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Old 06-02-2007, 02:01 AM   #21
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Rich In Tampa

Is there a reason for using Wellesley instead of Wellington for Bucket II?

Also, if one were actually in ER would a CD ladder work better than short term bonds for Bucket I?

Are you planning for a Bucket I duration of 4, 5, 6 or 7 years and what is your rationale?

Ferco
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Old 06-02-2007, 02:45 AM   #22
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Rich In Tampa

Is there a reason for using Wellesley instead of Wellington for Bucket II?

Also, if one were actually in ER would a CD ladder work better than short term bonds for Bucket I?

Are you planning for a Bucket I duration of 4, 5, 6 or 7 years and what is your rationale?

Ferco
short term bonds are better in bucket 2, anything that can change principal value shouldnt really be in bucket 1. cd's money markets, the bank are all great bucket 1 types
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Old 06-02-2007, 09:16 AM   #23
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Like mathjak I find some value in the book. In addition to what's been cited, I like the idea of self-annuitizing your cash account (in 7-year chunks, for example) rather than sipping and rebalancing all the time. It provides peace of mind in the form of predictability (you don't have to transfer funds from stocks or bonds every year or two), and reduces the temptation (in fact the obligation) of fiddling and rebalancing often.

I do not plan untraded REITs, annuities, or anything with a front end cost, and it still works for me. Each to his own.
The concept of timing and "level of certainty" is what I see as the best concept from his books. When I read his first book, I got all excited that this was a new approach with a higher certainty of success. When I actually started looking at how my assets were set up, it didn't change anything. As I looked at it in more detail, it seemed just an obvious part of asset allocation and cash flow planning.

Of course, being me, I quickly dropped any thought of including closed end REITs or fancy annuity products. I do not willingly lose liquidity or pay front end fees. There are publically traded versions that create the same result that won't leave you trapped if you need the cash or lose faith in your asset management.

In past annuity discussions I kept repeating (perhaps ad nauseum ) about self-annuities with CDs or govt paper yielding a better return than your local insurance company annuity and with a higher credit rating. I also have never accepted the concept of giving away principal for "income you can't outlive." I've seen the damages of inflation and the impact of defaults too many times to trust a smiling salesman.

I'll repeat Rich's comment of "to each his own." Mathjak is certainly into a lot more of the sophisticated investment products than I would feel comfortable with but we all get to plan for our own futures. Mathjak is also playing in a different financial league than I am so I might become more "sophisticated" if my assets enlarged suddenly.
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Old 06-02-2007, 09:32 AM   #24
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Rich In Tampa

Is there a reason for using Wellesley instead of Wellington for Bucket II?

Also, if one were actually in ER would a CD ladder work better than short term bonds for Bucket I?

Are you planning for a Bucket I duration of 4, 5, 6 or 7 years and what is your rationale?
Wellington is a fine choice, too. I went with Wellesley only because it is a little more conservative for my Bucket 2 mindset (at 35:65 versus 65:35). For B1 short term bonds are one of the options which even Lucia recommends; while there may be some gentle fluctuation of principle, in the Vgd STF Bond fund this is minimal and the incremental increase in returns makes it very comfortable for me.

A CD ladder would work well, though I prefer not having to futz around with it, add a rung every year, split among institutions to seal your FDIC coverage, mild loss of liquidity, etc.

I chose a 7 yr duration for B1 and B2 because it is conservative (a good thing for my temperament) and the arithmetic with a 4-4.5% SWR puts you about 50% in equities which is my target. Perhaps more importantly, if you buy in to the safety-means-time-in-the-market approach for each asset class, that puts you in very confident historic boundaries. That is, bonds are very safe if held for 6-7 years; stocks the same over 12-15 years, and cash shouldn't be subject to much fluctuation at all.

It's interesting how the same framework is good for naive conservative investors like me and also for the mathjaks of the world who prefer a more active or sophisticated investment style. It suggests to me that the basic tenets are sound.

That's how I look at the Bucket approach. I've contemplated this quite a while, and have a spreadsheet model using Present Value calculations for B1 and B2 balance allocation. This seems to meet my needs, but I'm always open to suggestions.
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Old 06-03-2007, 03:36 AM   #25
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the different stratagys are less about how much money you have and more about opening our eyes to other types of invsetments. GULP!yes even those that may have a charge for the price of admission.

as savey investors we have been well trained to close our eyes to things that have a price of admission and yes i was guilty too.

case in point was if you read our discussion on un-listed reits. would there be not one of us who would not have given up less that 1% a year to get 7% interest during the early 2,000's when bonds and money markets were under 1% at times. and to get an amazing capital gains distribution a few months ago when the property was sold. all with as much risk as a quality corporate bond .

we run at the word annuities, but the new low cost ones while stinky stock investments because of charges and fees they work great to bolster income from bonds money markets and cd's with hardly anymore risk.

key word is risk... and we have lots of products out there that work well when used outside the box of what they were designed for so you spend an extra 6 cents or so and get back an extra 7-8 cents[....... not much in the world of stocks but that could be an extra 20% in the fixed income world
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Old 06-03-2007, 06:32 PM   #26
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What rules of thumb do you use/plan to use in re-balancing buckets along the way? I currently have a 50/35/15 asset allocation that I like to think of somewhat in a bucket structure. Would a time independent re-balancing strategy using allocation ranges not work here? E.g,
Stock 45-55%
Bond 30-40%
Reserve 12-18%
You live out of reserve and then quarterly evaluate ranges and only shift between buckets when out of range.
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Old 06-03-2007, 07:15 PM   #27
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What rules of thumb do you use/plan to use in re-balancing buckets along the way? I currently have a 50/35/15 asset allocation that I like to think of somewhat in a bucket structure.
Careful - a true bucket system is very different from a "bucket sorta like these are my buckets" system when it comes to rebalancing.

For example, in a true bucket system, your cash bucket is intended to shrink by 4% a year or so, burning up completely in the process. You basically don't rebalance into it other than every 7 years or so (or whatever your selected interval is).

There is some rebalancing between buckets 2 and 3, but that is intended to be light. Finally, you do rebalance within bucket 3 in the traditional way - when it's well out of kilter, or every year or two.
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Old 06-03-2007, 07:36 PM   #28
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Thanks for the reply Rich. Yes, I just got off Ray's web site after running his demo and I see your point.

Still, I kinda like this approach. Rebalancing on ranges allows the long and intermediate allocations (buckets) to run a little bit without a mechanical rebalancing on time while also not letting the overall portfolio get too strangely disproportioned. If you route most dividends and interest to bucket 1, rebalances should be infrequent but hopefully the min-max on each bucket will cause a shift at opportune times (rather than when a clock runs out) .
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Old 06-04-2007, 02:58 AM   #29
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dividends and interest are already figured into sustaining bucket 1. the origional capital you put in is say 7 years less what ever the interest and dividends you would accumulate over time. to make things work all you need as an example is 4% on bucket 1, 5% on bucket 2 , 7-8% on 3 .

your risk now only need match the buckets goal.
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Old 06-04-2007, 11:08 AM   #30
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"dividends and interest are already figured into sustaining bucket 1."

That means bucket 3 & 2 dividends are routed to bucket 1 rather than re-invested? Regardless, it still seems like some method to gradually/ sporadically move money to bucket 1 over time without waiting for it to completely deplete would be desirable.
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Old 06-04-2007, 05:43 PM   #31
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"dividends and interest are already figured into sustaining bucket 1."

That means bucket 3 & 2 dividends are routed to bucket 1 rather than re-invested? Regardless, it still seems like some method to gradually/ sporadically move money to bucket 1 over time without waiting for it to completely deplete would be desirable.
bucket 1 dividends and interest are figured initially in bucket 1. the other buckets can compound. i find the easiest way to refill buckets is whenever you have some nice gains take some profits out of 3 and refill 1 and 2 restoring them to another 14 year time frame.
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Old 06-04-2007, 07:03 PM   #32
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"i find the easiest way to refill buckets is whenever you have some nice gains take some profits out of 3 and refill 1 and 2 restoring them to another 14 year time frame."

Well then you're doing what I would feel more comfortable with. Somehow you must decide when to pull the trigger on plumping buckets to another 14 year timeframe, but basically the buckets are just another manner of crafting a portfolio's allocation.

ps - have read a couple of articles lately recommending less rather than more re-balancing activity. the buckets seems to be an approach which will result in relatively infrequent tinkering which I think is probably a good thing.
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Old 06-04-2007, 08:56 PM   #33
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Well then you're doing what I would feel more comfortable with. Somehow you must decide when to pull the trigger on plumping buckets to another 14 year timeframe, but basically the buckets are just another manner of crafting a portfolio's allocation.
William, if that's what you are comfortable with by all means go for it. But understand that it is not what's being touted by Lucia. He recommends a rather restrained approach to rebalancing, particularly in re: B1.

So do your thing but if you want to give due consideration to the traditional bucket approach you should give it a good read.

I am not promoting any specific plan but I am sensing that you may be more of an Armstrong than a Lucia.
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Old 06-05-2007, 03:06 AM   #34
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the reason i wouldnt wait until buckets were empty to refill is that while it may be true you have very little chance of being down in a 14 year period ,what if the market was down 40% like in the early 2,000's. id rather refill gradually in good times and give up a little bucket 3 gains then wait and gamble on the market not being in a long term drop when a bucket was empty.

in fact ray talks about if your gains are higher then anticipated take the excess and move it down a rung. by the same token if you end up with more in 1 or 2 take the excess when bucket 3 fails to achieve its goal and buy more
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Old 06-05-2007, 09:13 AM   #35
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"But understand that it is not what's being touted by Lucia."

Point taken. I have only looked at the demo at his site and was intrigued by "bucket structuring". Am just looking for more specificity in what parameter(s) should trigger bucket shifts as described by mathjak. I read Frank Armstrong in 1999 the year before I retired and liked his two bucket analogy for avoiding selling stocks in a down market. Not much in specifics there either. Just thought putting some sort of guideline on min-max of each bucket might be useful in flagging possible shifts, but didn't intend to hi-jack thread off subject.
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Old 06-05-2007, 09:38 AM   #36
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I have only looked at the demo at his site and was intrigued by "bucket structuring".
Yep, the web site cartoon is too simplistic. FWIW, Lucia does recommend not letting your B2 get down below 2 yrs worth of expenses, so that's one broad indicator of when to rebalance buckets.

As for rebalancing between B3 and B2 or even within B3, it returns to the generic question of how often to rebalance (you might search under "rebalance" for other threads here). Personally, I will wait until something is more than 5-10% off its target, but in any case no more frequently than annually. Hope that helps, unscientific though it may be.
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Old 06-05-2007, 10:47 AM   #37
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I think the whole premis of Ray's book is to use your cheap money, while letting those investments with higher returns due their compounding, thus deriving the most return for the portfolio.

The problem lies I think in the timing. Again, I know all we have to go by is past performance. However, a 14 year period for your bucket #3 could start with a market drop of 30 percent followed by a up market and at the end of your 14 years another market drop. Not a good time to have to replenish bucket #2 or 1. And now on top of that your principal is gone in Bucket #1.

I do believe if the timing is RIGHT, that this approach will lend greater profits. However, if the timing and market is not so great, you could end of in worse shape. Hard to tell without running the scenerio through actual time periods. I think the biggest difficulty I have with this approach is spending principal. I do realize that it all works fine in the end if you are gaining over all. I just wonder how this approach will work in periods of a long extended flat market or two severe dips during your 14 year time frame.
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Old 06-05-2007, 11:30 AM   #38
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The problem lies I think in the timing. Again, I know all we have to go by is past performance. However, a 14 year period for your bucket #3 could start with a market drop of 30 percent followed by a up market and at the end of your 14 years another market drop. Not a good time to have to replenish bucket #2 or 1. And now on top of that your principal is gone in Bucket #1.

I do believe if the timing is RIGHT, that this approach will lend greater profits.
It's market timing if you're counting on withdrawing only when the market is up. I think Lucia's point is that short term ups and downs pale in importance when the money has sat there for the last 14 years.

Example: $500k in B3 at 8% for 14 years grows to $1.47mm. If a very bad year happens to occur then, and markets are down 10%, you take out maybe $350k to replenish bucket 2, and lose $35k (10% of the amount transferred to b2) compared to what you would have taken out if the markets were neutral (any other loss is paper loss only - it'll bounce back eventually). Alot of money, true, but just a blip on the 14 year radar, and of course it's just as likely you might be UP 15% for the year. You just don't worry about market gyrations when you have that long a period.

And you will have done some light rebalancing along the way so the effect isn't even as aburpt as above. Hey, a catastrophic market will hurt everyone, buckets or not. But Lucia's plan is an "anti-timing" one in the big picture.

The system is designed such that the duration of time the money is left alone corresponds to how long that asset class has needed (at the most) historically to even itself out in its returns. Sure there will be variation depending on the market, but it'll likely be a ripple rather than an earthquake over a 14 year ride.
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Old 06-05-2007, 11:30 AM   #39
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What rules of thumb do you use/plan to use in re-balancing buckets along the way? I currently have a 50/35/15 asset allocation that I like to think of somewhat in a bucket structure. Would a time independent re-balancing strategy using allocation ranges not work here? E.g,
Stock 45-55%
Bond 30-40%
Reserve 12-18%
You live out of reserve and then quarterly evaluate ranges and only shift between buckets when out of range.
Ray Lucia's "buckets" don't allocate fixed percentages to asset classes, but "years of income."

Someone who only needs 1% of their retirement portfolio might only have 5-10% of it in Bucket 1, whereas someone who needs 4% of it might keep 20-30% in Bucket 1.

This probably makes more sense than a traditional fixed allocation such as 70/30 or 60/40; someone who needs only 1% per year probably doesn't need 40% in bonds and can easily afford a more aggressive mix. As I (and others) said before, though, the fly in the ointment is that there is an element of market timing to this in terms of deciding when to move from Bucket 3 to Bucket 2, and from Bucket 2 to Bucket 1.
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Old 06-05-2007, 06:14 PM   #40
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good point , we are talking years worth of money in allocations between buckets not in terms of gains. this strategy is not about gains, its about meeting the goal you need to sustain the income you need. theres a big difference . i only need to achieve 7% annual average return to meet my goal so i can pull the income i want. i dont have to put any more capital than needed to do this at risk. i can run each of buckets 1 and 2 a full 7 years each. i never have to sweat if this time the drop thats coming will be year 2000 again.
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