressed to find a 15 year period where stocks were not higher than they were 15 years ago. You may find 1 but i wouldnt plan around that happening.

The withdrawl rate and planning is no different than any other assumptions and monte carlo studies figuring a return thats only 4% or so above the inflation rate. All the buckets do is help you organize and give you some defined amounts to set up as opposed to just the seat of your pants.

 

[razztazz]

You now have 7 more years before you liquidate stock. I have to admit you will be hard pressed to find a 15 year period where stocks were not higher than they were 15 years ago. You may find 1 but i wouldnt plan around that happening.

This is one of those "buzz phrases" that usually gets tossed of like "have a nice day" or rama-lama-ding dong and nobody really hears it.

So what if every 15 yrs period is up? Is it up enough.?

 

[donheff]

When I first heard of the buckets approach it sounded sensible to me. But that is because I *assumed* I understood what Lucia meant without reading the book. Now I have seen that people who actually read the book are all over the place about what the strategy really is. To me that says, the book isn't clear enough for people to consistently devine Lucia's strategy. If you can't understand a strategy you should not be quick to adopt it. I will wait until I see a consensus among readers about what the strategy actually is before deciding if it makes sense.

 

[mathjak107]

as long as your up when you liquidate stocks you should be okay.
you need to average around 7% or so overall to make it work,but then again any retirement planning is based on the same thing.
There isnt a retirement calculator that dosnt figure a certain amount of growth over a certain period of time,thats were the success rate percentages come in .

A 95% success rate still leaves that 5% chance that stocks may go the way of tokyo

 

[Rich_by_the_Bay]

When I first heard of the buckets approach it sounded sensible to me. But that is because I *assumed* I understood what Lucia meant without reading the book. Now I have seen that people who actually read the book are all over the place about what the strategy really is. To me that says, the book isn't clear enough for people to consistently devine Lucia's strategy. If you can't understand a strategy you should not be quick to adopt it. I will wait until I see a consensus among readers about what the strategy actually is before deciding if it makes sense.

That may be a premature conclusion, Don. I think it's more like one of those old ink-blot tests: you can take from it what you need. I must admit I am intrigued by it, having just now read the book. What you are assuming is lack of consensus may reflect that it's really more flexible than I realized.

The buckets define your needs; the contents of the bucket can be highly variable depending on your assets, expenses, etc. Just like the more traditional plans here. But what it does do is force a certain discipline on your planning, and help make explicit what might be less clear in a standard 60:40/slice and dice/4% SWR plan. In fact, you may be able to fit what you have now quite nicely into a bucket framework.

Overall, I do think it's one of the few books I really found useful. Give it a look.

 

[Brat]

Here's the link to the show archives:
http://www.businesstalkradio.net/weekday_host/Archives/rl.shtml

I like the archives because I can skip forward and pause.  

The book is almost 300 pages long.  My recommendation is to go to your public library, check it out and form your own opinion.  I did.  That what living below your means is all about.

 

[mathjak107]

well said rich

 

[mathjak107]

Yes the flexibilty is nice,you dont have to go out 7 years in your buckets either. If your more aggressive pick a different time frame, 15 years is the most conservative.

 

[youbet]

My recommendation is to go to your public library, check it out and form your own opinion.  I did.  That what living below your means is all about.

OK OK....... I'm still a big doubter about this but I'll go to the library tomorrow and thumb through the book.

But tell me this.....do you wind up with a significantly larger cash position than you would otherwise? I'm currently 65/30/5 and I don't think I'd be comfortable with that 5% cash equvilant position being too much higher than that.

Have you looked at the opportunity cost of having a large cash position during a bull market? IE., you collect 5% - 6% on a large chunk of your portfolio while the equity market returns 7% - 8% over that same time period?

 

[oisif]

Something I'm not getting here

What's the buzz around buckets...It' s just portfolio diversification in my book...

 

[youbet]

oisif,

I suggest you do a search and read some of the past discussion on this as it's been an active topic for quite a while now.

It appears to be a methodology for structuring your portfolio and phasing the timing of withdrawals from asset classes to guard against liquidating equities during down markets but at the expense of carrying a high cash equivalent allocation. But, I need to go thrumb through the book.

 

[mathjak107]

Have you looked at the opportunity cost of having a large cash position during a bull market?  IE., you collect 5% - 6% on a large chunk of your portfolio while the equity market returns 7% - 8% over that same time period?

Any good retirement plan is no longer about getting richer and maximizing returns for most of us. We shift gears to not growing poorer and getting the income stream we need.

Just like any other plan you are free to shorten the time frame between buckets and get more aggressive, another thing is a portion of bucket 3 is split between growth and income funds and growth.  Well you can also go all growth in bucket 3. 

As long as we meet the needs of the plan to generate our income perpetually the beauty of these plans is the game is over and we can finally relax.

In my case i was 50/50 before i organized in buckets and 50/50 after. If i dont count the cash in bucket 1  as a part of my portfolio as at this point im not retired and use bucket 1 for the cash for our retirement home and 3 up coming weddings than im about 60% stock and 40% everything else.

The flexibilty of the idea is very great, it merely is giving you the most conservative numbers to keep from selling in a down market yet maintaining the income stream you want.

Another benefit is i find my bucket 3 which is stocks is invested alot more aggressively than i might have normally done because i have the 15 year time frame in the back of my mind. I think i would be alot more into growth and income funds at this point if left to my own devices.

It also allows you to hand taylor the investments in each bucket to a particular time frame.

 

[mathjak107]

Now that i have the buckets to fill this is what i did.

Since i use fidelity exclusively i use 2 newsletters FIDELITY MONITOR & FIDELITY INSIGHT..

bucket 1 is cash and cd's

bucket 2 is fidelity monitors income and preservation model plus i added some treasury notes going out up to 7 years, fidelitty new market income , fidelity strategic income and lastly my un-listed reit

Bucket 3 i have a portion in fidelity monitors growth and income model  and the bulk in fidelity insights growth model plus i added a little gsg commodities fund.

 

[youbet]

bucket 1 is cash and cd's

bucket 2 is fidelity monitors income and preservation model plus i added some treasury notes going out up to 7 years, fidelitty new market income , fidelity strategic income and lastly my un-listed reit

Bucket 3 i have a portion in fidelity monitors growth and income model  and the bulk in fidelity insights growth model plus i added a little gsg commodities fund.

What percentage of your total portfolio to you have in each of the three buckets?

What consideration do you give to where qualified and non-qualified dollars go?

Are the CD's in bucket one laddered?

I understand that holding a large cash position could make you feel more comfortable with being agressive with your equity position.  I'm certainly not looking for that.  Considering I'm fully retired with no intention of ever working again and I'm in my late 50's, my portfolio would be considered by many to already be too aggressive.......