Are Ray's Buckets of Money fatally flawed?

[ziggy29]

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Originally Posted by Rich_in_Tampa I wonder where Lucia would put it: is it a Bucket 1 investment combined with a lower investment-based SWR? Is it a Bucket 2 for its stability? A separate Bucket altogether, maybe combined with other pensions and SS?

I'd put an SPIA in the same bucket as pensions and Social Security, assuming I assigned a "bucket" to it. I don't really think of income streams as part of my AA but simply as something that allows me to withdraw less from the rest of my portfolio each year -- which, in turn, allows me to adjust my AA. Some consider their cash value as a bond, and that works reasonably well, but I don't "own" the cash value so I'd choose not to include them.

As an example, I have a puny pension coming to me at age 65 (around $8000 a year). I don't use that in my AA at all. But when I'm eligible to collect it, I'll realize that this means $8000 a year less I need to withdraw, lowering my "burn rate" which means I can adjust my AA accordingly if appropriate.

[W2R]

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Originally Posted by ziggy29 But I'm with REW -- Personally, I can't imagine entering retirement with more than about 50% equities. (A little over a year ago I would have said 60%.) I think a lot of the recent conventional wisdom about what is "survivable" may have to be re-evaluated when all is said and done here. As will be a lot of asset allocations.

Thank goodness, my brother suggested a little over a year ago that I would be happier with 45:55 than with 60:40 (equities:fixed). He is a long retired former CFO/CPA with a multimillion dollar investment portfolio, and IMO genuinely brilliant and knows what he is doing, and knows ME, so I took his advice.

Now, I can't imagine how awful it would have been to go through this at 60:40 because it was bad enough at 45:55.

What's really scary to me, is that his portfolio took at least as bad a hit as mine. Even someone like him couldn't escape this downward spiral.

As for the original topic - - I blush to admit that I haven't read Ray Lucia's book, though I have read about his ideas. I incorporate some of them, in some sense, because I do have parts of my portfolio that are losely earmarked for different stages of my retirement. However, I do not follow his plan.

And as for the SPIA option - - I am MUCH less concerned about the low return than I am about the possibility of no return, should the insurance company go belly up. Even though states have some guarantees of annuities, many of the states are strapped for money and I don't have confidence that I would get all my inflation adjusted money back from an inflation adjusted SPIA.

As for the low SPIA return, to me the first dollars I spend in ER are much more valuable than the last dollars. I value being able to afford food and property taxes more highly than being able to afford the same dollar value spent for more Wii software and pretty antiques, in other words. So, if I could buy a bulletproof guarantee that my food and property taxes would always be paid, it would be worth getting a lower rate. (Unfortunately, I think that's a pipedream and I am approaching that problem from another angle these days).

[REWahoo]

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Originally Posted by Want2retire Now, I can't imagine how awful it would have been to go through this at 60:40 because it was bad enough at 45:55.

Yes, it certainly was.

Prior to my retirement four years ago my AA was 60/40. When I rolled over my 401k to an IRA at Vanguard, my plan was to stay with 60/40. Not sure why, but I could not force myself to anything more than a 45-48% exposure to equities. Perhaps it was due to all the discussion here regarding the "right" AA, perhaps it was what Unclemick describes as 'chickenheartedness'.

Whatever it was, I'm thankful I didn't stick to my plan.

[ERD50]

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Originally Posted by Rich_in_Tampa .... has me thinking that maybe Armstrong's withdrawal strategy might be better -- (Armstrong basically says rebalance annually, distributing your annual SWR from whichever bucket has done better than year - stocks v. bonds/cash (no longer than short term). Am I getting this right?

Here's a simple way to look at it. Forget for a moment who is "right/better" and who might be "wrong/worse". If you are comfortable with FireCalc output as one data point for your success, well, it seems to be based on what you refer to as the "Armstrong" method, as that is what annual rebalancing would do.

So at least, your results from FireCalc should be consistent with that approach. Since FireCalc does not model "buckets", it's hard to say.

Now, as far as which might be better - I suspect you will run into "data mining" with that one. One will be better under certain periods, one will be better in others.

I've never looked into the buckets approach in any detail. The posts I've seen on it here never really motivated me too much to go put in the effort. Maybe it's because I have not looked at it, but my impression is that the buckets actually complicates how you view your AA, and makes it less transparent. I don't see how that helps. Maybe it helps people who just can't deal with the concept of AA (RIT is certainly not in that camp) I don't care what you call it, it is still an AA. That is simple arithmetic, and calling it by another name does not change it. Maybe my head is in the sand, I dunno.

-ERD50

[FinanceDude]

I don't think Ray or almost anyone else thought we would have a 40% loss in equities, along with bonds getting a haircut of 15-20% on a lot of them, plus a fed funds rate of .25, leading to MM funds getting yields of less than 1%.

In other words, the "perfect storm" of 2008 was nver back-tested because there was no real precedent to measure..........

[ziggy29]

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Originally Posted by FinanceDude In other words, the "perfect storm" of 2008 was nver back-tested because there was no real precedent to measure..........

In terms of the magnitude of the loss I'd say 1929-1932 was more than a solid precedent, and arguably so was 1973-74 (except that rates on cash didn't tank as hard then). But there's only one, maybe two data points here, which isn't a sufficient sample size to provide much comfort that the markets will rally back "just in time" to save our portfolios yet again.

[W2R]

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Originally Posted by ziggy29 In terms of the magnitude of the loss I'd say 1929-1932 was more than a solid precedent, and arguably so was 1973-74 (except that rates on cash didn't tank as hard then). But there's only one, maybe two data points here, which isn't a sufficient sample size to provide much comfort that the markets will rally back "just in time" to save our portfolios yet again.

It'll be easier to identify comparable precedents once we are completely through this. Things always seem so much clearer in hindsight, to me, anyway.

I am not at all confident that this won't be followed by runaway inflation that could be worse than anything that has happened yet. But then, who knows. Just thought I'd add that cheery observation.

[FinanceDude]

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Originally Posted by Want2retire I am not at all confident that this won't be followed by runaway inflation that could be worse than anything that has happened yet. But then, who knows. Just thought I'd add that cheery observation.

Runaway inflation would be better than STAGFLATION.......

[FIREd]

I am not a specialist of the "bucket" strategy, but if it were me I would use dividends from the income and equity buckets to replenish (at least partially) the cash bucket on a regular basis and if the cash bucket needed further replenishing sell some assets either from the income or equity bucket on a yearly basis based on performance (I'd be selling treasuries from the income bucket right now). Would it be " bucket blasphemy"? I call it the "total return Norwegian bucket strategy" and that's how I (kinda) intend to do it in retirement...

[Independent]

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Originally Posted by FinanceDude I don't think Ray or almost anyone else thought we would have a 40% loss in equities, along with bonds getting a haircut of 15-20% on a lot of them, plus a fed funds rate of .25, leading to MM funds getting yields of less than 1%. In other words, the "perfect storm" of 2008 was nver back-tested because there was no real precedent to measure..........

You are correct that this drop is historically unique. But anyone recommending a strategy like this ought to test it against the low returns in the late 60's and 70's. The S&P 500 lost 30% of its (real) value in the 10 years starting in December 1968, and was even for the 15 years with the same starting date. (Those numbers include reinvesting dividends.)

Maybe his strategy worked very well for that period. I don't know, but I think it would be interesting to see.

[audreyh1]

YES! I've always used Armstrong's approach (plus a cash bucket - my own personal twist before I even heard of Ray Lucia). IMO, it only makes sense to keep rebalancing out of equities in the good years. This keeps replenishing your "cash" and low-volatility buckets (or bonds) and lowers the volatility of the overall portfolio. I think it's perfectly logical to think that after a run of several good years equities are more vulnerable to a correction or crash. So if you aren't harvesting some of those gains in the good years - then what the heck are you doing?!?! Surely not trying to maximize long-term return! LOL!

Does Lucia's approach REALLY have you not taking at least some of your withdrawals out of equities during the good years? When are you supposed to replenish the other buckets if not after the good years? That's the only thing that makes sense to me!

Audrey

[ziggy29]

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Originally Posted by audreyh1 Does Lucia's approach REALLY have you not taking at least some of your withdrawals out of equities during the good years? When are you supposed to replenish the other buckets if not after the good years? That's the only thing that makes sense to me!

When I've listened to his show, he does advocate occasionally replenishing the near-term buckets when stocks have been doing well. But there really never seems to be any mechanical strategy to do it, and that's always concerned me. It seems like without it you're left to "gut feel" and "emotion" which have torpedoed a lot of portfolios. I'd rather follow a fixed, well-defined process to know HOW much to take off and WHEN.

A variant I've toyed with is something like: "when the return on your stock bucket exceeds the average assumed return for stocks (say 9%), take a defined percentage of the excess return and use it to replenish the income buckets." I wonder if there are any backtests developed on a model like this. On one hand it seems intuitive to take some off the table when equities are doing well, but on the other -- how much?

[ERD50]

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Originally Posted by ziggy29 When I've listened to his show, he does advocate occasionally replenishing the near-term buckets when stocks have been doing well. But there really never seems to be any mechanical strategy to do it, and that's always concerned me.

If it is not mechanical, there really is no way to back test it. And that makes it impossible to determine if it would do better/worse than any strategy, using historical data.

This is starting to sound more like voodoo to me. It's a mild version of the people who show up here and say " Well, I told everyone to sell when the DOW hit X". How do you evaluate that?

-ERD50

[ziggy29]

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Originally Posted by ERD50 This is starting to sound more like voodoo to me. It's a mild version of the people who show up here and say " Well, I told everyone to sell when the DOW hit X". How do you evaluate that?

The only reason I think it sounds anything like "voodoo" is because a lot of this relies on gut feel and thus (as you say) can't be backtested.

But intuitively, I see nothing "voodoo" about suggesting that you shouldn't be as heavy in stocks when valuations (according to most conventional measures) are at nosebleed levels as when the markets are going on sale. This seems obvious to me (and did before October '07). What's never been clear to me is how to create a solid, backtested and mechanical AA decision based on it. I suspect it can be done, but I'm probably not bright enough (or good enough with databases ans spreadsheets) to figure it out.

I mean, if NOT buying stocks when valuation is high and loading up on them when valuation is low is voodoo, then Warren Buffett has been one helluva witch doctor.

[FinanceDude]

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Originally Posted by ERD50 If it is not mechanical, there really is no way to back test it. And that makes it impossible to determine if it would do better/worse than any strategy, using historical data. This is starting to sound more like voodoo to me. It's a mild version of the people who show up here and say " Well, I told everyone to sell when the DOW hit X". How do you evaluate that? -ERD50

You don't.........remember, EVERYONE is an EXPERT on the Internet............

[audreyh1]

Well - this is where Armstrong does have a specific approach.

- Withdraw your annual amount and rebalance when equities have had a good year.
- Withdraw from cash/bonds only when equities have had a bad year.

Basically he doesn't want you withdrawing from equities "when they are down", but to use your cash/high-quality bonds while you wait for the market (equities) to recover. He recommends starting out with at least 7 years in cash and very high-quality short-term bonds in your cash/bonds allocation as this should allow sufficient time for the market to recover after a bad crash.

I don't remember what he says about rebalancing by buying equities after a bad year. But I have interpreted his approach (or made my own) that you can rebalance by buying equities after a bad year AS LONG AS you maintain the minimum number of years in cash/bonds.

In my case, I have held 10 years after-tax expenses as the minimum for my cash+bonds allocation. I confess that in my recent rebalancing last year after the crash and this year, I found I couldn't bring myself to go below 12 years cash/bonds which forced my equity AA down to 55% from where it had originally been 58%. But I still did manage to buy some downtrodden equities both late last year and this year.

Audrey

[ziggy29]

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Originally Posted by audreyh1 But I still did manage to buy some downtrodden equities both late last year and this year.

Sort of like taking cod liver oil. It doesn't go down easily, it leaves a bad taste in your mouth, but in the long run it seems like the healthy thing to do...

[ERD50]

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Originally Posted by ziggy29 The only reason I think it sounds anything like "voodoo" is because a lot of this relies on gut feel and thus (as you say) can't be backtested.

I agree, and that is all I really meant. It probably came across stronger than I intended. Not "voodoo" in the extreme sense of the word, but when something is untestable, because it has not been defined, it's moving closer to "voodoo".

-ERD50

[ziggy29]

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Originally Posted by ERD50 I agree, and that is all I really meant. It probably came across stronger than I intended. Not "voodoo" in the extreme sense of the word, but when something is untestable, because it has not been defined, it's moving closer to "voodoo".

I don't think the concept is purely untestable, but there are a lot of permutations and slight variations one could make, and choosing the "best" of them would feel like excessive data mining.

Having said that, it would be interesting to see Monte Carlo simulations on various AAs with "valuation-based rebalancing" over (say) 30-50 year periods, much as we do with FIREcalc. A good candidate would do one of four things compared to a traditional fixed AA with periodic rebalancing:

(1) Increase the expected long-term return without an unacceptable increase in risk;

(2) Significantly reduce the risk without an unacceptably large drop in expected return;

(3) Keep the return about the same with less volatility;

(4) Keep the volatility about the same with a higher return.

[mathjak107]

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Originally Posted by FinanceDude I don't think Ray or almost anyone else thought we would have a 40% loss in equities, along with bonds getting a haircut of 15-20% on a lot of them, plus a fed funds rate of .25, leading to MM funds getting yields of less than 1%. In other words, the "perfect storm" of 2008 was nver back-tested because there was no real precedent to measure..........

i certainly have to agree with you on this point