Are Ray's Buckets of Money fatally flawed?

[Rich_by_the_Bay]

Some of you know I'm a fan of Lucia's buckets of money for the most part.

But if I were, say 11 years into it as of 2 years ago I would have been some 75-80% in equities going into the recession (assuming moderate withdrawal rate of 4%, usual returns til that time, modest inflation). I would be eating Alpo now and quite close to selling low in the near future.

Ray tap dances around this possibility in his books and on his show, but says maybe you should rebalance a little bit along the way only when stocks are well higher than their presumed returns, etc. Of course the more you do so, the less you are adhering to the principle of leaving your stocks to grow for 14 years or more.

This current mess, rare as it may be historically, has me thinking that maybe Armstrong's withdrawal strategy might be better -- certainly is now for anyone already deeply into Lucia's pure Buckets approach. (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?

 

[REWahoo]

But if I were, say 11 years into it as of 2 years ago I would have been some 75-80% in equities going into the recession...

Rich, I'm a self-made 'bucketeer' but not a follower of Ray Lucia. I say that as background for the following statement: I don't see how anyone could be comfortable in retirement (sans pension, annuity, etc.) with that much exposure to equities. If that's what Lucia's bucket strategy advocates I can understand your concern. It's nuts.

 

[ziggy29]

I think the buckets idea is a sound one but I wouldn't enter it unless I had at least 15-20 years of less volatile investments. And I'd want to make sure I used a strategy that had me replenishing the safer buckets any time the market had an above average return. Even in the bust since early 2000 there would have been a chance to take a little off from 2003 to 2006. That could have extended the life of the "safer" buckets by a handful of years.

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.

 

[dex]

This current mess, rare as it may be historically, has me thinking that maybe Armstrong's withdrawal strategy might be better -- certainly is now for anyone already deeply into Lucia's pure Buckets approach. (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).

Recessions are not a rare event - look back to 2000, 1981 and other times in history.

 

[samclem]

I think the buckets idea is a sound one but I wouldn't enter it unless I had at least 15-20 years of less volatile investments.

20 years worth of less volatile investments doesn't leave much for that last, high-growth [-]bucket[/-] thimble.

I've not read Lucia's books, just the synopsis of his plan. It seems that, to be better than simple annual rebalancing to the same overall allocation, Lucia is counting on markets recovering before the cash-bucket runs dry. If this happens, then his method comes out a winner. If the down market outlasts your cash bucket, you lose the bet and pay a bigger price than if you'd been rebalancing all along.

That black swan--she's an ugly bird.

 

[dex]

I don't know the bucket allocation you are referring to.
Does it recommend 3 - 4 years of expenses (net of pension and Social Security income) in cash equivalents?

If not it should. If not that is the flaw in the system. 4 years of net expenses in cash equivalents should bridge most of the recovery period.
If you had 4 years of net expenses you could live on that then determine what investment to withdraw the next year's living expense. After the recovery you build up the cash again to the 3 - 4 years needed.

 

[Rich_by_the_Bay]

For clarity, Lucia does not recommend you enter retirement with a high ration of equities. In fact, you start out at a level in the 40-50% range for most. What happens next is the rub: you burn through 7 years of cash, then 7 years of bonds and finally get to your stocks 15 years after you started.

At that time, there is a high historic probability that your equity holdings will be quite robust. I can buy that argument in general, but when I look where that would leave someone if that moment came during a monster recession, you'd be hosed.

Selling bonds and cash first is a well-studied strategy that is supported by academic studies. But it seems to me it takes a set of brass ones to keep the faith after what we are going through these days.

 

[Bikerdude]

Bogle. 100 - age = equities. My plan going forward.

 

[DblDoc]

Sounds like a flaw to me. You are increasing your risk until it reaches maximum 14 years into your retirement. If that fell in 2008 you would be most unhappy. I would think you would need some way of rebalancing and some way of belt tightening in bad times to make it work without severe loss of sphincter tone...

DD

 

[CuppaJoe]

Another thing I see as a flaw in Lucia’s plan is his over-emphasis on REITs. I had looked into my landlord’s financing as far as I could get and could see that my apt. bldg. is about 92% financed deep into a commercial REIT-style investment. I also know the guy is over-extended, is slow to pay contractors, and is dealing with multiple lawsuits, etc. I decided not to go with that part of the bucket plan. My rent is now going to the landlord’s bank.

Edit: BTW, according to Wikipedia, my landlord was CEO of a savings and loan that “was taken over by the Office of Thrift Supervision to prevent insolvency due to bad high-risk real estate loans in the savings and loan crisis of the 1980s.”

 

[mathjak107]

i think rays idea is to actually not wait until 15 years to rebalance but to do it each time stocks are up and rebalance by years of safe money left..

but even if you didnt, 15 years ago we stood at 4,000 so even if you waited until today it wouldnt be a case of selling stocks at a loss, you would be selling at 8,000 ... you just may not be as high as we once were but your still relativly okay to sell if needed..

your withdrawls would have all been based on what you set up 15 years ago, not on what you would have set up at the high a year and a half ago. the withdrawls would have all been inflation adjusted all those years but still based on the amount you had 15 years ago ....dont forget its all relative to when you started and with how much.....

 

[mathjak107]

no matter what plan you use if you dont achieve a 7% return as a long term average and inflation is still 3% then you have to reduce the 4% withdrawl rate..... with rays plan just refill all the buckets as if you were starting retirement today and thats your new withdrawl amount based on todays nest egg value...

whether you stick to the old withdrawl rate from 15 years ago and refill your buckets over the years or whether you wait until 15 years later the differences should sill be slight..... either way your selling stock when its higher, its just not as high and you may have to cut your withdrawl to match the nest egg value.... but thats true in any portfolio

 

[ziggy29]

20 years worth of less volatile investments doesn't leave much for that last, high-growth [-]bucket[/-] thimble.

20 years is on the high end, but at a 3% withdrawal rate it's still a 40/60 allocation which isn't unreasonably "light" on equities for a retiree.

If you *need* 4%, then yes, it doesn't leave much room at all for growth. In that case 15 years in the less volatile buckets gets you at 40/60.

 

[donheff]

We have talked this over before and like Rich, I like the idea of a "bucket of cash" to cover periods like the one we are in now. But the idea that you draw down that bucket until empty and then refill regardless of market conditions seems suicidal. I intend to keep the cash bucket refreshed in good periods and draw on it in bad. If the bad period lasts long enough, the cash bucket will empty. If equities are still down then, I will already have entered plan B which includes drastically cutting expenses and selling the weekend house. If real estate is still a mess I will be in plan C, ...if...if.

For plan D, Isn't there some cheap food substitute you can buy for $.05/meal or something?

 

[freebird5825]

Bogle. 100 - age = equities. My plan going forward.

Ditto to the nth power.
I recently rebalanced from a 50/50 AA (migrated to 45/55 in 2008) to a 40/60 AA (for proactive damage control for 2009). The main reason to adjust my AA ahead of time (age is 50) was my portfolio hit the upper limit of my comfort zone for maximum annual loss in 2008.
The exchange of half my stake in VFINX to VWINX (pssstt ) locked in my 2009 TLH in one simple move. Now I leave it alone for 2 years and revisit. DCA continues.

Re Lucia, I am aware of but never checked out his approach.

edited - had wrong ticker for Wellesley.

 

[Dawg52]

CD's baby. Actually, I'm more in the 100 rule camp as Bikerdude. But if I get lucky one day and recoup most of my losses, I'm gonna pretend I'm a 100 year old man.

 

[Rich_by_the_Bay]

i think rays idea is to actually not wait until 15 years to rebalance but to do it each time stocks are up and rebalance by years of safe money left..

but even if you didnt, 15 years ago we stood at 4,000 so even if you waited until today it wouldnt be a case of selling stocks at a loss, you would be selling at 8,000 ... you just may not be as high as we once were but your still relativly okay to sell if needed...

I have heard Ray say maybe you should rebalance using "value averaging" where you sweep out 50% of earnings above the originally projected amount as those years occur. But that tweak has not been tested to my knowledge, and he is vague and inconsistent about it.

I hear you as far as the long holding period being a great way to mitigate the volatility risk. And 99% of the time, figuratively speaking, I'd guess that would cover it. But living through one of those 1% volcanic markets, I really don't think the original strategy quite does it for me. Even if you don't let your bucket 2 drift to near-zero (say you start rebalancing with 2-3 years left) you are still dangerously overweighted in stocks under today's conditions, and if the market stays down 4-6 years you are in your 70s with little cash and only social security to prevent you from selling low for quite a while. Ray hints that he's leaning toward a SPIA allocation (e.g. 15-20% of overall portfolio) as part of his recent thinking. Maybe that's why.

I still like the overall approach, and will stick with it but I think I will rebalance more often (maybe every couple of years). Or maybe rebalance to maintain a 7 year cushion, not 2 years. Sure, my returns may be a little lower overalll but I'll maintain a larger, longer cushion for times like this.

Gotta change with the times. If Ray or anyone else comes up with a better-documented revision, I'm all ears. Maybe even look at a SPIA when I'm in my 70s if interest rates are favorable.

 

[ziggy29]

Ray hints that he's leaning toward a SPIA allocation (e.g. 15-20% of overall portfolio) as part of his recent thinking. Maybe that's why.

For the right situation (particularly healthy people with a favorable family history of longevity), I see no problems with using an SPIA as *part* of an retirement income strategy (assuming a sound insurer), but the problem here for many is human emotion. It's precisely times like these (when the markets stink) that people want the guaranteed income you can't outlive aspect of an SPIA. But these are also the times when an SPIA is the worst deal going because interest rates are so pathetically low, and an SPIA's payout is largely tied to the long-term interest rates at the time the contract is set.

Often you get MUCH better long-term rates when stocks are flying high, inflation is moderate and you don't have a crush of money going after Treasuries -- but that's usually not the time people think "gee, I want to get some money out of stocks and cash some of my portfolio in for a guaranteed lifetime income stream." The financial markets give no free lunch.

 

[Bikerdude]

I still like the overall approach, and will stick with it but I think I will rebalance more often (maybe every couple of years). Or maybe rebalance to maintain a 7 year cushion, not 2 years. Sure, my returns may be a little lower overalll but I'll maintain a larger, longer cushion for times like this.

I live on interest and dividends and add cash as needed to maintain lifestyle (within the 4% SWR). I usually have a 10 year cushion before I have to sell equities. I'm comfortable with that and it has served me well so far in this trying time.

 

[Rich_by_the_Bay]

For the right situation (particularly healthy people with a favorable family history of longevity), I see no problems with using an SPIA as *part* of an retirement income strategy (assuming a sound insurer), but the problem here for many is human emotion. It's precisely times like these (when the markets stink) that people want the guaranteed income you can't outlive aspect of an SPIA. But these are also the times when an SPIA is the worst deal going because interest rates are so pathetically low, and an SPIA's payout is largely tied to the long-term interest rates at the time the contract is set.

Yep, I think most of the regulars around here agree with that.

I'd just look at it line any other candidate investment for your diversification strategy. There is no other investment with the properties of a SPIA (yes, you can approach it with laddered CDs, etc. but differences remain). If conditions are right when decision time arises (including health, interest rates, carrier stability, inflation prospects, how my kids are doing re: estate needs etc.) I can see scenarios where it could be a plausible part of the big picture. Not rushing -- a SPIA has little appeal to me now.

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?

 

[ziggy29]

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]

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]

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]

.... 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..........