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Old 10-20-2020, 05:06 PM   #41
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When the time comes we won't use buckets, as defined by sites like Morningstar. Most studies of these sorts of systems indicate that the result is no different than just having a fixed asset allocation. That's the math. It's not the emotion. If buckets help you sleep at night, then why not?
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Old 10-20-2020, 05:32 PM   #42
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When the time comes we won't use buckets, as defined by sites like Morningstar. Most studies of these sorts of systems indicate that the result is no different than just having a fixed asset allocation. That's the math. It's not the emotion.
I would argue that both are just a point of view, useful in various degrees to various people.

There is a near infinite number of rule sets for selecting assets and rebalancing, just as there is a near infinite number of rule sets for drawing on and refilling buckets, and a near-infinite number of paths of possible market returns. So there is no "math" comparing one set of of rules and one path that can prove any kind of general case. Tell me which you want to win, let me pick the rule sets and path, and I'll give you what you want without breaking a sweat.

Further, it is almost certainly true that almost no investor follows any rule set exactly. Life and investor psychology will always trump rules. So, yes:
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If buckets help you sleep at night, then why not?
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Old 10-20-2020, 05:50 PM   #43
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I would argue that both are just a point of view, useful in various degrees to various people.

There is a near infinite number of rule sets for selecting assets and rebalancing, just as there is a near infinite number of rule sets for drawing on and refilling buckets, and a near-infinite number of paths of possible market returns. So there is no "math" comparing one set of of rules and one path that can prove any kind of general case. Tell me which you want to win, let me pick the rule sets and path, and I'll give you what you want without breaking a sweat.

Further, it is almost certainly true that almost no investor follows any rule set exactly. Life and investor psychology will always trump rules. So, yes:
The "math" I spoke of was related to one type of bucketing definition which appears most often on financial websites. There are of course an inifinite number of possibilities of AA (fixed or variable), rebalancing methods, bucket methods, choose-your-favorite timing scheme, live-on-dividends and ignore total return methods, etc. And, like you, I know how to make just about anything work - in the past.

I have made my choices and believe it will work for me as it meets my own personal requirements. The past being fixed and the future unknowable, however, means that no matter what I do, saving as much as possible and maintaining, to the degree that I can, as much flexibility as possible helps me sleep at night. Your mileage, by definition, can and will vary.
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Old 10-20-2020, 07:20 PM   #44
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Let's say you decide to keep 5 yrs of expenses in cash (outside of the market) earning virtually nil in today's environment. Assuming a market gain of 10% per year. If you don't need to tap into that safety net during those 5 years, at an average of 10% per year gain you have lost approximately $61k per $100K cash of possible gains for every $100K in that bucket. $100K*(1.1^5)-$100k. If you can mentally deal with that potential loss vs the potential of needing to tap into your investments, you will be ahead just keeping the money invested.

Everybody's risk tolerance is different as is their financial situation.
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Old 10-20-2020, 08:28 PM   #45
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Let's say you decide to keep 5 yrs of expenses in cash (outside of the market) earning virtually nil in today's environment. Assuming a market gain of 10% per year. If you don't need to tap into that safety net during those 5 years, at an average of 10% per year gain you have lost approximately $61k per $100K cash of possible gains for every $100K in that bucket. $100K*(1.1^5)-$100k. If you can mentally deal with that potential loss vs the potential of needing to tap into your investments, you will be ahead just keeping the money invested.

Everybody's risk tolerance is different as is their financial situation.
Absolutely true. I have been planning to RE in May, but then my assets dropped by 1/3, and the losses were cushioned by the money market/bond portion of my investments. If I had been drawing on the assets, and the crash had been prolonged, I could have seen permanent losses far greater than the 10% annual gains that you cite above. It's an AA question. You're essentially saying we should be 100% in equities, at all stages in one's life, if I read your intent correctly.

For me, having 3 years of investments in something that won't lose significant value (like VMFXX) helps me cope with being relaxed enough to RE, even though I won't be taking SS payments for 15 years. Yes, there's a potential significant cost to this, but also a huge potential benefit.
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Old 10-21-2020, 02:41 AM   #46
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Let's say you decide to keep 5 yrs of expenses in cash (outside of the market) earning virtually nil in today's environment. Assuming a market gain of 10% per year. If you don't need to tap into that safety net during those 5 years, at an average of 10% per year gain you have lost approximately $61k per $100K cash of possible gains for every $100K in that bucket. $100K*(1.1^5)-$100k. If you can mentally deal with that potential loss vs the potential of needing to tap into your investments, you will be ahead just keeping the money invested.

Everybody's risk tolerance is different as is their financial situation.
Market gain of 10% a year for five consecutive years? Wow! Someone would want to be 100% stocks I guess.

Personally I’m always fine with leaving some money on the table. I would not have retired early otherwise. It’s not about maximizing long term return for us. As long as we have enough invested for long term needs, we don’t worry about the rest.
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Old 10-21-2020, 04:01 AM   #47
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I looked into buckets a long ago. I could see the advantage to someone who wants to be a bit more involved in their portfolio management. I finally decided that sounded like more w*rk than I wanted to do. So simply balancing my portfolio was easier for me. Keeping plenty in ready cash or short term bonds should keep you from panicking. BUT whatever works for you and keeps you retired is good. YMMV
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Old 10-21-2020, 07:42 AM   #48
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Absolutely true. I have been planning to RE in May, but then my assets dropped by 1/3, and the losses were cushioned by the money market/bond portion of my investments. If I had been drawing on the assets, and the crash had been prolonged, I could have seen permanent losses far greater than the 10% annual gains that you cite above. It's an AA question. You're essentially saying we should be 100% in equities, at all stages in one's life, if I read your intent correctly.

For me, having 3 years of investments in something that won't lose significant value (like VMFXX) helps me cope with being relaxed enough to RE, even though I won't be taking SS payments for 15 years. Yes, there's a potential significant cost to this, but also a huge potential benefit.
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Market gain of 10% a year for five consecutive years? Wow! Someone would want to be 100% stocks I guess.

Personally Iím always fine with leaving some money on the table. I would not have retired early otherwise. Itís not about maximizing long term return for us. As long as we have enough invested for long term needs, we donít worry about the rest.
According to Goldman Sacks the S&P 500 has had an average annual return of 13.6% over the last 10 years. I tempered that number a bit and used 10% purely as an example. It is not as a guarantee as we all know. To perform any calculations one must use some numbers. Feel free to use any one you want and adjust the numbers accordingly. One can even use a blended percentage if desired for any AA chosen. For instance, using the 10% annual gain closely reflects a 75/25 AA assuming the 25% bonds earn nothing.

My point was there is a cost to keeping a cash bucket strategy. And that cost is not a minor amount. If that makes one happy, or helps them sleep at night, just be aware of the costs involved with that decision. I'm not saying a cash bucket is good or bad. BTW, many here do not use a bucket strategy as mentioned earlier in this thread. BTW, I never suggested a 100% equity investment plan.
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Old 10-21-2020, 08:18 AM   #49
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Of course the higher equity allocation gives a higher longer term return at the expense of higher short term volatility. But the largest portfolio at death is not the only consideration.

Many of us here have already run the models before making our choices. Firecalc does a great job of modeling various AAs, withdrawal rates and different withdrawal methods and shows what ending portfolios look like historically. My point is that maximizing the long term return is not the only consideration.

There is also the concept of “do you have enough?”. Once your investments get to a certain size relative to your needs/spending, there is much less pressure to try to maximize gains in every possible way. You stop worrying about things like having a cash buffer and whether it is “opportunity costing” in terms of long term performance. Because it doesn’t matter. You just need to choose an investment strategy that has a high very high probably of meeting your goals long term - and that’s good enough!

Incidentally many here invested in CDs yielding 3%+ recently before the big drop in rates, so not everyone’s cash buffer is yielding “essentially” zero.
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Old 10-21-2020, 09:03 AM   #50
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Way too many variables and situations that require a properly functioning crystal ball to give a definitive answer.

Since I am no longer in the accumulation phase and now drawing RMD with not too many years before my "sell by date" my views will be different that those of many others.

Although I have about 1/3 of our net worth in actual cash or CDs the stocks I have are producing more income than I use for annual expenses. Our needs are taken care of already and we don't have expensive wants. The only "want" I have is to turn back the clock and eliminate health issues of aging. But that's never going to happen. So I don't think about buckets or if I am losing a few dollars for not having all that cash in equities.

However, my powder is dry in the event of a down market. No telling how much money I might be able to make for my wife's grown children that will get the inheritance in the event that happens. If the market never adjusts or goes to the bears they will still be just fine. In the meantime I am waiting for the time I can spend more on safe travel.


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Old 10-21-2020, 09:57 AM   #51
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This good thread has now drifted into talking about "cash." IMO this is a word that has specific meaning only to the speaker. To me, "cash" is the two twenties and one five that are in my wallet. Or maybe I include a $K or so that is in my checking account.

I think of our portfolio in terms of "liability matching" or maybe "need matching." Every asset has characteristics, including potential yield, liquidity, volatility, risk, and hassle-factor. For near-in liabilities like December's groceries I prize liquidity and low volatility over potential yield. I guess this suits "cash." But if I am a bucket guy with a 5-year bucket strategy, my matched liabilities for that fifth-year money are quite different. First, because the liability is a long ways away and second because it would take a pretty miserable 5 years of market decline before I would even get into that fifth year money. So, liquidity and volatility probably give way to seeking some potential gain. I may choose to buy something like bonds that mature then, CDs that mature then, or (higher hassle factor) an SPIA/MYGA that I have learned about here. Or I might even put some of that 5 year money into some very solid citizen type stocks or mutual funds.

So, to belabor the point I guess, IMO the asset contents of a multi-year first bucket should not be homogeneous and should almost certainly not be only "cash," whatever that word means.
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Old 10-22-2020, 08:59 PM   #52
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One reason to have a multi-year cash “bucket” is to keep your income down, if you are not yet 65, and can qualify for ACA subsidies.
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Old 10-23-2020, 01:48 PM   #53
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I think everyone has buckets unless they are 100% cash, bonds or stock.
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Old 10-23-2020, 02:19 PM   #54
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I am new to this forum, so apologize if I am asking an obvious question. When people discuss their cash needs (e.g., setting aside a certain sum to fund 3-5 years of retirement), does that refer to cash over and above anticipated income streams such as dividends, rental income, social security, etc? Or is it a larger sum, including some or all of those anticipated sources of income?
For me, since I have a pension, it is the amount excess of pension that I anticipate needing for 5 years, adjusted for inflation (as best as possible since my crystal ball is broken ).

Simple example, if my non-COLA pension was 50K/year, and I anticipated my total expenses would start at 100K/year and go up 3% per year for inflation, my 5 year cash need would be about $280K (sum of total 5 year inflation adjusted expenses less 250K five year pension income).

Of course, if I include anticipated interest and dividends, that amount would be reduced... and I also look at our spending and inflation expectations yearly to see if the amount needs adjusting.

For some that may seen a lot to have in cash, but for others it is worth the "sleep well at night regardless of the market" factor.
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Old 10-23-2020, 04:33 PM   #55
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it's a mental construct. Its as useful as you think it is.
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Old 10-23-2020, 04:38 PM   #56
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I agree with RunningBum...get some bonds with a short duration...they are less sensitive to interest rate changes and therefore the volatility should be much lower. A duration in the range of 5-8 years would probably be a good option.
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Old 10-23-2020, 05:22 PM   #57
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Click the following link to understand what happens to various type of bonds during a crash:

https://obliviousinvestor.com/what-h...-market-crash/

As you can read: Equities do poorly. High Yield Corporate (Junk) Bonds also do badly but not as bad as Equities. Next are Investment Grade Bonds which also decline. The safest are Treasuries which actually rises during a crash.

However, during the long term, the opposite is generally true: That is...Equities performs the best, Junk Bonds performs well, Investment Grade Bonds are next, followed by Treasuries. Classic Risk versus Reward decision.

Note that the graph involve intermediate term bonds. If you want to be even more conservative, go short term bonds. If you want to be less conservative in order to get more reward, go long term bonds. Another classic Risk versus Reward decision.

I would start with your AA. Examine your bond portfolio and then examine the amount of treasuries, junk bonds, corporate bonds and equities. If your AA is top heavy with equities and junk bonds, then you may have too much risk but good returns in the long term. This means you may need a parachute of cash, CD, money market, treasuries if the SHTF.

How big of a parachute is up to you. Just make sure you do not have holes in it...or else you may have a hard landing. In my case, I am using treasuries such as VFIRX and VUSUX as my parachute because the returns on cash, CD and money market are less than treasuries. However, that is my own personal preference and everyone has their own opinion of a safety net or parachute.

On the other hand, if you already have short term treasuries in your bond portion of your portfolio and the treasuries are not intermingled with other bonds so that you can liquidate short term treasuries separately, then your parachute is already built-in your portfolio and you have liquidity in case the SHTF.
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Old 10-23-2020, 08:08 PM   #58
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+1 mental accounting. A number of years ago I considered buckets based on a Christine Benz article on the subject. After calculations, it broadly came back to the 60/40 AA that I was using at the time.

I figure it this way, if your WR is 4% and you keep 10 years of withdrawals in "safe" money that is 40% bonds and the other 60% ends up in equities... so six of one or a half-dozen of the other IMO.

Now within the bond allocation I can see a subset being a ladder of CDs or target maturity bond funds for liquidity sake if it make one sleep better at night.
This is exactly the path my thinking followed. It is just two different ways to look at things. The bucket system is easier for my DP (who is not comfortable with financial concepts) to understand, and in the odd moment when I get worried about the future, I shift to the bucket mindset and say to myself, no worries, we have 4-5 yearsí of spending (minus DPís SocSec) in cash equivalents. The rest of the time I just focus on my AA.
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Old 10-23-2020, 11:45 PM   #59
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The key is comparing income to expenses in this equation. The more your basic living expenses are coming out of your portfolio (the spigot out of the bottom of your bucket) the more important the need to manage the sequence of returns risk. This year is a great example. What if you didnít use a bucket strategy and you needed to pay the rent out of your portfolio in March? Every share of stock sold then was sold at a 30%+ discount.
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Old 10-24-2020, 10:05 PM   #60
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Although the Asset Allocation (55/45) is my top consideration --

It does make sense for me in looking at the total portfolio in BUCKETS of sorts, in matching liabilities of immediate 3 yrs with cash, the next 8 -10 yrs with Bonds & the next subsequent 10 yrs & beyond with stocks.

Although I did not change my present accounts in any way, buckets do in a way simplify my understanding of my different investments.
For what its worth, this outlook helps more so during market downturns.. .. like during the last Covid downturn in March & can possibly prevent selling stocks at lower prices, the dreaded sequence of bad returns.
It helps in focusing the immediate present needs(Cash$), the next 10 years (Bonds $) & in reassuring (Hand holding) oneself that the money in stocks will be there when you need them at a later point in time. No recession has lasted > than 5 years.

It is just a way of mental accounting, it does not require changing your investments if you have them diversified appropriately according to your AA or it may help in guiding in rearranging if one feels their portfolio is lopsided .
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