AA vs Buckets during the bridge to SoSec

[Ed B]

I look at these threads on this forum, and others, as giant brainstorming sessions. Everybody throws out ideas, thoughts and premises for everyone else to examine and use or reject that idea.

I agree. And that is something I appreciate about this forum.

 

[FinancialDave]

As luck would have it, just a few days ago I made a post (on another board) in a thread about how a cash bucket would have helped if you retired in the very bad SOR year of 1966.

Here's what I posted:
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Anyway, look at the CashBucket spreadsheet I posted. https://www.dropbox.com/s/xf4ma5blug27aws/SPY_Withdraw_by_CashBucket_rules.xls
Set the start year to 1966, the SWR to 4%, and # of years in cash-bucket to 4.

With no cash bucket, the 60/40 portfolio goes to zero in 2007.
With a 4-year cash bucket, the 60/40 portfolio goes to zero in 2003.
Oops.


That's with refill strategies 3 or 4.
3 "as soon as possible, whenever there was a portfolio gain the previous year."
4 "Only when the market is higher than 2 years ago -- 2 years after a bottom."

You're actually better off with strategy 0 "Never refill the cash bucket."
That goes to zero in...2007. Exactly the same as no cash bucket at all.


The mirage of the cash bucket costs you a heck of a lot of money.

Ray, if you think the cash bucket is the problem, why not try running the 1966 simulation with a 20 year cash bucket and set to Rule zero to never refill the cash bucket. Also set allocation to 100% S&P. In this case your standard line fails miserably around 1997 and the investor still has $34,000 after 48 years (2014). Runs about 17 years longer. I submit it is not the cash bucket's problem.

I have used cash buckets, but I use them almost the opposite way they you have shown. I pull money from a diversified mutual fund portfolio UNLESS the market is down by my "trigger" amount, or the cash bucket is "overfull." The way it gets overfull is all the dividends from the equity portfolio flow into it.

Also, I typically like pulling money quarterly rather than once a year.

Dave

 

[rayvt]

"if you think the cash bucket is the problem, why not try running the 1966 simulation with a 20 year cash bucket and set to Rule zero to never refill the cash bucket. Also set allocation to 100% S&P. In this case your standard line fails miserably around 1997 and the investor still has $34,000 after 48 years (2014). Runs about 17 years longer. I submit it is not the cash bucket's problem."

Well, that's not how anybody who proposes cash-bucket defines it. And nobody but us weirdos have 100% stock allocation -- and that kind of weirdo doesn't run a cash bucket anyway.

Doing an unmodified 4% SWR starting in 1966 is a problem. Although even 100% stocks survives for 30 years. Barely. Doesn't survive 40 years, though. 60/40 survives 40 years, but not 41.

Whether with or without a cash bucket, it does not survive. That's why you *must* use some sort of variable withdrawal method.

"I have used cash buckets, but I use them almost the opposite way they you have shown. I pull money from a diversified mutual fund portfolio UNLESS the market is down by my "trigger" amount."

But that's not the opposite, that's the way that the standard cash-bucket method works. The way I have shown is the way that cash-bucket proponents (like Christine Benz) describe it. My cash-bucket spreadsheet does that, if you follow the money flow. The way it computes it is a bit convoluted, though. (It computes it by withdrawing from cash and then transferring money from investments back into the cash account--which is the same thing as withdrawing from investments. It was just easier to do it that way in excel. If I cared enough I would re-write it, but it wouldn't perform any diffently.)

 

[ERD50]

...

Doing an unmodified 4% SWR starting in 1966 is a problem. Although even 100% stocks survives for 30 years. Barely. Doesn't survive 40 years, though. 60/40 survives 40 years, but not 41.

Whether with or without a cash bucket, it does not survive. That's why you *must* use some sort of variable withdrawal method.. ..

Careful with must, never, always.

Another way to survive is with an initial lower withdraw level. Inflation adjust each year (but constant otherwise).

-ERD50

 

[FinancialDave]

ray,

I am confused as under the parameters I gave - 20 years to the cash bucket and the rest to 100% SPY the account survives 47 or 48 years? This is not 100% equities it is more like 20% equities - it is all in your perspective and having the right asset allocation.

I am not arguing that a variable withdrawal rate won't give you more, I am using them, as I know they will:

https://seekingalpha.com/article/4143448-another-good-year-dgi10-tr7


I just think cash buckets can be used for those who want a little more consistency in their withdrawal rates and some downside protection.

Dave

 

[FinancialDave]

Careful with must, never, always.

Another way to survive is with an initial lower withdraw level. Inflation adjust each year (but constant otherwise).

-ERD50

Certainly, you only need to take the withdrawal level to 3.8% and it survives!

Also remember this is the absolute worst starting time in recent years. There are plenty of starting times where 40 years will leave you with over $1 million if you want to roll the dice!

 

[bgyt]

But if my AA is 60/35/5 and my WR is 3%, even if I use an AA approach then essentially I have 1-2 years in a cash bucket and ~10+ years in a bond bucket (recognizing that withdrawals will increase each year for inflation) and the remainder in equities.

If the SHTF, I can chose to just spend from cash/bonds and let equities ride.... or I can chose to rebalance.

I'm thinking an interesting strategy to deal with sequence of return risks might be to only rebalance where equities exceed target, and if equities are less than target then just replenish cash from bonds until equities recover above target. I'm thinking that a decision rule along those lines simply adds a bucket tilt to a traditional AA approach... a good middle ground that is easy to administer.

I think until someone establishes a ruleset that is anchored in historical data, this argument will continue to rage in the subjective and emotional portions of our brains.

Has no one established an AA or Bucket explicit ruleset for market corrections (10%+) or Retirement Date glidepaths?

Seems like a ripe area for so many number crunchers.

 

[bingybear]

We're 57, so no SS yet. Pensions went bust in the tech bubble - so no joy there. Been RE since 53. No investment buckets here as I don't understand the need for them. I look at the ability of my investments to fund my needs. It really is the same as when I was working with the earned income set to zero. I'm not sure why I need to create new structure in my mind to deal with it.

 

[Chuckanut]

I'm not sure why I need to create new structure in my mind to deal with it.

I think you have hit on the main point.

Some of us have to build that structure to manage our finances. It's the way the brain works. If they did not, they would end up spending more than they should or not fully enjoying their lives because they are not spending enough Other's can take a more 'unorganized' approach and get things to balance out at the end point.

Like when to take SS or what eating plan keeps the weight off, it's all very individual.

 

[GravitySucks]

Seems like an illusion to me.

Can't we also say that this year is the start of a possible "sequence of returns risk" in the next 5 years? Granted, there are 5 fewer years that your portfolio needs to last, but that's probably a minor effect?

-ERD50

5 years is probably between 12 and 20% of the time a single 55 year old man would need to fund, hardly inconsequential.
I find this whole thread a bit odd. If I have buckets i still have an asset allocation of some sort. For instance, I have a bond / CD ladder. The closer those bond dates come the closer they are like cash. If they come due and I need to replenish my living funds it gets spent ( moved to checking) if not it moves to a MM till it is needed or I decide to rebalance. So my 60/40 AA isn't always that but sometimes moves to 60/35/5.
Are those pending bonds a cash or near cash bucket? Yup! Are they part of the fixed income portion of my AA? You bet!
Maybe the OP would get different advice if he called his buckets plan a Glide Path plan since he has a fixed period in mind.