Ray Lucia...Buckets of Money

[IHateCNBC]

-- Bucket 1 (CDs and MM accts) in taxable accts
-- Bucket 2 (hybrid funds and individual bonds) almost entirely in taxable accts
-- Bucket 3 (stock funds in a sort of slice & dice port and a few individual stocks) in IRAs and taxable

I think with the 15% tax rate on dividends you may want to reverse this.

Just a thought. Bonds in a taxable account - Uncle Sam loves ya baby.

[astromeria]

Originally Posted by IHateCNBC

Bonds in a taxable account - Uncle Sam loves ya baby.

I know.
-- One problem is that we have twice as much $$ in taxable accounts as IRAs.
-- Another is that when I started buying bonds and hybrid funds, we didn't have IRAs, just 401ks, and we never bought the bond or asset-allocation funds offered (always 100% in stock funds, whcih we picked based on what did well the previous year ). We bought corporate bonds (using a broker) in a taxable account (we only use the broker for bonds--and a couple of preferred stocks and a REIT CEF).

My thinking at the time was that this would help us retire early--I knew of no other way to provide reliable income from investments than fixed income . I'm sure that those of you who grew up learning about investing, learned about finance in school or on the job, planned to live off investments from early adulthood, or were simply very motivated and loved the game of investing and watching your net worth grow--can't understand how someone with an IQ over 140 could be so stupid. Well....what can I say, it's like the old German saying--too soon old, too late smart!

[Telly]

I just watched Lucia's website demo on the buckets.* I'll skip the examples 6% withdrawal rate, with the initial sum also left to heirs!

I really expected to see some bucket movement every year. I did not. It seemed obvious that retiring in '73 wouldn't be a problem, due to the long length of the short-term buffer (Bucket #1).

But it looked to me that there was a major sensitivity point to down markets as the years close in to year 14. Because Bucket #1 is running low/out, Bucket #2 is empty, and Bucket #3 will have to be heavily tapped (real bad if it is a bear market then!).

Is his demo NOT showing his real idea? Is there much more to it than the demo shows?* If so, I wonder why his demo would show such an Achilles Heel. It doesn't encourage me.

[astromeria]

He gets into the nuances in the book. The demo is high-level, just to give an idea of what the buckets are all about. (Hmmm, maybe it's all about the book sales-)

[FinanceDude]

Originally Posted by Rich_in_Tampa

Finally got my copy of Lucia's book. I think his buckets are a very useful mindset for retirement.

Lucia sure seems to like annuities and sure seems to feel we all need personal financial advisors. This alone would make him suspect on this board, yet he is received in a surprisingly generous way around here!

I am playing around with some pretend models as to how I might implement 3 buckets and had some questions:

1. Wellesley seems like a great bucket 2 vehicle to me. Or is it too aggressive (40:60)?

2. I am confused as to how much play he advises in bucket 2. On the one hand, he suggest simplistically that you empty bucket 2 after you deplete bucket 1, total 14 years. Then he backs off and says, well you can tap bucket 2 to troll for some bargains after a downturn in stocks, but don't literally deplete bucket 2; or you can prune back bucket 3 in order to shore up bucket 2 during an upturn.

My intuition is that if you are a bucket-lover, you'd do well to just tweak bucket 2 here and there, but basically leave it intact - maybe allow yourself 1 years expenses worth of bargain hunting money play with, but otherwise keep it loaded at the 6-7 year level more or less.

3. His rationale for using a financial advisor is to present complicated tax situations, tracking of managers in active mutual funds, surveillance of rebalancing, etc. Yeah, yeah. Would you agree that this is bogus for most of us who get it, and primarily use index funds?

Sounds like you answered your own question.......... Like I have always said, some people have need of an advisor, and some don't. BTW, your life insurance agent IS NOT a financial advisor................

[Rich_in_Tampa]

Originally Posted by Brat

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]

Originally Posted by 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.

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.

Originally Posted by Brat

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

Agree.

Originally Posted by Brat

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]

Originally Posted by modhatter

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]

Originally Posted by astromeria

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]

Originally Posted by astromeria

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.

Originally Posted by astromeria

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.