Who follows a "buckets strategy" in retirement?

[FloridaJim57]

Do you follow a three buckets strategy and how has it worked for you in retirement?

 

[audreyh1]

I don’t, but Christine Benz over on MorningStar.com has covered it for many years and writes the most practical how-tos on the Bucket Strategy that I’ve seen.

https://www.morningstar.com/portfolios/bucket-approach-building-retirement-portfolio

 

[Out-to-Lunch]

Do you follow a three buckets strategy and how has it worked for you in retirement?

You may want to precisely define what you mean by "a three-bucket strategy." As I see it, the problem is that it is very easy to give the broad outlines of a bucket strategy such that it sounds appealing. But the devil is in the details. When eactly should you "refill" a bucket. What are the quantitative metrics. Do they meaningfully differ from simple rebalancing? Are you comfortable with timing the market by altering your AA due to market conditions?

As much as I adore Audrey and respect Christine Benz, I do no believe they have addressed these questions.

 

[Kork13]

I'm not retired, and I'm years out from even considering implementing such a plan .... However, my intention is to follow the bucket concept. (1) Cash bucket with ~2 yrs' expenses to live off of (2) income bucket (think bonds/balanced fund) with ~5yrs' expenses to provide a steadying income stream; (3) Growth bucket with the rest (mostly stock funds) to keep the portfolio growing. As 'Income' and 'Growth' buckets throw off income, dividends, etc., direct it all into 'Cash' -- that can happen automatically (no reinvesting, distribute direct to 'Cash'). If that's insufficient to keep 'Cash' at a comfortable level (probably >1yr's worth), I can sell winners/over-balanced assets from 'Income' or 'Growth' (whichever is performing well) to refill Cash ... perhaps looking at that quarterly, or semi-annually?

In my view, it just seems like a simple way to look at how to live off your portfolio. Perhaps there are little details that could complicate such a scenario, but if you set the rules early & keep it as clear/simple as possible, it's at least a point of deviation from which to operate.

 

[target2019]

I listened to a few podcasts about bucket strategy. I didn't listen in depth, but there are differences in terminology.

I have my own approach, and it is based on a money flow process diagram I started while working. That helped us move to consolidation and simplification.

In my diagram I can draw boundaries around what others would call bucket 1-3. So there's that.

The gist is, income sources are listed on the left, and flow to checking. Bill paying from the reservoir of inputs is shown in the center, and regular bills are on the right.

I added values to the process lines so I could identify monthly need, and a deficit (if any). I use a different style flow line to show where we have push/pull links between accounts.

I don't really need to look at this to find my way (yet), but it will probably be useful to whoever needs an explanation.

https://open.spotify.com/episode/1PZnfDlxZ4i5r2WHs10xjV?si=jhhwvWjyTiCf0D6iJob-sw

In this interview with Christine Benz, Director of Personal Finance at Morningstar, we cover several timely topics including inflation, stimulus, the 4% rule and the bucket strategy of retirement spending.

Bucket discussion starts around 12:30 in the podcast.

 

[DrRoy]

I do not. I manage my various taxable, IRA, and 401K accounts as a combined entity, except that I lean towards equities in the taxable one.

 

[TheWizard]

No I don't.
I have plenty of retirement income from pension/annuities + SS.
So I keep my portfolio invested largely in stock index funds...

 

[Car-Guy]

I've been using a two bucket strategy for decades now. Basically bucket 1 is for everyday living, hobbies, traveling, investing, etc, etc, and I really don't track much of anything. Bucket 2 is my emergency fund to be used in case bucket 1 ever runs dry. (Unlikely but possible)

 

[OldShooter]

You may want to precisely define what you mean by "a three-bucket strategy." As I see it, the problem is that it is very easy to give the broad outlines of a bucket strategy such that it sounds appealing. But the devil is in the details. When eactly should you "refill" a bucket. What are the quantitative metrics. Do they meaningfully differ from simple rebalancing? Are you comfortable with timing the market by altering your AA due to market conditions? ...

@FloridaJim57, this is typical of the kind of responses that come when a bucket strategy is proposed. The commenter typically wants "quantitative metrics" so the system works like some kind of a machine. It is easy to propose various recipes, run a simulation, and show that the recipes do not work.

My bucket philosophy is simpler. To me it is just a way of looking at assets versus future needs; close-in, intermediate, and long term. For example, a couple of years ago we committed to build a new lake home. In preparation for that I sold some long-term equity assets and moved the money into very short term money funds. From bucket 3 to bucket 1 according to some people's nomenclature. I didn't use any formulas for this and, if equities weren't very strong at the time I may not have done exactly that thing, but the umbrella concept is a liability matching portfolio. I knew I'd need the money in a couple of years, so I needed to top up bucket #1. I still have a couple of years' routine spend in short term money funds, so I can look at that as my current bucket #1. The big thing in our bucket #2 is TIPS, specifically the 2s of 26. So when those pay out, I will take a portion to refill bucket #2 and consider the balance to be in bucket #2, to be invested accordingly.

And so on ... no recipes, no allgorithms, no real precision. Just a useful viewpoint from which to maintain an amateur's liability-matching portfolio. (https://www.investopedia.com/terms/l/liabilitymatching.asp)

 

[Gotadimple]

I do and I don't. The concept has you moving money between the buckets as they are depleted. I don't wait for depletion. I have 2 years of cash (cds, money market) to cover expenses. And then there is everything else. All of this is part of my asset allocation and gets rebalanced annually.

I agree with other posters that Christine Benz writes excellent articles on personal finance. I don't believe you need to register on the site to read her columns. But if you do, it is a free account.

-Rita

 

[punkinhead]

I read quite a few articles by Christine Benz and others and came away thinking "bucket strategy" is just another way of saying "asset allocation". I never found any article that got into the nuts and bolts of how to implement it.

 

[TheWizard]

I read quite a few articles by Christine Benz and others and came away thinking "bucket strategy" is just another way of saying "asset allocation". I never found any article that got into the nuts and bolts of how to implement it.

Yes, it's true that you can compute an equivalent AA (stocks/bonds/cash) by analyzing a bucketeer's total assets.
I would prefer to look at your portfolio from the AA perspective only.

I feel that bucket strategies start to resemble a shell game at some point.
Additionally, some bucketeers may have too much money in cash for my comfort level...

 

[Luvtoride]

FloridaJim, not sure if this is what you meant, but this is the Bucket Plan that I have used:

The Bucket Plan®: Protecting and Growing Your Assets for a Worry-Free Retirement – August 29, 2017
by Jason L Smith (Author)
We put this strategy in place with the help of our Financial Advisor a few years before I retired in July. It attempts to put assets into 3 buckets, based on timeframes of needs to draw from our retirement assets.
Now- cash and short term within the next 2-3 years
Soon- 3 to 6 years out
Later- Longer term, more than 6 years out

Appropriate assets for each of these timeframes are used to mitigate risk or take advantage of longer term market exposures.

Although only 6 months into retirement, I can say I'm very comfortable with this approach and the allocation of assets within these buckets have performed as expected.

Some may say that the book is a bit simplistic, but as many here have said, there is no reason to overcomplicate FIRE and investing. Good Luck.

 

[OldShooter]

... I would prefer to look at your portfolio from the AA perspective only. ...

As you like. AA, however, says nothing about liabilities. A 100/0 AA, for example, is probably not what you want if there is a balloon payment due on your mortgage 6 months from now. So you still have to keep track of liabilities in addition to AA, whether you call the view "buckets" or not.

 

[TheWizard]

As you like. AA, however, says nothing about liabilities. A 100/0 AA, for example, is probably not what you want if there is a balloon payment due on your mortgage 6 months from now. So you still have to keep track of liabilities in addition to AA, whether you call the view "buckets" or not.

Actually, I think the more significant issue about the AA of your portfolio in retirement is: it doesn't include anything about your monthly income from SS+pensions+annuities.

As to liabilities? Most of mine are covered by non-portfolio income buffered by my ~$10K checking account.
Now I did order my new car last July so when it was ready for shipping in October, I sold some stock index funds in my taxable account to raise $45k to pay for it...

 

[audreyh1]

I have short-term funds ready for spending in the next year or few, and I have my long term retirement investments for withdrawing from and adding to short-term each Jan. I use a target 50/50 AA and rebalancing after withdrawal to manage the long-term retirement investments.

It’s kind of like buckets, but there is no depletion. Instead there is an annual withdrawal from the long-term (retirement) investments instead. This is quite mechanical and has worked very well for me for over a decade.

 

[Midpack]

I don't, and won't need to. I do keep up to 5% in cash, but that's the extent of my buckets. But there is nothing wrong with the 3-bucket strategy, if the resulting AA is about what you're comfortable with anyway.

 

[marko]

I keep it simple:
We live off our dividends so all pre-tax dividends are sent to a MM (now paying 5%+) inside the IRA. Each month $X are sent to the checking account.

A smaller amount of dividends come from after-tax funds and those are sent to checking as soon as they're paid.

 

[youbet]

I use the single bucket approach. All investable assets are placed in a bucket labeled “FIRE PORTFOLIO.” The bucket is painted fire engine red and hangs on my office wall. I manage the contents of the bucket using an AA scheme. Simple, effective and has served me well for 18+ years of full retirement.

 

[Mark1]

Many years ago (prior to finding the forum), I listened to Ray Lucia on the radio (podcast) who always promoted a bucket strategy. I really learned a lot listening to them (Ray, Professor Plum, and Rob Butterfield), but I could never really grasp the concept of refilling the buckets without timing the market. Then I realized you just rebalance to fill the buckets and it is really only a bucket strategy by name. Since then I have ignored the approach and now I just have an AA with yearly rebalancing.

Ray was mostly peddling his bucket strategy and non-traded REITs which I didn't care for much, but I really miss Professor Plum whom I thought was a very smart guy. The attorney Rob was also a bright guy, but I mostly liked him since he was even more cynical than myself.

 

[DJRR]

Seems to be simple asset allocation. Maybe actually having cash makes a small difference:

$1,000,000 portfolio with $40,000 annual spending:

Bucket 1 - 2 years cash - $80k - 8%
Bucket 2 - 5 years income - $200k - 20%
Bucket 3 - growth stock - $720k - 72%

So essentially a 70/30 AA

I will personally just do a 60/40 AA rebalanced annually with a check for $3,333 deposited into my checking account each month.

 

[AZsniper]

I plan on having a bucket strategy, as I have been working on my retirement planning. I retire in 1 year.

I have a pension which helps with the withdraw strategy, but I will be 46, and want to keep AGI low for ACA insurance. So I am building a brokerage account up along with some HYSA to so I don't have to withdraw from my 457, which would increase my AGI. My bucket 1 is Brokerage/HYSA, Bucket 2 is 457 and bucket 3 is 401k/403b money (access at 59.5) they are kind of like time buckets as well, on when I will access them.

Bucket 1 for me will hold more than the traditional 2-3 years of money. (planning to WD 20-30k per year from it).

 

[jim584672]

To me bucketing just another market timing scheme. How do you decide when to fill the empty bucket? Unless a robot is doing it with set rules, it is just timing.

 

[Alex The Great]

I use at least two buckets which are allocated pretty much naturally: (1) after tax (2) pre-tax and tax-free. I'm 57 and live off dividends, interest and some part of principal from after tax money. All interest and dividend in IRAs are reinvested for the long term income. My plan is to draw after tax bucket till 65, in order to manage ACA cost unless something unpredictable happen.

 

[foxfirev5]

I might suggest more of a LMP approach. I've set aside about 20 years expenses in TIPS/I Bonds and Strips. In 20 years the equity allotment will probably cover any future needs. If not I'll probably be dead anyway. Either way the kids will probably benefit greatly. I might add that the equities are converted to Roth accounts.