"Bucket" 1 Money

[ferco]

Those who use the term Bucket 1 (Ray Lucia style) for their living expense money at FI what do you hold that money in.......CD's, Money Market, Wellesley, or Treasuries. If that fund has to feed you for a specified time, say 6-7 yrs, how do you select a fund/allocation that will stand up to your projected needs and not drop in value. I guess this would more apply to a mutual fund like Wellesly or a fluctuating interest MM than fixed return instruments like a laddered CD over 6-7 years.

 

[Rich_by_the_Bay]

Those who use the term Bucket 1 (Ray Lucia style) for their living expense money at FI what do you hold that money in.......CD's, Money Market, Wellesley, or Treasuries. If that fund has to feed you for a specified time, say 6-7 yrs, how do you select a fund/allocation that will stand up to your projected needs and not drop in value. I guess this would more apply to a mutual fund like Wellesly or a fluctuating interest MM than fixed return instruments like a laddered CD over 6-7 years.

I mostly use what you listed plus short term federal bond fund. But for me Wellesley is a bucket two holding -- too volatile over a short period for B1, but rock solid historically over 7 years or more. B1 earns what it earns, not where you need to fret over marginal returns.

 

[jIMOh]

I am not retired
I plan to use buckets

Year 1 cd/cash
year 2 cd
year 3 cd
year 4-8 in TIPs
year 9 is in bucket 2, allocated moderately.

9 years when I retire will shrink to 4-6 years once I see portfolio surviving first 3 years.

 

[ferco]

Rich,

I would imagine that both Wellesley and Wellington would be good in Bucket II as a complimentary pair. My concern however would be in placing them in a taxable account, due to the annual taxable gains. Would they not be more suitable, esp Wellington in your tax deferred account.

Ferco

 

[Alan]

CD's, Money Market, and Treasuries are all in my bucket 1 - with 5 yrs worth of supplements to my non-cola pension.

Wellesley is in bucket 2, dividends going into B1, capital gains re-invested.

 

[CuppaJoe]

Retired end of Aug. '08. Instead of saving in '08, I just left cash in my checking acct. which became the first few months of Bucket 1. The rest of Bucket 1 is simple savings, CDs, MM and GNMAs. I have some "simple" savings because I didn't roll CDs into the lower interest rates. I'm not concerned about fluctuations in these accounts but am moving some money from over-weighted GNMA into equities. Am pondering a major re-allocation but will still have about 12 years in Bucket 1. I expect my Buckets to always be in flux, just as my allocation was during the accumulation phase. P.S. I don't follow Lucia closely, but like the basic bucket idea.

 

[Rich_by_the_Bay]

Rich,

I would imagine that both Wellesley and Wellington would be good in Bucket II as a complimentary pair. My concern however would be in placing them in a taxable account, due to the annual taxable gains. Would they not be more suitable, esp Wellington in your tax deferred account.

Agree - a pinch of Wellesley, maybe a pinch of Wellington to taste, all in sheltered accounts. Main point for me is that they are not a good bucket 1 choice, but rather a bucket 2.

 

[Behan]

Our bucket #1 is one year of expenses in cash and 5 years of expenses in CDs. Wellesley is a part of our bucket #2.

 

[Dennis]

I keep 3 yrs of COH for my est. Bills.. and it changes every yr..
For 07' it was:
1 yr in VSGBX
#2 yrs $ was in VFITX
#3 yrs $ was in VUSTX
They made about 13% last yr btwn them( Net of 9.6% after Taxes)

I follow History.. Bear markets are Treas. , Bull Markets > Bal. Funds...This yr is different & Expecting Treas. Bonds to do poorly and following what I did in 03' for my Yr #2 and #3 $..This yr. is in Bal. Funds> OAKBX ...w/alot less taxes as well.
Estimating a Worse of a -10% drop and a +30% upside by end of Yr.. and just hope for the best.. 55% chance now things will improve by Summer..It was 46%..and expecting DeFlation? and traditional bond funds don't do that well in Recovery and Bull markets..if anything? You always have VBMFX..

 

[teejayevans]

Rich,

I would imagine that both Wellesley and Wellington would be good in Bucket II as a complimentary pair. My concern however would be in placing them in a taxable account, due to the annual taxable gains. Would they not be more suitable, esp Wellington in your tax deferred account.

Ferco

Since dividends and long term gains get preferred tax treatment (0-15%),
and regular interest is taxed at your nominal rate, the opposite is true,
if possible.

 

[cardude]

I currently have 6.5 years worth of living expenses in GMAC and Capital One "online savings" accounts, which pay 3% and 2.65% respectively right now (and falling), and a GMAC 1 year CD paying 4%.

Not a very imaginative bucket 1, but that's all I could come up with.

I also have another chunk of cash coming in over the next few months that I need to do something with. This cash may be needed for living expenses after the 6.5 years, depending on how poorly my equity portfolio does over the next 6.5 years.

Any suggestions?

 

[Rich_by_the_Bay]

Not a very imaginative bucket 1, but that's all I could come up with.

If you look at your bucket 1 and the word "imaginative" crosses your mind, you probably are getting too risky for that bucket. The only possible exception I can think of is a fixed 6 or 7 year immediate annuity if the interest rates are right.

I like intermediate bonds for B2, or Wellesley-like blended funds. Historically they have almost always grown in value if you give them 7 years or so. Boring.

 

[cardude]

I like intermediate bonds for B2, or Wellesley-like blended funds. Historically they have almost always grown in value if you give them 7 years or so. Boring.

What happens if rates go way up over the next 6-7 years? Will Wellesley still perform well under that scenario, or would plain old cash be better?

Does anyone think inflation could crank up again after the economy gets rolling again, causing rates to go up condiserably from where they are now?

 

[FinanceDude]

What happens if rates go way up over the next 6-7 years? Will Wellesley still perform well under that scenario, or would plain old cash be better?

Wellesley or any other fund with bonds in it will be hurt when rates start going up, but over time the yield will increase. A lot depends on how the duration of the fund is set up.

Does anyone think inflation could crank up again after the economy gets rolling again, causing rates to go up condiserably from where they are now?

Absolutely. Stay short on the CDs and stuff out there, if possible. I think the Fed will start raising rates as soon as the economy stabilizes. If they don't, we could see high single digit inflation..........

 

[Rich_by_the_Bay]

What happens if rates go way up over the next 6-7 years? Will Wellesley still perform well under that scenario, or would plain old cash be better?

Sure, I think it will perform adequately -- especially after a year or so of ramp up. During that time TIPs and intermediate bonds may hold their own. In any case, as Bucket 2 money it can sit for years while you live off your bucket 1 money. It does point out the benefits of diversification not just for your stocks, but also for your bonds and other B2 holdings. I have foreign bonds, intermediate federal bonds, TIPs, and Wellesley in there.

For me the idea isn't to win the race, but just to be in the pack.

 

[JOHNNIE36]

Learned something new yesterday about Brokerage CD's. At end of November I rolled my 401k (very conservative fund managed by Fidelity at 4.1%) into a five year IRA CD at 5%. Just prior to this move I took my Minimum Required Distribution for 2008. Yesterday I get a monthly report from Fidelity on the CD and notice that its value is now worth about $7000 more than I put in. Great return for one month. I didn't understand so I called Fidelity. Found out this is a brokerage CD that I could sell if I wanted to, at the increased value, because it's a brokerage CD. The rep explained to me that you just can't find a 5% CD today and people are willing to pay extra because of its rate. Of course, if I sold it I would have to buy another investment. Just didn't know you could do that with CD's. Thought when I bought this 5 year CD, I was locked into it without paying a penalty to redeem. Learn something new every day. CD's vs brokerage CD's--two similar but very different things.
I had also received forms from Fidelity to fill out if I wanted them to calculate and manage the Minimum Required Distribution. Discussed this with the rep and he advised me to not send in the forms because the government has rescinded the MRD for 2009. Filing the forms would force the distribution. Come the end of 2009, I may not need the money so why take the distribution. This change is for 2009 only and may change for 2010. Everyone aware of this?