Who follows a "buckets strategy" in retirement?

[CardsFan]

After careful consideration of my income-expenses flow diagram I (70+) see the following conceptual/practical boundaries:

Bucket A - Checking, bill-paying accounts (0-3 months)
Bucket B - MMFs, HYSA, dividends from taxable brokerage (4 months - 2 yrs)
Bucket C - SEP-IRA, Rollover-IRAs, 403(b) (3-10 yrs)
Bucket D - Roth-IRA accounts (10 yrs +)

Bucket A has two SSA and one pension monthly input. So the bucket does not need to pull much from the reservoir.

Bucket B will soon receive RMDs from Bucket C (in 2 years).

Bucket C is 60-65% equity funds. Some Roth conversion for two more years.

Bucket D is 100% equity.

I never thought about them as buckets, but your buckets above are almost identical to how we are set up.

 

[PointBreeze]

Sort of

I have read all of Christine Benz's articles on the bucket approach. Once per year, I go through all the calculations to see if I have enough in buckets one and two (next few years and the following 10 years or so, respectively).



I generally keep bucket one in money market and CDs, and bucket two in CDs and Treasuries. It gives me peace of mind to think in terms of the bucket approach.


However, I'm sure I would end up with almost the exact same asset allocation if I had never heard of the bucket approach. Like I said, it gives me peace of mind to think in the bucket approach, but it did not really change the way I invest our portfolio.

 

[Lron58]

I use a 3 bucket approach but have modified it significantly from the one that advocates having two investment buckets. My bucket 1 is strictly cash flow (bank) with 3 months worth of expenses. Bucket 2 is a high-yield (currently 4.7% for 9 months which gives me 1 year of liquid living expenses. The interest from Bucket2 pays for at least one vacation per year vs. leaving it in the bank. Bucket 3 is all investments that I reevaluate on an annual basis (but have quarterly sessions with my advisor.)

 

[GrayHare]

I use a bucket approach, with the cash bucket there to smooth asset value (stock market) ups and downs. The cash bucket is a form of insurance against selling stocks at depressed price levels. I refill the cash bucket after stocks rise, which lets me lock in gains rather than losses.

 

[mathjak107]

I use a bucket approach, with the cash bucket there to smooth asset value (stock market) ups and downs. The cash bucket is a form of insurance against selling stocks at depressed price levels. I refill the cash bucket after stocks rise, which lets me lock in gains rather than losses.

except if you read kitces research on cash buckets it really is a mirage.

the higher highs without the weight of cash and even bonds has pretty much equaled a 50/50 as well as spending right from 100% equities even in the worst of times.


it really is only a mental thing unless you are a great timer

 

[razztazz]

kitces research

That's kitces research. Other's show different all along the line. That's why there's so many of them. kitces is just some guy who did a thing like everybody else.

 

[mathjak107]

i find him far more plausible then many of the others .

firecalc also shows very little difference with or without cash buffers as well .

100% equities is just about the same success rate as 50/50 and that is based on actual outcomes looked at over the 123 rolling 30 year time frames to date .

so that is as concrete as you can get that in actual outcomes there is 1 cycle failure more with 100% equities.

not much different in outcomes but a big difference in potential balance with 100% equities , not that i am advocating that but the idea that spending from high equity levels do something bad in downturns is just unfounded to actually be true.

firecalc proves that point

i use cash buffers as well but it’s just mentally comfortable

 

[TheWizard]

... I use cash buffers as well but it’s just mentally comfortable

As I mentioned previously, I aim to keep ~$10k in my checking account to buffer my various expenses, including travel.
That's about two months of average spending for me.
I don't see any point in holding more cash.

Now I do sometimes have a fair amount of additional "cash" in the settlement funds of my various accounts, but there are generally ETF limit orders posted against those funds waiting to execute.
Of course, right now, none of them are executing...

 

[youbet]

I use a bucket approach, with the cash bucket there to smooth asset value (stock market) ups and downs. The cash bucket is a form of insurance against selling stocks at depressed price levels. I refill the cash bucket after stocks rise, which lets me lock in gains rather than losses.

What is your contingency if a prolonged down market causes your cash “bucket” to run dry before you have a chance to refill it after stocks rise?

 

[mathjak107]

that is the problem .

any down turn that would effect a safe withdrawal has to be an extended U SHAPED one , not like 2008 which was a V shaped quick one .

so cash buckets would be drained in a situation that actually effected one’s draw

 

[GrayHare]

So far, my 3-year cash bucket has outlasted any downturn. With diversified holdings, there's always been something in my portfolio I can sell to lock in a profit. I've held some of these stocks, like Apple and Microsoft, for decades, which hardly feels like timing if I sell a few shares. To me it's more a "pricing" technique since I'm not predicting anything, instead I'm referencing actual share prices to determine what shows gains. Yes, I suppose Apple and Microsoft could suddenly crater to below $1 per share, but if that happens we'll all have bigger problems.

 

[mathjak107]

so far any downturn we had since 1966 was no problem spending down even from 100% equities either so again. much ado about nothing.

it doesn’t mean having that cash bucket is any better or worse than not .

it is just another way of keeping the money we spend without adding much in the protection many try to attribute to cash buckets

retirement outcomes are shaped up pretty much over at least 5 years and fully determined by 15 years in.

anything that would effect that outcome would need more than 2 or 3 years cash to matter and that would eat in to returns.

could we come up with some outlier situations where cash makes a difference? sure

but it never happened.

cash is a comfort food …

 

[rayvt]

That's kitces research. Other's show different all along the line. That's why there's so many of them. kitces is just some guy who did a thing like everybody else.

Those "others" generally did a bunch of handwaving and vague words. Christine Benz being an example of that.

Kitces did actual backtests & research, using real historical data.

Along the lines of "trust but verify", I grabbed the data and created my own large spreadsheet to see which side was more right, Kitces's or Benz's.

Guess what? Kitces was right and the cash bucket proponents are wrong.

I also tried modelling several different refill methods. The one that seemed intuitively best was where the cash bucket gets refilled from the stock gains after the bear market is over. Guess what? That does not work either.

Here is link to the spreadsheet. Feel free to make a copy and enter your own desired parameters. https://www.dropbox.com/s/xf4ma5blug27aws/SPY_Withdraw_by_CashBucket_rules.xls

 

[rayvt]

... the idea that spending from high equity levels do something bad in downturns is just unfounded to actually be true.

firecalc proves that point

i use cash buffers as well but it’s just mentally comfortable

Yes, it is just for the emotional comfort.

The thing about "spending from high equity levels do something bad" is this:
Would you rather get a 30% drop from $2,000,000 stock portfolio or a 15% drop from a $1,500,000 balanced portfolio?

Emotionally, a 15% drop is far better than a 30% drop. But you have less money. $1.4m vs. $1.275m

 

[sunnysideup]

I use the bucket approach, but I have modified it to work for me.

About 60% of my monies are in dividend and growth stocks.
About 20% is in funds that are 50% bonds at 50% stocks.
The remaining 20% is in money market funds with some in certificates of deposit.

Currently, I have my dividends paid out to me into my checking account. It bolsters the income I already have from Social Security and pensions. Basically, it really helps pay for our travel. I adjusted during Covid when we weren’t traveling and I reinvested the dividends during those two years.

I only occasionally make changes to my portfolio in funds or stocks. Sometimes I’ll take a little bit of money out of the money market funds,but mostly it will cover 3 or four years of expenses if necessary. This strategy has worked well for me. I don’t have to sell stocks just for income, and I’m getting income monthly.

 

[Exchme]

Those "others" generally did a bunch of handwaving and vague words. Christine Benz being an example of that.

Kitces did actual backtests & research, using real historical data.

Along the lines of "trust but verify", I grabbed the data and created my own large spreadsheet to see which side was more right, Kitces's or Benz's.

Guess what? Kitces was right and the cash bucket proponents are wrong.

I also tried modelling several different refill methods. The one that seemed intuitively best was where the cash bucket gets refilled from the stock gains after the bear market is over. Guess what? That does not work either.

Here is link to the spreadsheet. Feel free to make a copy and enter your own desired parameters. https://www.dropbox.com/s/xf4ma5blug27aws/SPY_Withdraw_by_CashBucket_rules.xls

It was interesting in the thread how few people were using the Benz-type buckets. Her approach is to have cash bonds and stocks and spend cash and bonds in a downturn. Then magically knowing when and how fast to refill.

I'll look at your spreadshhet later, but your findings are similar to what EarlyRetiremrentNow found in his SWR series and what I found when I experimented with historical data in my own amateur attempts to look at it using our finances.

Holding cash amounts to pre-selling. If you are lucky and pre-sell at just the right moment, it could help. But odds are you pre-sell at the wrong time and miss out on the very bull market that would have protected you. The longer prior to retirement that you hold a big cash bucket, the more likely you miss on a bull market, but selling all at once to create the cash bucket just concentrates the SOR risk to the moment you sell.

Similarly, the idea of spending bonds first in a downturn means increasing risk in the down market, hoping for a quick recovery. For every downturn that market-timing approach would help, there is a possible longer and deeper downturn where it would hurt and it's those long and deep downturns that set the SWR.

No free lunches anywhere in sight.

 

[target2019]

I haven't read all the Benz bucket stuff, but I'd imagine her approach assumes you have some rebalancing knowledge/method in place. At beginning of year, take from 1st bucket and add additional to meet your needs. Additional comes from bucket 2. Then rebalance A/A across buckets.

Whatever floats your boat...

 

[mathjak107]

Those "others" generally did a bunch of handwaving and vague words. Christine Benz being an example of that.

Kitces did actual backtests & research, using real historical data.

Along the lines of "trust but verify", I grabbed the data and created my own large spreadsheet to see which side was more right, Kitces's or Benz's.

Guess what? Kitces was right and the cash bucket proponents are wrong.

I also tried modelling several different refill methods. The one that seemed intuitively best was where the cash bucket gets refilled from the stock gains after the bear market is over. Guess what? That does not work either.

Here is link to the spreadsheet. Feel free to make a copy and enter your own desired parameters. https://www.dropbox.com/s/xf4ma5blug27aws/SPY_Withdraw_by_CashBucket_rules.xls

Yes, it is just for the emotional comfort.

The thing about "spending from high equity levels do something bad" is this:
Would you rather get a 30% drop from $2,000,000 stock portfolio or a 15% drop from a $1,500,000 balanced portfolio?

Emotionally, a 15% drop is far better than a 30% drop. But you have less money. $1.4m vs. $1.275m

you can usually count on kitces for findings that have been well researched.

there is so much myth and old wives tales that just perpetuate in the investment world

most people never really look under the hood , they just accept the popular consensus as it stands …

more and more the old school thinking is just found to be wrong or not the best way

 

[mathjak107]

It was interesting in the thread how few people were using the Benz-type buckets. Her approach is to have cash bonds and stocks and spend cash and bonds in a downturn. Then magically knowing when and how fast to refill.

I'll look at your spreadshhet later, but your findings are similar to what EarlyRetiremrentNow found in his SWR series and what I found when I experimented with historical data in my own amateur attempts to look at it using our finances.

Holding cash amounts to pre-selling. If you are lucky and pre-sell at just the right moment, it could help. But odds are you pre-sell at the wrong time and miss out on the very bull market that would have protected you. The longer prior to retirement that you hold a big cash bucket, the more likely you miss on a bull market, but selling all at once to create the cash bucket just concentrates the SOR risk to the moment you sell.

Similarly, the idea of spending bonds first in a downturn means increasing risk in the down market, hoping for a quick recovery. For every downturn that market-timing approach would help, there is a possible longer and deeper downturn where it would hurt and it's those long and deep downturns that set the SWR.

No free lunches anywhere in sight.

it’s longer persistent down turns that hurt the most .

even moderate prolonged down turns can effect portfolio survival , while deep fast drops don’t do much damage at all .

it is the U shaped recoveries that sting , not the V shaped ones

 

[Koolau]

Before retirement, I looked into the "Buckets strategy." It sounded like a good idea until I realized it would take a lot of extra w*rk to accomplish. Moving stuff around all the time sounded like too much effort AND who knows if you're doing it right until it w*rks of it fails. SO, I just set a comfortable asset allocation and took from it as needed during my first 18 years. My withdrawals are a part of my rebalancing. YMMV

 

[ncbill]

then there's the "once depleted, never refilled" cash bucket strategy to mitigate sequence of return risk:

see the "Cash Bucket" section

 

[mathjak107]

people tend to over complicate the income creation , including myself .

all one needs to do is simply rebalance each year and fill the checking account…done.

in fact besides running three different portfolios for 3 different time frames we also found trying to live off dividends, interest and distributions was very hard since they varied so much .

so any thing spun off goes in next years bucket …

it gets buffered and at the end of the year we see what the short fall is and refill for the new year .

it was much easier then trying to live hand to mouth as bills come in at different times and some are large.

so we actually have 3 portfolios and two cash buckets …it is very easy to maintain since the portfolios use the fidelity insight models , so little to do with them except for an occasional fund swap and once a year rebalance of the income model

 

[old medic]

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.

Thats us.... auto fill buckets of pension and SS.... Then we have other buckets to try not to trip over...