Details of your buckets

[Dances With Fire]

Exactly. I agree with your comments since I've always said that in retirement, cash flow is everything.

Sure, you may not pursue "possibilities" since you've diverted some of your portfolio to cash/cash-like instruments (including an SPIA, which DW/me have) to maximize your possible gains. But that's the difference in the accumulation (when you're trying to "hit your number") and decumulation (when you're trying to protect/use "your number), along with ensuring cash flow for immediate retirement income needs.

+1

Protection and cash flow. With the possiblity of (some growth) with what is left in buckets 2 and/or 3.

 

[mathjak107]

The bucket system does't know how long you live, it just doesn't care how long you live. The buckets are the same no matter how old you are. If I reach the age of 100, I still want to plan for the contingency that I reach 150. I have no intention of trying to do that with 100% bond/cash.

With a bucket system, you have a separate risk tolerance portfolio for each bucket (e.g. emergency money, short term money, mid term money, and long term money). I don't intend to ever empty all my buckets (but if the doom and gloomers are right I have that option). My more aggressive buckets should spin off enough to keep my conservative buckets going and keep up with inflation. What remains in the buckets after I die is my legacy.

live like you will die tomorrow but plan like you will live forever

 

[teejayevans]

Regarding the 8 years of balance funds--- does that refer to a balanced fund such as Vanguard Wellesly or Wellington? If not, what does it refuere to? Thanks.

Yes, any balance fund (part stocks/part bonds).
TJ

 

[teejayevans]

No he didn't change it, but yes he did?

In other words, he didn't change how it works, just provided additional options, I think he calls them bucket 3A and bucket 2B or something like that.
You gotta sell books somehow ?
TJ

 

[teejayevans]

As ERD50 a bucket option would be nice for FIRECalc but even just an explanation of how it would have worked from 1999 to 2011 would be beneficial. E.g. from 1999-2002 I withdraw money from Bucket 1, and Falling interest rates caused spillage of $X dollars from Bucket 2 to Bucket one in 2005, higher stock market would cause Bucket 3 to refill the other buckets by $A and B$.

Dividing money into 3 buckets is easy, it is the flows from the buckets to the bills over time that is difficult to describe.

Worst case and what I would use if doing simulations is just to wait for the bucket 1 to empty and then move B2 into cash. It's been 7 years so you 2nd bucket should be worth more than you started. Continue until year 15, replenish both buckets.
In reality, if you do rebalancing anytime you feel your bucket 3 has grown and its time to take profits off the table, you'll be better off. If you don't like to go by "feel" or want to do simulations, then "if B3 has grown by X%, replenish buckets" would be a good easy formula to follow.
TJ

 

[teejayevans]

You have 500K your long term bucket in total stock market VTSMX. The other 500K is split in what ever conforms with the system.
Would somebody walk through the process of withdrawing 40K a year indexing it for inflation (2.8%/year from 1999 to 2010).

It works the other way, simplified version:

• Figure out how much you need, say 40K/yr
• 40K*7 years = $280 in B1. (for simplicity we'll assume inflation rate=CD rate)
• 40K + 7 years of inflation, assume its now 50K/yr
• 50K*8yrs = 400K, but you assume you will have some growth (dividends, etc), the number required today will be less, ie it will grow to 400K, so you may put in 300K into B2 if you think you will conservatively get 33% return over next 8 years
• The rest goes into B3

That's basically it, again you start with how much you need to withdrawal and work from there. I have a spreadsheet that does it but Ray likes to sue anybody who even mentions the word bucket , so I won't post it.
TJ

 

[youbet]

In other words, he didn't change how it works, just provided additional options, I think he calls them bucket 3A and bucket 2B or something like that.
You gotta sell books somehow ?
TJ

+1

Yep, as exceptions to "the system" crop up, afterthought alternative solutions (bucket 1A, 3V, 7H, etc.) magically appear and all is well.

I just can't buy into a system that sells itself by boasting of giving detailed instructions on how to withdraw during retirement but then suggests flexibility and vague decision making guidelines as variables occur over time. It's not really a system, it's just book selling jargon that helps people understand and deal with existing concepts.

There are lots of good ideas from the world of retirement finances used in the bucket system. For example, having cash or cash equivalents available for near term spending is great. I certainly do that. I'm just comfortable not calling that part of my AA "bucket #1."

 

[youbet]

The bucket system does't know how long you live, it just doesn't care how long you live. The buckets are the same no matter how old you are. If I reach the age of 100, I still want to plan for the contingency that I reach 150. I have no intention of trying to do that with 100% bond/cash.

With a bucket system, you have a separate risk tolerance portfolio for each bucket (e.g. emergency money, short term money, mid term money, and long term money). I don't intend to ever empty all my buckets (but if the doom and gloomers are right I have that option). My more aggressive buckets should spin off enough to keep my conservative buckets going and keep up with inflation. What remains in the buckets after I die is my legacy.

I don't see a single thing here that's different from an AA system, other than the jargon.

You may be incorrectly assuming that using some sort of AA system during retirement (ie., not using Lucia's bucket system) requires using the age suggestion to determine your percentage of fixed allocation. Not true at all. Here's a thread for your review where we discuss various methods people use to come up with a fixed allocation and also some critique of the age suggestion. Note that no one mentions that you must either use the age suggestion or Lucia's bucket system. There is a world of other possibilities.

http://www.early-retirement.org/for...you-determine-your-bond-allocation-54480.html

edit: I note you participated in that thread. Your comments there don't seem congruent with you being a "buckets" fan. Especially your comfort with having relatively low cash and high equity allocations. Ray would roll over in his grave (wishful thinking) if he saw that kind of high equity percentage in a FIRE portfolio beginning retirement.

 

[HFWR]

Buckets 1, 2a-d, 3.1-3.7 are all leaky.

 

[mathjak107]

I don't see a single thing here that's different from an AA system, other than the jargon.

You may be incorrectly assuming that using some sort of AA system during retirement (ie., not using Lucia's bucket system) requires using the age suggestion to determine your percentage of fixed allocation. Not true at all. Here's a thread for your review where we discuss various methods people use to come up with a fixed allocation and also some critique of the age suggestion. Note that no one mentions that you must either use the age suggestion or Lucia's bucket system. There is a world of other possibilities.

http://www.early-retirement.org/for...you-determine-your-bond-allocation-54480.html

edit: I note you participated in that thread. Your comments there don't seem congruent with you being a "buckets" fan. Especially your comfort with having relatively low cash and high equity allocations. Ray would roll over in his grave (wishful thinking) if he saw that kind of high equity percentage in a FIRE portfolio beginning retirement.

tthe way i use my buckets they differ from a traditional AA in these ways.

the major difference is the structured well defined time frames of money..

the way investments are handled such as dividends are not used directly to fund safe money buckets but only re-invested .

the biggest difference is rebalancing . traditional aa rebalances by performance or date . the buckets are rebalanced by years of money needed.

if my buckets are pretty full and markets take off i can let them run . a traditional system usually has a performance based number that triggers a rebalance or a date.

 

[youbet]

tthe way i use my buckets they differ from a traditional AA in these ways.

the major difference is the structured well defined time frames of money..

the way investments are handled such as dividends are not used directly to fund safe money buckets but only re-invested .

the biggest difference is rebalancing . traditional aa rebalances by performance or date . the buckets are rebalanced by years of money needed.

if my buckets are pretty full and markets take off i can let them run . a traditional system usually has a performance based number that triggers a rebalance or a date.

you sell equities at a loss to replinish fixed if the time frame requires?

 

[mathjak107]

never never never. , thats why the time frames are set to carry you through 15 years. we never ever had a time where we didnt hit a high in a 15 year period where you couldnt refill. refill any chance you can when your up.

could it happen where are down longer ? sure it could ,but so far never did.

that 15 year time frame was selected just for that reason. thats why i said the buckets give you very defined time frames of money unlike a traditional aa.

i believe in planning around what was,what is and what stands a reasonable chance of continuing rather than the what ifs.

 

[freebird5825]

Current age = 52.9

Bucket 1: Immediate income = COLA'd survivor pension and immediate fixed annuity, keeping on a modest budget from age 48 to 56. Still contributing to/reinvesting into retirement portfolio (AA 32/65/3).
Backup plan for involuntary COL increases between age 48 and age 56 = 30 day dividend generating muni bond fund, EE bonds, and cash reserves.

Bucket 2: Future income= modest deferred FERS pension at age 56. A lot of this will go into retirement portfolio minus a small skim for fun.

Bucket 3: Distant future income= SS at age 62, I bonds maturing, and retirement portfolio gradual drawdown at a rate dependent upon what is covered by whatever SS benefit exists,
a little more than 9 years hence from today.

 

[youbet]

never never never. , thats why the time frames are set to carry you through 15 years. we never ever had a time where we didnt hit a high in a 15 year period where you couldnt refill. refill any chance you can when your up.

could it happen where are down longer ? sure it could ,but so far never did.

that 15 year time frame was selected just for that reason. thats why i said the buckets give you very defined time frames of money unlike a traditional aa.

i believe in planning around what was,what is and what stands a reasonable chance of continuing rather than the what ifs.

So the time frames are only fixed for the first day? After that you might sell eqities, and change the time frame, at any time depending on market performance? Or the market may drop leaving you short of 15 yrs of equities? Your fixed time frames are totally flexible. Sell anytime the market is up to refill? Or watch the number of years you have in equities drop if the market falls. Have I got it now?

 

[clifp]

It works the other way, simplified version:

• Figure out how much you need, say 40K/yr
• 40K*7 years = $280 in B1. (for simplicity we'll assume inflation rate=CD rate)
• 40K + 7 years of inflation, assume its now 50K/yr
• 50K*8yrs = 400K, but you assume you will have some growth (dividends, etc), the number required today will be less, ie it will grow to 400K, so you may put in 300K into B2 if you think you will conservatively get 33% return over next 8 years
• The rest goes into B3

That's basically it, again you start with how much you need to withdrawal and work from there. I have a spreadsheet that does it but Ray likes to sue anybody who even mentions the word bucket , so I won't post it.
TJ

Thanks TJ, I have asked multiple times over 3 years how this system works and your the first person to actually provides some numbers. (For you bucket fans, this is money forum and numbers matter!).


So lets set the way back machine to July 1999. The internet is really hot, the unemployment is low, inflation is moderate but there are fears of it rising. People are debating if oral sex is really sex, and Texas governor is looking like the favorite to win the GOP nomination. (See not everything has changed).

B1=280K
(I think historically a 7 year CD ladder probably exceeds inflation by roughly 1% however for those wanting to set up a bucket system today the situation is different. A 7 year CD ladder at Penfed is 1.8% while in inflation is 3.6%. This means that if you were setting up a 40K inflation adjusted bucket 1 today for 7 years you'd need $300K. The good news is with rates so low you really can ignore taxes..)
B2= 275K
Back in 1999, the ten year bill was around 5.5-6.0 for planning purposes I assumed a 5.5% return but I will stick Bucket 2 in the Vanguard Total Bond Market
B3= 445K (1 million - B1 - B2)
I'll stick this in Vanguard Total Stock Market.

Fast forward to July 2006. The economy is doing ok. The stock market is recovering from the 2000 crash. B1 is needs to be refilled,roughly 10K remains due to CD returns exceeding inflation during this time.

As predicted our 275K in bucket 2 has grown to almost exactly 400K, 398 actually. The good news is inflation is slightly lower than predicted we now need $48,400 to keep purchasing power constant. After refilling Bucket 1 with (7 * 48,400) B2 has only 70K left.

Bucket 3 has grown just under 11% and now contains $493K. I guess the main rule with bucket 3 is to not sell at loss. So I can see selling 50K from Bucket 3 to refill bucket 2. However, this only leaves 120K in Bucket 2.
The 10 year T-Bond was yielding 5% back in summer 2006. So in order to refill bucket 1 in 7 years we need to have 340K. However, refilling bucket 2 completely only leave 225K in Bucket 3.

I think this is my main problem with the system. Over 7 years our assets have decreased by 10% and spending needs have increased 20%. I am struggling to understand what the average early retiree is suppose to do in 2006. Refill bucket 2 and leave only a small amount for inflation protection/growth, or short change Bucket 2 and risk running out of money to refill bucket 1 in 7 years? Now with the benefit of 20/20 hindsight it is obvious sell bucket 3 to refill Bucket 2. But how would you know to do this back in Summer 2006.

Now lets move to July 2011. Bucket 3 is up 20% and Bucket 2 is up 100%! Bucket 1 is probably doing better than projected because inflation has been low, you probably have 3 years (150K) left in bucket 1 but the Penfed 6% are a thing of the past 7 year ones are 2.75% today. If you refilled bucket 2 back in 2006 you've done very well total assets near $1.1 million (you are 12 years older and probably able to collect SS now or very soon). If on the other hand you didn't refill bucket 2 your total assets are around 900K, your retirement is still probably ok. However, your buckets seem all screwed up.

So Ray Lucia fans help me fill my buckets.
Bucket 1 is 160K spend rate is 52K/year. 50K in 5% CD due in 2012, 45K in 6% CD in 2013, 40K in a 4% in 2014K, 15K in MM/Checking earning 0%
Bucket 2: 240K total, 50K in Penfed 5% CD in 2021, the rest in Total Bond Market
Bucket 3: 500K total stock market.

What would you do?

 

[mathjak107]

the concept is you have the ability to go out as long as 15 years to refill your buckets.

it all depends how conservative you want to be.

i can spend down for 2 years from bucket one as an example. the following year is an up year. if im really chicken hearted i can sell a little equities and refill bucket 1. if im a more game hearted i may decided to let it run another year or 2 and see if i get another chance.

if i dont then i can start to fill bucket one from 2 and keep going waiting for an up moment to refill.

worst case is i can go up to 15 years and rebalance. some may even choose to do that.

let it all deplete, let the equities grow with out any selling along the way and hope the rule still applys and we arent down in year 15.


ill dig out my real numbers tomorrow if i have time.

 

[youbet]

Sorry mathjak, but there's just nothing special about what you're doing. Everything you've mentioned might be done by someone who is thinking in terms of AA during the withdrawal phase. You start with a 15yr/8yr/7yr balance. I start with a 50/27/23 balance. Same thing. You spend cash first. I could chose to spend cash first. You "refill" bucket one from the other buckets if opportunities arise. I rebalance towards cash from equities and fixed if the opportunity arises.

I don't get it. What's so special about starting with a 50/27/23 AA, spending cash first and rebalancing (refilling "buckets") opportunistically?

Oh, I know! It makes Ray Lucia wealthy and gives his devotees the pleasure of using his jargon like insiders of a secret club.

 

[clifp]

blah blah blah


ill dig out my real numbers tomorrow if i have time.

Look I get the concept. I explained the operations in way more detail than you have in the last 50 posts.

I am asking simple question. What would you do with the buckets that I derived from tracking real performance, real CD rates and real inflation going back from 1999.

Acceptable answer are I'd sell $X dollars in Bucket 3 or 2 and put it in Bucket 1 or 2. If X is 0, then tell me what would your criteria be in 2014 when the last CD matures I'd sell Bucket 3 if the S&P was what value.?

 

[teejayevans]

I don't get it. What's so special about starting with a 50/27/23 AA, spending cash first and rebalancing (refilling "buckets") opportunistically?

Its simply a way of calculating how much money you should have in cash, balance funds, equities. As oppose to 100 - age, 60/40, etc.

I don't understand why this is so difficult? And why some people are so hostile to a different idea?
TJ

 

[ziggy29]

Its simply a way of calculating how much money you should have in cash, balance funds, equities. As oppose to 100 - age, 60/40, etc.

I don't understand why this is so difficult? And why some people are so hostile to a different idea?

I don't know that the hostility is to the buckets concept themselves but with the idea of paying someone like Lucia a lot of money to perform it.

After all, using buckets is a form of AA much like the more conventional form of AA we discuss here. The main difference is that the allocations are in terms of years of income instead of percentages of the portfolio and that the "rebalancing" is more like replenishing the "safer" buckets from the "riskier" buckets.

To me the concept is appealing except that I can see a situation where your "safe" bucket is running low on cash even while the equities bucket is still pretty depressed, forcing you to "sell low" in order to keep the safe bucket from drying up. Sort of feels like we'll be in that mode soon, if not already.

 

[ERD50]

Its simply a way of calculating how much money you should have in cash, balance funds, equities. As oppose to 100 - age, 60/40, etc.

I don't understand why this is so difficult? And why some people are so hostile to a different idea?
TJ

I also don't think anyone is being hostile - they are simply trying to understand how this works. Skepticism has served me well over the years.

Also, I'm not even thinking in terms of 100-age for my AA. I've done plenty of FIRECALC runs, and they were all with a fixed AA.

For me, the "litmus test" is: Would the bucket strategy provide a higher portfolio value than a fixed AA after a particularly bad run of years, the 'scary dips' in portfolio balance that we see in the squiggly lines on a FIRECALC run? Everything else is personal preference, comfort and such - I want to see the numbers, that's what helps me sleep at night.

If buckets accomplish that, then I want to start filling my buckets! But yes, I'm skeptical.


-ERD50

 

[clifp]

I don't know that the hostility is to the buckets concept themselves but with the idea of paying someone like Lucia a lot of money to perform it.

After all, using buckets is a form of AA much like the more conventional form of AA we discuss here. The main difference is that the allocations are in terms of years of income instead of percentages of the portfolio and that the "rebalancing" is more like replenishing the "safer" buckets from the "riskier" buckets.

Conceptually I don't have a problem with buckets. In fact, I like the concept quite a bit. Mathjack's insistence that using dividends as form of income is crazy risky is annoying but not that important.

In truth, the fact that my favorite investing strategy dividend income, has gained a bit of a cult following in the last couple of years has me worried.
To the point that I'm thinking there is a bit of bubble in dividend stocks. I always want to be a contrarion investor. Clearly if I had loaded up on treasury bonds the last few months when all the smart money hated them, I would be richer. I can't quite convince myself to buy Treasury bonds.

However, it is possible for me to switch from a dividend investor to a growth stock or even total return investor, for example both GOOG and AAPL are looking pretty cheap despite (or maybe because) of no dividend. However, if I do this I need to develop a withdrawal strategy. (The beauty of dividend investing is you spend a bit less than your dividends) Buckets is certainly a viable candidate for withdrawals.

But before I switch from doing what I currently doing to something else. I need to subject the new strategies, like buckets, to some serious scrutiny. Ideally somebody who has been retired using buckets for the last 10-20 years would be great. Baring that I am trying to get past the handwaving stage where people says well you sell stocks when they are up, and over 15 years they will almost always be up. This is almost useless info for a portfolio retiree.

Oh ya what ERD said also.

 

[ziggy29]

In truth, the fact that my favorite investing strategy dividend income, has gained a bit of a cult following in the last couple of years has me worried.
To the point that I'm thinking there is a bit of bubble in dividend stocks.

Yeah, this worries me too. There's a desperate search for yield out there, and thus many stocks with juicy dividends are being bid up. I mean, if a stock was paying a 5% dividend and the price rises by 25%, it will still be yielding 4% -- still attractive in a yield-starved world and better than most highest quality bonds of moderate duration. Lather, rinse, repeat.

Baring that I am trying to get past the handwaving stage where people says well you sell stocks when they are up, and over 15 years they will almost always be up. This is almost useless info for a portfolio retiree.

This is the main sticking point for me. With traditional AA you have well defined dates and/or events that trigger a rebalance -- when your AA is 5% off the target, for example, or every 12 months. AA with buckets doesn't really have that fixed strategy that takes the guesswork, fear and greed out of the picture.

 

[haha]

I suppose that if one sells only their short-term assets while trying to ride out a market decline, that they are actually changing their asset allocation to the riskier more equities, less fixed income. That may be OK for some, but a standard rebalancing approach would not have you increasing your risk (as measured by your stock:bond ratio) in a market decline while still letting you hold onto to your equities.

How would that be done? The money must come from somewhere. If it comes from fixed assets, the allocation becomes skewed toward equities. If it comes equally from all asset classes, you have the reverse cost averaging method.

Ha

 

[haha]

But before I switch from doing what I currently doing to something else. I need to subject the new strategies, like buckets, to some serious scrutiny.

There is almost no chance that the concept of buckets brings anything new to the table. It is just clever marketing, and retired investors are always half scared and looking for anything that will reduce anxiety.

Buckets are just a way to keep from going all in, which is very often a good idea however it is pitched. Anyway, I am sure that mathjak will make some new converts since he is very confident.

Re: your point about a dividend stock bubble, I think that one must be careful as most times, but for example Walmart is on many measures selling cheaper than in March 2009. A really good way to get a historical look at your stocks of interest is their price/sales ratios.

I think that is a nice way to go. I suspect some folks couldn't stand the volatility, but something tells me you will be rewarded (just don't panic the next time they drop 40% like they did back in 2008).

If you had been around here you would realize that he was retired then, and no, he did not panic. He did not even get nervous.


Ha