are buckets really necessary?

[Ready-4-ER-at-14]

The concept of buckets was important for my understanding time frames of holdings and expected variations in those time frames.. The old volatility vs yield thing smacks you right in the face repeatedly.

It was also important to realize the "experts" had left a lot of the details fuzzy.
cash +cds short.. stock long... and then you fudge...

An idea I always had problems with was when to cash out winning Stock holdings making net returns on investments to fund the stuff just treading water after a long drawdown. Should you have drawn cash in feb, march or this year then sold enough in sept to replenish those two months?

 

[RunningBum]

Can't wait to share that bit of news with DW.

No, not you. He was replying to Cotton1929. Apparently there is no higher authority than Cotton1929.

 

[CRLLS]

We don't use any real form of "buckets" strategy. We never have. We do have a proportionally small amount of cash in local and online banks. One is used to collect any income and to pay bills, The other is just because. It sort of just worked out that way. We could easily spend it down for discretionary purposes and not really make a dent.

I think it may be more worthwhile for those in the working world where some sort of safety is needed. For us, we have a fair amount of guaranteed income (SS) compared to our expenses that we don't need to take anywhere near a 4% WD rate from our investments. I know many are not in that situation.

When I was entering data into i-Orp, Fidelity's Retirement Planner and FireCalc, checking on our success rate, I don't recall ever being asked about any bucket strategy we wanted to use. Maybe I dis-remember about that.

 

[OldShooter]

... Apparently there is no higher authority than Cotton1929.

... on the subject of whether buckets are necessary for Cotton1929. That credential is probably not much value in domestic disputes.

 

[RunningBum]

... on the subject of whether buckets are necessary for Cotton1929. That credential is probably not much value in domestic disputes.

Just having a little fun.

 

[mrfeh]

I understand the bucket system, but have been slow to adopt it.

It's not necessary. Buckets is an example of mental accounting for the most part.

The only exception I would make to that statement is if you are living solely off a taxable account (pre-59.5) and the taxable account is 100% equities. Then I would want about 3 years of expenses in something safe.

 

[pb4uski]

+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.

 

[Ole Red 29]

I may have muddied the water asking about buckets. My real question is how many years of living expenses do most of you keep in cash/MM/CD's (out of the market)? I currently keep one year and plan to draw from an after tax bond fund going forward. I don't have any other income (including SS). thanks

 

[GravitySucks]

Around 3 months to a years worth. Three years of Safe money is in a short term mixed Gov/Corp bond fund and FUAMX (intermediate treasuries). Another seven years safe money total market and corporate bond funds.

 

[pb4uski]

I may have muddied the water asking about buckets. My real question is how many years of living expenses do most of you keep in cash/MM/CD's (out of the market)? I currently keep one year and plan to draw from an after tax bond fund going forward. I don't have any other income (including SS). thanks

For a number of years, I had a 60/35/5 AA rather than 60/40... the 5% was cash and the 5% cash, along with taxable account dividends and interest that I took in cash rather than reinvest, would be sufficient to fund 2-3 years of spending (net of pension income).

There's no right answer... some people are perfectly comfortable with negligible cash and others like 3-5 years of spending in cash... and there is a lot in-between.

 

[RunningBum]

I may have muddied the water asking about buckets. My real question is how many years of living expenses do most of you keep in cash/MM/CD's (out of the market)? I currently keep one year and plan to draw from an after tax bond fund going forward. I don't have any other income (including SS). thanks

In the past I'd pretty much do what you do, though if the market wasn't down I didn't mind selling some stock funds too. Now, with the ACA subsidy as a target each year, I have enough cash to supplement the dividends I take from those equity funds to get me to 65. This way I don't have to take extra CG income by selling stock funds. So right now I have about 6 years worth, less dividends each year. Once I get closer to and then over 65 I'll figure how out how much I want to keep available.

 

[mickeyd]

I have always thought that "buckets" just complicates my relatively simple (current) retirement plan. Most folks here seem to agree with me.

 

[Iggysmom]

New to forum

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?

 

[OldShooter]

I think generally it would be the amount of cash needed from a portfolio that is needed over and above pensions, SS, etc. to support a desired lifestyle. Some may be conservative, though, and not count on 100% of less-certain sources like dividends and rental income. I think it is almost never adjusted for expected inflation, which is potentially a big uncertainty factor. When you are not sure, ask.

The other thing to know is that there is a "4%" "safe withdrawal rate" (SWR) number thrown around here a lot. It comes from an old study that said one could retire and draw 4% inflation-adjusted for 30 years without worrying about running out of money. I think people rarely remember the "30 year" part and the "inflation-adjusted" part but still talk about 4% SWRs. https://en.wikipedia.org/wiki/Trinity_study

 

[pb4uski]

I think generally it would be the amount of cash needed from a portfolio that is needed over and above pensions, SS, etc. to support a desired lifestyle. ...

+1 Withdrawals would be spending needs less pensions less SS and any other regular income.

And if you have taxable account dividends and interest that you are taking in cash rather than reinvesting, those technically are withdrawals from the portfolio and included in the WR. So for example, if you need $100k to live on and have $60k from pensions and SS then your portfolio would need to provide the remaining $40k and in the first year that would be a 4% WR on a $1 million portfolio... but if you receive $10k a year in taxable account dividends and interest then your withdrawals from the portfolio from redemptions would only be $30k.

 

[big-papa]

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?

 

[OldShooter]

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:

If buckets help you sleep at night, then why not?

 

[big-papa]

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.

 

[CRLLS]

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.

 

[HI Bill]

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.

 

[audreyh1]

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.

 

[Koolau]

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

 

[CRLLS]

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.

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.

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.

 

[audreyh1]

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.

 

[Badger]

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.


Cheers!