Think I'll Kick the Bucket (Bucket 2, that is)

[Rich_in_Tampa]

I'm getting a little less impressed with Lucia's 3-bucket concept, though I found it very helpful in my planning process.

As I read and learned more about it and gauged the reaction here and elsewhere, there is too much ambiguity about just how to maneuver money into and out of his intermediate bucket, even by Ray himself. In fact, it was his radio show podcasts that soured me a bit on the whole idea. As a grabber, he says 3 buckets, empty 1, empty 2, and 14 years later use 3 to replenish. But scratch the surface and you hear about 3A, 3B, rebalancing periodically from 3 to 2, 2 to 3, and 2 to 1.

I think I am going to stick with Armstrong's 2-bucket approach. That is, 7 years expenses in ultraconservative cash and short term bondss; forget trying to squeeze optimal bond returns in return for more volatility with this money, just keep it basic. Invest the rest in diversified equities and rebalance the allocation ever 1-2 years but only when the market (or at least a sector or two) is up, wait it out if not.

In the 4% SWR world, this means a 72:28% allocation -- higher than conventional wisdom. But 7 years of sure-thing money will probably let me sleep just fine. Maybe stretch it out with intermediates if things go very well a few years down the road.

As added incentive, FIRECalc seems to like higher stock:bond allocations -- at least 72:28.

[Nords]

Originally Posted by Rich_in_Tampa

I think I am going to stick with Armstrong's 2-bucket approach.

It seems to be working for Armstrong, and there sure is a lot less yapping from him than from Lucia...

[audreyh1]

Originally Posted by Rich_in_Tampa

In the 4% SWR world, this means a 72:28% allocation -- higher than conventional wisdom. But 7 years of sure-thing money will probably let me sleep just fine. Maybe stretch it out with intermediates if things go very well a few years down the road.

Now you aren't limited to 28% cash/short-term high-quality bonds. You can hold more in fixed income if you like - that 28% would be the MINIMUM. If you hold more than 28%, you have additional cash/bonds that can be used to rebalance your portfolio (i.e. buy equities) during those down equity years. If you don't hold enough cash/bonds you don't have what you need to take advantage of those down equity years.

I just think of the "7 year rule" as establishing a level of cash/bonds for which I will not go under whenever rebalancing my portfolio. This would only apply, of course, after several down market years when equities have gotten so low that buying more of them would lower your cash/bonds portion too low. A pretty extreme scenario.

Audrey

Originally Posted by Rich_in_Tampa

As added incentive, FIRECalc seems to like higher stock:bond allocations -- at least 72:28.

How did you arrive at this conclusion? - I have seen some studies that suggested a 'sweet spot' - I remember something like 55-65 % stocks.

[Mysto]

While looking for a conservative approach, I came to a 2 buffer solution myself (I don't do buck***s). This type of solution has been suggested by Armstong, Grangaard, and several others.

I set up a 10 year CD ladder with a 6% mean and the rest I put into a portfolio but rather than Armstrongs approach I used a more conservative 60/40 portfolio. With my required withdrawals I've run it on Firecalc and Monte Carlo with a 100% success rates. I plan to add to my fixed income buffer using the rebalance on "up markets" approach.

The use of a buffer with drawdown from my taxable account also decreased my tax liability.

As always, I'm not suggesting following my approach but the info may help others find their best solution.

[audreyh1]

Originally Posted by Cut-Throat

How did you arrive at this conclusion? - I have seen some studies that suggested a 'sweet spot' - I remember something like 55-65 % stocks.

I thought the sweet spot for portfolio survivability was 75% stocks. I vaguely recall this from either a businessweek or newsweek article in the late 90s. Been a while...

But personally, I don't like the volatility of a 75% equities portfolio. Plus I tend to believe that equities won't outperform bonds with as high a margin in the future.

Audrey

[Hydroman]

Originally Posted by Mysto

I set up a 10 year CD ladder with a 6% mean and the rest I put into a portfolio but rather than Armstrongs approach I used a more conservative 60/40 portfolio. With my required withdrawals I've run it on Firecalc and Monte Carlo with a 100% success rates.
As always, I'm not suggesting following my approach but the info may help others find their best solution.

Mysto,

What percent of your total portfolio does the 10 year CD Ladder represent? What is your SWR percentage?

Thanks

[astromeria]

Since my buckets are virtual, I can look at our investments in different ways--and I do.

Depending on how I look at our portfolio:

-- I have 3 Lucia buckets plus an emergency fund.

-- I have 10 years of fixed income plus a diversified slice & dice equities portfolio.

-- I have 45% fixed income and 55% equities.

In any case, I rebalance the equities as needed and invest fixed income opportunistically (adjust balance between MMAs, CDs, gov't bonds, and corp bonds).

When I get too confused/annoyed/lazy to handle this, I'll go with a target fund and/or Wellesley, or some such and mostly scoop out the interest and dividends.

[Telly]

Originally Posted by Mysto

I set up a 10 year CD ladder with a 6% mean and the rest I put into a portfolio but rather than Armstrongs approach I used a more conservative 60/40 portfolio. With my required withdrawals I've run it on Firecalc and Monte Carlo with a 100% success rates. I plan to add to my fixed income buffer using the rebalance on "up markets" approach.

Your CD ladder is outside of the 60/40 portfolio, am I undestanding that correctly?

I have 3 buckets, but they're all used for cleaning purposes

[Mysto]

What percent of your total portfolio does the 10 year CD Ladder represent?

32%

What is your SWR percentage?

4.2%

Your CD ladder is outside of the 60/40 portfolio, am I undestanding that correctly?

Yes. That is correct.


I'm not holding out that my plan is a "magic bullet". I don't think there is one when looking at an unknown future. I have limited funds, no pension, and portfolio survivorablity is #1. After that I tried to best optimize for tax (I'll pay almost none) risk (not only have I invested for a low beta but with the 10 years of CDs I know that I don't have to touch my portfolio during hard times - a big sleep factor for me) I addition the 10 year (actually 11 as my DW is still working so I will live off of her and some cash until year 1 CD kicks in) "self annuity" allowed me to have a couple of bigger years at the begining to deal with known upcoming expenses. Finally, my plan should allow for funds left to help my kids. In other words, I have tried to customize my plan to my needs/temperment and financial situation.

[Rich_in_Tampa]

Originally Posted by Cut-Throat

How did you arrive at this conclusion? - I have seen some studies that suggested a 'sweet spot' - I remember something like 55-65 % stocks.

I've read that 55-60% is the best spot for survivability v. volatility; you don't buy alot more survivability by going up to 70%, but you do get some additional volatility (and in fact survivability is actually worse as you approach 80% stocks over most time periods).

FIRECalc seems to like 70:30 more than 55:45 in virtually every scenario I have tested; these are all 35 year simulations, so stock tilting may benefit from the long horizon.

I think the Armstrong approach (a bit high on stocks) is offset volatility-wise by his advice to keep your fixed-income vehicles very conservative -- not total bond market or even intermediate term.

[Hydroman]

Originally Posted by Mysto

3

I'm not holding out that my plan is a "magic bullet". I don't think there is one when looking at an unknown future. I have limited funds, no pension, and portfolio survivorablity is #1.

Thanks Mysto. I know there is no silver bullet. Each of us needs to play our cards with the best hand we can put together. Ten years for me would be 40%. Your situation is very similar to mine (No pension and investments will be sole source of retirement income until SSI kicks in). So your data point is very relevent to my situation. Thanks again.