Withdrawal Strategies-Bucket study

[Huston55]

I do like the conceptual appeal of the bucket strategy but its not really in conflict with a specific asset allocation. Heres what I do.

1) start with an annual budget - say 50k
2) Then I have a series of portfolios with different risk based asset allocations based on when I need the money
i) 2 years expenses in Cash - bucket 1
ii) Next bucket has 3 years inflation adjusted expenses - bucket 2 - this has money needed 3 to 5 years from now so use a Conservative Asset Allocation
iii) Next bucket has 5 years inflation adjusted expenses - bucket 3 - this has money needed 5 to 10 years from now so use a Moderately Conservative Asset Allocation
iv) Next bucket has 5 years inflation adjusted expenses - bucket 4 - this has money needed 10 to 15 years from now so use a Moderate Asset Allocation
v) Next bucket has 5 years inflation adjusted expenses - bucket 5 - this has money needed 15 to 20 years from now so use a Moderately Aggressive Asset Allocation
vi) Everything left is in the last bucket - bucket 6 - this has money needed 20 years+ from now so use an Aggressive Asset Allocation
3) Map all your money into these buckets
4) Now take a step back and add up the total amount of money you have in your Asset classes across all the buckets. This is going to result in an overall Asset Allocation. Use this to invest.

This strategy has the advantage of the simplicity of an overall Asset Allocation at the same time as the conceptual appeal of the buckets.

I like how it is bottom up based on expenses rather than top down based on how much money you have. I also like the fact that it forces you to be more conservative when you don't have enough money and more aggressive when you have more than enough. Human nature pressures you to do the opposite.

This is more buckets than I'm used to seeing. I'm curious how you actually invest for six different buckets. Do you select different MFs/ETFs, do you blend adjoining buckets into the same MF/ETF? Pls share the nuts & bolts of how you create and maintain your buckets.

 

[Puravida1]

I use ETFs. The important thing is that there is no need to have different accounts or positions for each bucket. You are just assigning money from each Asset type in each bucket to part of each position. Its basically just a ladder of portfolios using the model portfolios published by the major financial institutions. So for example if you are supposed to have an amount of Large cap equity in three of the buckets you can use the same ETF for all three buckets and just own a single position.

 

[ncbill]

This is the only bucket strategy I'm considering:

https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/

Note the "cash bucket" is never refilled once depleted...it's a method for reducing sequence of return risk (SORR) early in retirement.

 

[audreyh1]

This is the only bucket strategy I'm considering:

https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/

Note the "cash bucket" is never refilled once depleted...it's a method for reducing sequence of return risk (SORR) early in retirement.

Well, I always wondered about that. But Benz at Morningstar never mentioned it, so I assumed it was replenished when equities were hopping.

In contrast to your link, I’m pretty sure Benz considered the cash bucket part of the starting portfolio and not in addition to it.

 

[Out_the_Door]

I'm also one of those people who uses the buckets as more of a mental strategy. Normal 65/30/5 AA but in my Excel sheets I have three buckets that help keep me disciplined. Next three years, 4-9 years and 10 till death do us part.

I just assign on paper where each fund or etf "belongs" so to speak. Helps me not lose sleep when things like March 2020 happens.

Have the next 9 years covered no issue, most downturns last max five years, so long term bucket no need to touch for a while.

I do exactly this but with a different asset allocation (65/25/10), and with a glidepath that will reduce my "cash and bond bucket" when my pension kicks in (5 years) and then again when SS kicks in (7 years)

 

[Puravida1]

This is a curious one. If its early retirement we are talking about a timeline of 30 to 40 years. The cash bucket they are talking about is only a couple of years long. So for the first two years you need 2 years cash for SORR risk and then after that you dont need any cash at all? What made SORR risk go away?

I think this highlights the need for building your own plan that you are comfortable with.