3 Bucket Strategy

[Out-to-Lunch]

Thanks for the link. It was good re-reading that blog post.


Are you going to implement a rising equity glidepath? IIRC, you're already at a 60-65% equity allocation. If you are, I'm interested in your reasoning.


In the case of the OP, NOT replenishing buckets 1 & 2 will lead to a glide path from 55/45 to 70/30 (approx) in 7 years.

I'm not Audrey, but that is close to what I plan to do. I'm at roughly 50/50. I will set aside a chunk in bonds to provide a bridge to SS. The remaining pot will be invested at 70/30. As the bridge is spent down, the AA will glide from 50/50 to 70/30. This is effectively Kitces's Bond Tent: https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

Edited to add: I cited Kitces here, but similar ideas are espoused by others. For example, in Michael Zwecher's book "Retirement Portfolios," and the actuaries who run the howmuchcaniaffordtospendinretirement.blogspot.com blog. (The specific post linked is just one of many they have on the subject, chosen nearly at random.)

 

[audreyh1]

Thanks for the link. It was good re-reading that blog post.


Are you going to implement a rising equity glidepath? IIRC, you're already at a 60-65% equity allocation. If you are, I'm interested in your reasoning.


In the case of the OP, NOT replenishing buckets 1 & 2 will lead to a glide path from 55/45 to 70/30 (approx) in 7 years.

No, too late for me. If such a blog and article had been available back in 1999 when I retired, I would probably have very serious considered it. I was understandably nervous about the markets back then. I chose to average in to my target allocation over 2 years - the only thing I could figure out to do at the time. That definitely helped during 2000-2002.

I’m around 50/50 now (21 years later) and have been for a while. Basically staying around here.

Their article doesn’t show nearly as much benefit if any starting from higher equity allocations.

A reason I might start to drift to a higher equity allocation in the far future — at some point when I’m much older and want to simplify, I may blow off rebalancing. This usually leads to the equity allocation increasing.

 

[walkinwood]

I'm not Audrey, but that is close to what I plan to do. I'm at roughly 50/50. I will set aside a chunk in bonds to provide a bridge to SS. The remaining pot will be invested at 70/30. As the bridge is spent down, the AA will glide from 50/50 to 70/30. This is effectively Kitces's Bond Tent: https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

Edited to add: I cited Kitces here, but similar ideas are espoused by others. For example, in Michael Zwecher's book "Retirement Portfolios," and the actuaries who run the howmuchcaniaffordtospendinretirement.blogspot.com blog. (The specific post linked is just one of many they have on the subject, chosen nearly at random.)

Thanks for the links. I enjoy reading about this topic even though my own portfolio & withdrawal method is rather simple.



The blog says that Dirk Cotton passed away in January. I liked his Retirement Cafe blog and will miss him.

 

[ncbill]

Well you are pretty close to the starting point for the Kitces Rising Equity Glide Path which is a way to handle sequence of return risk (SORR) during early retirement. So you might want to review that.
https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

Another SORR mitigation strategy is to use this cash bucket approach...note once the bucket is depleted it's never refilled:

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

I wonder if a HELCO set up before retirement would work as the "cash bucket?"

 

[doneat54]

In the case of the OP, NOT replenishing buckets 1 & 2 will lead to a glide path from 55/45 to 70/30 (approx) in 7 years.

The more I think about that, the more I like it. In fact I am at 32/68 roughly now and I now think that is far to conservative (it drifted from 30/70 in just about the last year). So maybe just leave it as is, maybe it gets to 55/45 in 1.4 years when DW retires, and let it go from there for the 7 years.


There is a video link in the Forbes article I posted at the top where he says data shows that 50-75% equities has been modeled to support the 4% rule. I thought the video was pretty good.



The other mental accounting epiphany for me is just thinking of the cash/bond % number as your first two buckets always.

 

[aebaeb]

I guess the thing that scares me about the bucket strategy is if you don't touch the stock bucket for 20 years your portfolio could get REALLY RISKY: Your overall portfolio could get extremely stock heavy, and if the stock market drops 60% in year 19, you'd could be in a world of hurt! Me, I'm going to have to re-balance somewhere along the way.

The person I've heard talk about buckets the most is Christine Benz of Morningstar, and she usually credits Harold Evensky with pioneering the bucket strategy. He details his strategy (which includes rebalancing) in his book "Retirement Income Redesigned", and calls it the Evensky & Katz Cash Flow Reserve Strategy. Check it out.

 

[RunningBum]

I guess the thing that scares me about the bucket strategy is if you don't touch the stock bucket for 20 years your portfolio could get REALLY RISKY: Your overall portfolio could get extremely stock heavy, and if the stock market drops 60% in year 19, you'd could be in a world of hurt! Me, I'm going to have to re-balance somewhere along the way.

The person I've heard talk about buckets the most is Christine Benz of Morningstar, and she usually credits Harold Evensky with pioneering the bucket strategy. He details his strategy (which includes rebalancing) in his book "Retirement Income Redesigned", and calls it the Evensky & Katz Cash Flow Reserve Strategy. Check it out.

So, buckets are really scary and risky because you don't touch the stock bucket for 20 years, but they aren't scary and risky because the pioneer says to rebalance. What makes you think people here aren't rebalancing, or moving funds out of the long term bucket to mid and short term buckets and rebalancing there?

 

[I am He]

What makes you think people here aren't rebalancing, or moving funds out of the long term bucket to mid and short term buckets and rebalancing there?

I think many of us are espousing maximizing returns. Or at the very least trying to avoid taxation on the gains.

The benefit of rebalancing is for risk mitigation. (Even though I often confuse it as a way of market timing by rebalancing if the market drops....argh, you caught me trying to maximize)

 

[2177V]

Compartmentalizing investments is quite sensible. If you have different goals with different parts of your money, separating them makes perfect sense.

What OS said.

I used a three bucket strategy at one time and each bucket compartmentalize into S&P500, value fund, growth fund, small caps, mid caps, treasuries, investment grade bonds, etc. When it is time to withdraw, I liquidate the asset class that is relatively high..so I will be consistent with the "sell high" strategy.

Lately I have been diversifying into real estate since I now believe having stocks and bonds are not diversified enough. The feds are now targeting a 2% inflation rate for the economy. Income producing non-commercial Real Estate does well during higher inflationary times. Some people are now suggesting an AA of 25% stock, 25% bond, 25% income producing real estate and 25% precious metals just in case inflation gets out of hand. Kinda make sense since the first two are paper assets while the other two are real tangible assets.

 

[Finance Dave]

I used a three bucket strategy at one time and each bucket compartmentalize into S&P500, value fund, growth fund, small caps, mid caps, treasuries, investment grade bonds, etc. When it is time to withdraw, I liquidate the asset class that is relatively high..so I will be consistent with the "sell high" strategy.

Lately I have been diversifying into real estate since I now believe having stocks and bonds are not diversified enough. The feds are now targeting a 2% inflation rate for the economy. Income producing non-commercial Real Estate does well during higher inflationary times. Some people are now suggesting an AA of 25% stock, 25% bond, 25% income producing real estate and 25% precious metals just in case inflation gets out of hand. Kinda make sense since the first two are paper assets while the other two are real tangible assets.

This is why I got into rental properties 15 years ago. We bought first one with cash, then saved all proceeds until we could buy 2nd with cash, and so on. Now we have 5 units, all paid for. These comprise about 20% of our NW now. Cash flow is great since 1) No mortgages 2) I am property manager 3) I do most repairs myself. My most critical metric is "Number of unscheduled service calls", as I don't want to get phone calls every week at 3 AM with some repair needed...so we fix them right and use good materials, robust processes, and put the money where tenants don't hurt things as much (we spend on electrical, roofing, gutters, siding, "unseen" plumbing such as supply and drain lines...not any fancy faucets, and so on). We use basic (durable but not expensive) cabinets/flooring, etc. since tenants tend to be hard on those things. Our places are very clean and safe, but a bit dated as far as cabinetry, trimwork, appliances, etc.

When I can no longer work on them, we will update things like cabinets and fixtures, then sell. I plan to then buy a proxy asset such as REITs or similar to maintain the diversification away from stocks.

Since we are not acquiring anymore, the cash flow is great. I'm able to transfer about $30k annually from the LLC to us for living expenses. Due to many tax writeoffs, the "book" profits don't show that much profit. We can deduct some non-cash items like depreciation and auto mileage at the IRS rate.

The trick will be selling them off in a tax-efficient way...we are working on a strategy for that now and will do this slowly starting in about 2-3 years.

 

[2177V]

This is why I got into rental properties 15 years ago. We bought first one with cash, then saved all proceeds until we could buy 2nd with cash, and so on. Now we have 5 units, all paid for. These comprise about 20% of our NW now. Cash flow is great since 1) No mortgages 2) I am property manager 3) I do most repairs myself. My most critical metric is "Number of unscheduled service calls", as I don't want to get phone calls every week at 3 AM with some repair needed...so we fix them right and use good materials, robust processes, and put the money where tenants don't hurt things as much (we spend on electrical, roofing, gutters, siding, "unseen" plumbing such as supply and drain lines...not any fancy faucets, and so on). We use basic (durable but not expensive) cabinets/flooring, etc. since tenants tend to be hard on those things. Our places are very clean and safe, but a bit dated as far as cabinetry, trimwork, appliances, etc.

When I can no longer work on them, we will update things like cabinets and fixtures, then sell. I plan to then buy a proxy asset such as REITs or similar to maintain the diversification away from stocks.

Since we are not acquiring anymore, the cash flow is great. I'm able to transfer about $30k annually from the LLC to us for living expenses. Due to many tax writeoffs, the "book" profits don't show that much profit. We can deduct some non-cash items like depreciation and auto mileage at the IRS rate.

The trick will be selling them off in a tax-efficient way...we are working on a strategy for that now and will do this slowly starting in about 2-3 years.

Your post reminded me of my landlord days when I was in my thirties. Your blueprint is similar to mine. I hate maintenance calls so like you I spend the extra money so I do not come back. Due to a divorce, I had to sell my rental property but now I will be going back in. Mainly because I believed that the stock market is overvalued and too risky with an overall S&P500 P/E ratio above their historical average.

My goal is 25% equities, 25% bonds, 25% income producing non commercial real estate and 10% cash and 15% precious metal. For previous metals, I like lithium and rare earth because every car maker will be making electrical cars.

 

[RunningBum]

So I've been thinking more about this approach, and have it in my spreadsheet to compare with a set AA. I like it. I'm going with it. It is mental accounting, but it makes more sense to me to have a certain amount set aside in cash equivalents for the next few years, then a reasonably safe mix for a few years after, and a much more aggressive AA for the other years. It turns out to be not so different from what I had been doing, but it may not always be. It just makes more sense to me than to have a set % of my entire portfolio in cash/bonds/stocks.

I thank doneat54 for raising the topic. I don't remember if I was already thinking about it before, but I didn't have this in my spreadsheet at the start of the year.

I know there were some points against this, and ideas like a rising glide path or CD ladder. This just makes more logical sense to me than the rising glide path. And CD rates are so low right now that I'd rather have my cash elsewhere. I did set up a 5 year later a couple years ago when rates were good. I just see that as a mechanism to fill my buckets.

I actually have a 4th bucket: money that I don't expect I need even if I live to 100, so I call it my legacy bucket. Right now it has the same aggressive AA as my long term bucket, but I'm thinking to reduce that gradually as I get older.

 

[flyingaway]

Your bucket strategy is fine. You don't need to refill the buckets. Once they are emptied, they have achieved their goals.

 

[doneat54]

Good discussion, and was enlightening for me. The buckets, I realized were just mental accounting, and I have since resolved that just managing AA is all I need to do to sleep at night.


I just did my first 6 month AA recalc for the over all portfolio and found that it "glidepathed" from a 32/68 at the first of the year (unnecessarily conservative I have since realized) to a 42/58 in the last 6 months. I FIRE'ed in 2017 and DW will retire next May. Thus far we have not touched our portfolio. I take solace in the fact that my Bond/cash segment (alone) will/would *easily* get us through that 7 year gap to Medicare and SS.

 

[skyking1]

We ( and I expect many others ) face the same issue with bridging the gap to SS. We have a MYGA that will do the trick and I can balance the rest of the portfolio without including it. We really did not know what we were doing when we got that annuity but I have figured out how to use it. It will pay out over the 6 years we need the boost, and the WR on the portfolio will stay at ~3% for as long as we want to travel extensively.
It also helps with keeping the income down for doing the roth conversions, as it is only 28% taxable.

 

[DawgMan]

Because the buckets analysis next year might point to some other AA. Not that an AA view is not a good way (also) to view any portfolio, but IMO it should not be a goal to manage a portfolio strictly by looking at AA.

By itself, IMO AA is a crude tool and it will often make sense for AA to vary from year to year. For example, we lived with about a 60/40 AA for quite a while but after a decade or more our personal planning horizon is shorter and our portfolio has grown rather than shrunk, so we went to 75/25. Then, just recently, we began making plans to build a lake home that will eat some cash, so we just sold equities to suit a cash target (aka bucket) and are probably now more like 70/30. I haven't bothered to check because it really doesn't matter much to the plan.

Coincidently, I have been banging around these same thoughts. As I have previously sold myself as an AA rebalance purest, however, I am starting to come around to OS's philosophy. You could argue that as your WR goes down (under 4%), a bucket strategy effectively tells you to have a much more aggressive overall AA. This may fly in the face of the conservative "won the game" folks since it "forces" you to "run up the score", but why not if the numbers really work? As others have said, it would seem natural to still pull/rebalance from the winning buckets each year to somewhat appease your rebalance glands.

My plan was to stay around a 60/40 AA (which who knows, I may still do), but if I really apply this bucket principle based on my WR, it pushes me into the 70% - 80% equity range over all. Will continue to tinker...

 

[audreyh1]

Why?

Why not?

Why?

Why not?

It ultimately comes down to people’s preferences….

 

[tulak]

I’m for running up the score. That’s my “why not?” [emoji4]

I’m single and if I had a partner, I’d be more conservative. For me, I’m not worried about ever living under a bridge and can reduce my expenses significantly if needed. I’m curious how much I can run up the score and if it works out, I’ll splurge a lot more. Business/first class, extravagant trips with family, custom sprinter van, house upgrade, the possibilities are endless!

I already have a higher allocation AA (80/20) and I’m still increasing equities. I’m going to model this approach to see what it looks like. It could be a good way to mentally separate short-term/long-term money.

 

[RetireAge50]

We are doing something similar filling in the gap with cash and stable value. Here is a picture:

 

[RunningBum]

We are doing something similar filling in the gap with cash and stable value. Here is a picture:
View attachment 39534

Does that mean you are going to be all stocks once you hit 65 or 66 or whenever you start SS? I'm looking to always have at least a 3 year cash or short term bonds bucket. Right now it's a little over 5 years, until I'm on Medicare. Then a 40/60 middle bucket that always takes me to 10 years out. After that the aggressive buckets for long-term and legacy.

Along with supplementing SS & pension when I start them, I also include estimated dividends in my taxable account.

 

[RetireAge50]

Does that mean you are going to be all stocks once you hit 65 or 66 or whenever you start SS?

I’ve pondered this but will likely stay around our current level of 75% stocks. So as the gap years start to drop off the cash will begin filling in the 3rd leg.

 

[Mountain skier]

We have a 5yr CD ladder using the bucket strategy

 

[TheWizard]

I'm another one who doesn't care for bucket strategies.
Like the OP, I had a seven year period from start of retirement at age 63 in 2013 to start of SS in 2020.

I "pensionized" a good portion of my TIAA 403(b) at the start to provide a healthy base to my retirement income.
Beyond that, I withdrew $3000/month in lieu of SS, pro rata from my mix of investments in my tax-deferred account, which was about 60% stock funds at that time.

In other words, I didn't separate out the money to bridge the seven years to SS.
This approach has worked out super fine for me...