Ray Lucia's new book

[mathjak107]

Lucia's approach is not any different than most traditional allocation techniques. Cash, Bonds, Stock. Near term money for 5+ years in short-term instruments (safe).


I have not read his books so I cannot comments on some of the proposed micro-mechanics of replenishing the buckets. But based on his slide-show at his site. The main feature that is a little different is that he does not rebalance/diversify the stock investment until about 14 years. He lets the bond investment ride for 7 years then moves to cash.

I have read some articles that indicate that longer rebalancing periods more efficient (taxes and let the stock value grow).

Does Lucia describe how he works the stock cashout in year 14. The Demo kinda indicates that it happens at one time. Of course, there are a number of implications. Moving that amount of money might tigger AMT, plus year 14 might be the time a big stock market correction occurs. Does he talk about this in his book?

the video is oversimplified ,ray dosnt recommend you wait until buckets are empty to refill
the buckets are refilled gradually thru the years the markets are up......

the strategy is very different from just say a 60/40 hodge podge. buckets can have dedicated portfolios just for that time frame with well defined amounts . until you have tried it you cant imagine how nice and easy it is to implement and use.

rebalancing is mostley just within that bucket, so if emerging markets funds have had a long healthy run and you wanted that to be a certain % of your stock bucket then maybe you will sell the excess and buy more small cap or whatever fell below the % you wanted it to be.

 

[chinaco]

the video is oversimplified ,ray dosnt recommend you wait until buckets are empty to refill
the buckets are refilled gradually thru the years the markets are up......

the strategy is very different from just say a 60/40 hodge podge. buckets can have dedicated portfolios just for that time frame with well defined amounts . until you have tried it you cant imagine how nice and easy it is to implement and use.

Then what differentiates his technique from the traditional 5+ years (expenses) in short-term, a portion in Bonds, A portion in stock. Then rebalance based on timing or trigger? I think his C/B/S allocations in the demo seem to indicate that the allocations in each (cash and Bonds) are approx 7x expenses. The stock allocation seems to be the remainder.

I think I understand what you are indicating with the dedicated portfolios for a time frame. But if one is rebalancing along the way between stocks and bonds I am not seeing the difference in the technique.

I could be all wet on the statement I am about to make... But here goes anyway.

I have read multiple books on the subject over the last 20 years (as most on this board have done). It kinda looks like Lucia is just repackaging the basic approach (academic approach) to managing a balanced portfolio in the draw-down phase. Since he is a money manager and fin planner, he must figure out a marketing description (selling approach) that is simple enough for customers (that are not savvy) to describe the traditional approach in a way that makes sense... hence the analogy of a bucket. His book is a form of Marketing, plus it serves as a mechanism to legitimize him....(well know author on the subject, on and on). The radio show is marketing (as everyone here knows). He has his marketing act down. His approach seems sound (it better be or many of us are scr3wed). But I do not believe he has come up with anything new. He has just repackaged the description of the existing (known) approach for customer consumption. Sounds like he has outline some basic rules/mechanics to the rebalancing (his signature twist on it). He has to try to differentiate himself (in a sea of financial advisers). But it seems like he does not provide new emerging insight into the problem.

If his book helps people get your mind around the problem... then it has provided some value.

 

[mathjak107]

you rebalance between buckets based not on gains but on years worth of money. thats the big difference. you can balance between what you have in the buckets if you so choose but not necessary unless you have sector funds or areas that really sored ala tech heavy funds in the 90's.


the whole idea is that rays plan revolves around getting a certain average return from each bucket with a risk level to match that income you desire.

in my case i need about 7%.

my retirement portfolio in real numbers has

420,000 in bucket 1

334,000 in 2

335,000 in 3a (growth and income funds

587,000 in 3b growth funds

right now im not retired so bucket 1 is holding the money for our retirement home and money for 3 up-coming weddings . it just so happens that the amount in 1 works out to 7 years income if i was retired so rays calculation works fine.


whats nice is i subscribe to fidelity monitor newsletter and use their income model portfolio in its entirety to fill bucket 2. its a nicely thought out well rounded dedicated income portfolio dedicated to just that .

i use their growth and income model to fill bucket 3a

i use fidelity insights growth model for 3b, been using that one for over 20 years.

once a week i get updates of any newsletter changes and thats it, good times or bad i dont worry about a thing anymore.

 

[mathjak107]

think of it this way ,in a 60/40 mix if stocks jumped to 70/30 you sell some stock and buy more bonds.

in rays system if you didnt need to refill bucket 1 as it still had 6 years worth of money in it because the bull run happened just after you started this system then there is no rebalancing between buckets yet. you can wait .

you could though choose to maybe fine tune your stock bucket, if small cap had a great run and is now heavier than you want then buy more mid-cap or large cap but you need not buy bonds . thats the difference

 

[Brat]

Since this approach is designed for retirees AMT is less likely to be an issue, and equities qualify for capital gains treatment if held outside an IRA providing the most favorable tax treatment.

No one can predict the future so no one can predict if year 14 is a bear year. But this will be after a 14 year run. Just for giggles, if you have access to the data, find a stinky year and go back 14. What was the total return over the period?

 

[Rich_by_the_Bay]

No one can predict the future so no one can predict if year 14 is a bear year. But this will be after a 14 year run. Just for giggles, if you have access to the data, find a stinky year and go back 14. What was the total return over the period?

Exactly. Market down 5% that year, up 210% for the past 14 years? Who cares!

 

[mathjak107]

yep thats why it works, 14 years pretty much guarantees that even in a fairly normaL bear market you will be fine if you have to sell some funds

 

[modhatter]

No it doesn't guarantee it. As I understand the market from 1966 to 1982 was flat NO GAINS. That was a 16 year time frame, and it could happen again.

 

[Rich_by_the_Bay]

No it doesn't guarantee it. As I understand the market from 1966 to 1982 was flat NO GAINS. That was a 16 year time frame, and it could happen again.

No dividends??

 

[mathjak107]

highly unlikely that we would ever have a extended period like that again, the markets were very thinly traded and didnt include much of the public or the world for that matter. i would never base a plan on anything that remote happening again

 

[Brat]

I remember that dividends were significant % during those years. A PE of 13 was on the high side.

 

[modhatter]

Yes, you are right. There were dividends.

 

[Rich_by_the_Bay]

I remember that dividends were significant % during those years. A PE of 13 was on the high side.

Right. And since we are talking about net value after 14 years, even if gains were neutral, the dividends would have fueled a decent if not stellar increase in your portfolio, I suspect.

 

[modhatter]

Problem is though. We don't have dividends like that any more.

 

[Rich_by_the_Bay]

Problem is though. We don't have dividends like that any more.

It was what it was, dividends were earned, and a bucket approach would have worked, according to Lucia's back testing

Feels like you are trying to talk yourself out of the Buckets approach, which is fine. It's not everyone's cup of tea and there are plenty of other great ways to implement your retirement program. I'm not trying to sell it, just explaining why it feels right for me. Each of us needs an approach we're comfortable with.

You might want to also consider Armstrong's recommendations. I find him very persuasive, too.

 

[teejayevans]

Problem is though. We don't have dividends like that any more.

We don't have the inflation either...gotta look at the whole picture:
gains/lossses, dividends, inflation, taxes...you just can pick one and
say "see this will/won't work"
In opinion, its hard to compare what happen in 1929, or 1974, etc
because:
1. we monitored the health of the economy so much closer, we can make
corrections earlier.
2. FED is much smarter and more proactive about controlling inflation
3. Economy is more global
4. Controls on the stock market, imagine what would have happen on 9/11
if we didn't shut down the market for a couple of days.

I'm not saying depression/high inflation couldn't happen, but I think it would
take something extraordinary to cause it, and I don't want to spend too
much of my time or resources on it.
TJ

 

[mathjak107]

im a big believer in planning around whaT makes sence , what has been historically and what has been the long term trends.

i plan for lower taxes when i retire---- no pay check coming in, higher and higher tax bracketing raising the 15 and 25% brackets allowing more and more income at a lower rate

i plan for social security to be there, as we will just pull from other programs,

no political group will dare tell 80 million voting baby boomers they are raising taxes or taking away social security.

i plan for long term average market returns for my mix, about 3-4% over inflation.

lastley i plan for uncertainty in our markets and allow for it using the bucket system.

 

[modhatter]

Today, 03:10 PM #67 mathjak107


I am not dismissing Ray's book at all. In fact my inclination tells me it is a practical strategy. However, whenever I read ANY BOOK by an author who also has something to sell, whether it be his asset management company or just a book, I always question the validity of the advise given to some extent and use my own brain to consider all the "what ifs".

It doen't mean that I think the book is bad or the advice is bad, I just don't allways accept everything I read without weighing all the pros and cons of it myself. Many times I just file the information in my head as just more information or approaches to consider, and as I become a little more astute in finances, I may draw upon them.

Heaven knows there are more books out there claiming that their way is the best way. Whether it be financial books, diet books, health books, self help books. Everyone wants you to believe that their way is the best way so you will buy their book (and make them very rich) Therefore, I feel it necessary to question everything I read, and in the end draw my own conclusions.

 

[hogwild]

I am not dismissing Ray's book at all. In fact my inclination tells me it is a practical strategy. However, whenever I read ANY BOOK by an author who also has something to sell, whether it be his asset management company or just a book, I always question the validity of the advise given to some extent and use my own brain to consider all the "what ifs".

Modhatter, I can appreciate your caution. I, too, always thoroughly research anything that affects me financially and there is nothing more financially important than how you plan for retirement income. As I said in a previous post, I have read both of Ray's books and I do plan to follow his advice. However, I wouldn't be doing this based on the books alone. I have been listening to his radio show for many months now and believe that I have a good idea of his integrity. I think if you just listen to a few of his archives as the link I previously posted, you will see what I mean.

 

[walkinwood]

You annuitize bucket 1, so 4% x 7 years works out to less than 4 x your anticipated annual expense.

Can someone tell me how to annuitize an amount using Excel? Is it just the net present value of a series of payments at a given interest rate?

Thanks for the help.
ww.

 

[Rich_by_the_Bay]

Can someone tell me how to annuitize an amount using Excel? Is it just the net present value of a series of payments at a given interest rate?

Yes. It's something like:

=PV((return%-inflation%),num_of_yrs,annual_withdrawal_amt,0,1)

You may have to multiply it by -1 to use it to calcluate a bucket amt. The above is for inflation-adjusted numbers. And don't forget that for bucket 2, it builds for 7yrs (or whatever you choose) at bucket 2 return rates, but the target is an amount sufficient to annuitize under bucket 1 return rates once you transfer it over at 7 years.

Hope that helps.