Ray Lucia...Buckets of Money

[Mr._johngalt]

Have you looked at the opportunity cost of having a large cash position during a bull market?  IE., you collect 5% - 6% on a large chunk of your portfolio while the equity market returns 7% - 8% over that same time period?

I know nothing about this book (other than what is posted here).
I am in a position where I get 5 -7% on a portfolio (if you can call
it that) which contains no equities. I am fully prepared to see the
equity markets return in double digits and to miss out. I also miss
out on any plunges, and just keep cashing those boring dividend
and interest checks. Not too unusual at my age I guess, but I took
this position right out of the (ER) gate and stuck with it.

JG

 

[Rich_by_the_Bay]

But tell me this.....do you wind up with a significantly larger cash position than you would otherwise?.

Youbet,

Yes, probably, if you stick to the typical guidelines and examples he gives. Depends on the size of your nest egg: your cash position is defined not by a percentage, but by 5-7 years worth of expenses. So if you spend 50K per year, you might have 250-350K in cash and near-cash. With a 1mm nest egg, that's a high percentage. With a 10mm nest egg, it's lower.

With a desire to have no more than 5% in cash, it would be hard to stay true to the spirit of the Buckets plan, IMHO. Might be more compatible with a Clyatt-type withdrawal approach.

OTOH, you might find aspects of Buckets which you like and can adapt to whatever you feel comfortable with. It does seem to enforce discipline without being overbearing.

 

[mathjak107]

I know nothing about this book (other than what is posted here).
I am in a position where I get 5 -7% on a portfolio (if you can call
it that) which contains no equities.  I am fully prepared to see the
equity markets return in double digits and to miss out.  I also miss
out on any plunges, and just keep cashing those boring dividend
and interest checks.  Not too unusual at my age I guess, but I took
this position right out of the (ER) gate and stuck with it.

JG

mathjak107
As long as your return can grow with inflation you are fine as the 7% i need right now is based on 3% inflation. I dont know any way to continually do that without stock. Theres plenty of fixed income ways yielding that but very little chance of keeping up with inflation

 

[mathjak107]

What percentage of your total portfolio to you have in each of the three buckets?

What consideration do you give to where qualified and non-qualified dollars go?

Are the CD's in bucket one laddered?

I understand that holding a large cash position could make you feel more comfortable with being agressive with your equity position.  I'm certainly not looking for that.  Considering I'm fully retired with no intention of ever working again and I'm in my late 50's, my portfolio would be considered by many to already be too aggressive....... 

bucket 1 is laddered but i dont go longer than 1 year.

i make no difference between qualified and non qualified at this point as im not drawing income yet. . i did try to get most of my stock funds in the taxable portion and my bonds and interest bearing stuff in the ira's.

The large cash position is based on what the cash is for if your not ready to draw income.  In my case we will be using alot of it over the next 2 years or so.  If i wasnt i may have more in the other buckets, in fact if your not drawing income the calculator on line wont even figure a bucket1 it goes right to 2& 3.

 

[mathjak107]

Over a 14-year period, any terrible market should have recovered--it has in the past.

Even more interesting is that if you pull out random blocks of 14 year periods of time and look at the returns they all seem to migrate back to the same average annual returns .

I was hard pressed to find any period that didnt yield the same return on average,the law of large numbers definately holds true .

 

[youbet]

Youbet,

Yes, probably, if you stick to the typical guidelines and examples he gives. Depends on the size of your nest egg: your cash position is defined not by a percentage, but by 5-7 years worth of expenses. So if you spend 50K per year, you might have 250-350K in cash and near-cash. With a 1mm nest egg, that's a high percentage. With a 10mm nest egg, it's lower.

Thanks Rich. Despite still not having gotten to the library to get the book, I think I'm starting to understand where Lucia is going. If you RE when your portfolio's SWR X portfolio value = desired retirement WR, then Lucia is going to have your cash allocation in the ballpark of 25% - 30%. The good news would be that you'll use that 25% cash positon as a steady source of income despite market conditions. The bad news is that your portfolio will probably not perform as well over time. I'll go into Firecalc and run some scenarios where my cash position is that high and see how it looks........

BTW, I understand your example where the WR is $50K and the portfolio is $10MM. Sure the cash allocation is low, but, of couse, that's only a 0.5% WR and not very realistic. Typically, folks would withdraw $50K from a $1.25MM portfolio (4%) and that would make 7 years of cash = to 28%. That is $350K/$1,250K. And, for me, that's a lot of cash unless I've decided I want a defensive allocation.

OTOH, you might find aspects of Buckets which you like and can adapt to whatever you feel comfortable with. It does seem to enforce discipline without being overbearing.

Well, as I've said, I gotta go look at the book since otherwise I'm still only going by the info on his web site and the explanations I've read here. (I appreciate the explanations!) The methodologies I followed during the accumulation phase and those I now follow during the withdrawal phase are a hybrid developed over the years, definitely not the methodology of any one "guru." But there is always room for improvement through more reading, research, etc.

But, sheesh, why did he have to give his system such a goofy name? "Buckets of Money." Sounds like something you'd hear on a late night TV infomercial!

 

[Rich_by_the_Bay]

By the way, Lucia's bucket one essentially gets annuitized over 7 years, not just "SWR'd." Perfect place for CDs, MMFs or <ducking>a fixed annuity if rates justify</ducking>.

 

[REWahoo]

...Perfect place for... <ducking>a fixed annuity if rates justify</ducking>.

Just more clutter.

Agreed.

 

[Brat]

I just returned from his conference. "Buckets of Money" is really designed for folks in or approaching retirement, not for the accumulation phase. It is a preservation of income approach because time is not on our side if the market tanks. He said that if you are in the accumulation phase Bucket 1 could be empty.

Bucket 1 is where you put very secure money to pay out for the number of years you are comfortable with during the draw down phase. Bucket 2 is the good-old reliable moderate growth & income bucket (low StD), Bucket 3 is for more volatile growth investments.

He provides formulas so that the retiree can determine how much they need in each area. While he has a total of 14 years for buckets 1 & 2 and weights them equally I found that my bucket 1 is small (4 years worth) but my bucket 2 (OAKBX AND DODBX) is 3 times the size he suggests. At the present time I am not driven to divest some of either for bucket 1.

I didn't take the 5:20 ferry, decided I would rather take the next one and be a little late. Breakfast was decent. He handled about an hour's worth of specific questions and did very well. One person has a tanked variable annuity (he indicated that he rarely recommends them), after expressing condolences he suggested a couple ways to rescue what value is left - depending on the contract terms. Ben Stein predicts significant increase in taxes because the current administration had driven the deficit so high – and he said he is a Republican. He bemoaned both corporate and government ethics. Event was worth my time. [When I put my parking receipt in the pay machine it gave me a get out of parking free message (Hilton charges $6) so I purchased a lotto ticket.]

 

[mathjak107]

Glad you enjoyed the presentation. Not having ever heard of ray my wife and i went just because it was something to do . We were blown away by the financial talent and showmanship of his group.

Now you understand why i stress the fact that a retirement and pre-retirement phase is structured different than the accumulation phase and thats what is a new concept to most people.

Going from the phase of "lets capture and maximize every last point we can of growth" to the "lets not grow poorer " phase is very important.

From the questions we always see come up about "but what if i dont have a large perecentage in stocks and the market goes up ill miss it"
you can see most people still try to carry that thought thru even in retirement and get caught getting poorer at times doing it.

Remember the market dropping drastically is a great buying opportunity in the accumulation phase.

The market dropping drastically in retirement or pre-retirement is financial sucide if you need to sell stock to draw income over a prolonged downturn

 

[ferco]

Does anyone know the rational for Lucia's use of 7 year intervals as opposed to say 5 years. Paul Grangaard in his book"The Grangaard Strategy" (chapter 12) uses a 10-year model.

I guess any interval combined with Bob Clyatt's suggestion of maintaining some part/part-time work would turn out just fine....it would certainly reduced the number of calculations and stress considerably and probably delay the onset of senile dementia from cerebral inactivity of doing nothing.

 

[mathjak107]

The 14 years between buckets 1 and 2 leave a fairly safe assumption that if you even waited until buckets 1 and 2 were empty, back testing 14 year time frames seems to always equal the average annual gains that you need to make the income stream work .

Pulling any 14 year periods randomely always averaged out to the average return for that asset allocation. You could shorten up buckets 1 and 2 but you may differ slightly in your average annual returns ,using 10 year periods still had to much variance to say for sure that you will almost always achieve a certain amount of average gains by that time frame.

. Those laws of large numbers are hard to make come out any different with longer periods of time.

 

[hogwild]

Today's Ray Lucia radio show (second hour) has a pretty good explanation of how the buckets are replenished over time. A caller asked a question about when bucket 2 gets replenished. You can listen to the 10/2/06 hour #2 archive at this site:
http://www.businesstalkradio.net/weekday_host/Archives/rl.shtml

You can skip thru the seemingly endless commercials.

 

[donheff]

Today's Ray Lucia radio show (second hour) has a pretty good explanation of how the buckets are replenished over time.

Actually, it is still a very vague explanation. He clearly says that you never let bucket 2 get empty because you don't want to be in a position of having to tap into bucket 3 in a bad market. He even adds a bucket 3a of REITS for "lazy bucketeers" to get several more years of relatively safe money to avoid touching bucket 3 in a bad market. The term "lazy buckteers" implies that alert bucketeers are actively pouring.

Sooo - the clear implication is that your pour funds down into bucket 2 from 3 (and presumably from 2 to 1). But he doesn't give any examples of when and how you would best do it (e.g. how high do you want the equity return to be in order to warrant adding how much to bucket 2, etc.) A discusion of just that methodology would be very helpful.

Ray did give a great example of a guy retiring with a $1M portfolio in 1966 (bad, bad timing) with $50K expenses inflated 3%/year. With a standard 60/40 portfolio he went balls up in 2003. Same portfolio but drew from the bond portion first (e.g. pull from a simple bond bucket during the bad years) he ended up with $1M+. Fully bucketized and the guy ended up with $4M+

 

[mathjak107]

MY plan is to channel some money into buckets 1 and 2 every year the markets up

 

[Rich_by_the_Bay]

It's true that on the one hand, he gushes about how the money in bucket 3 remains untouched for 14 years and is almost guaranteed to be up (probably way up); then on the other hand, he cautions you to never let bucket 2 go dry, implying that you have to cherry-pick bucket 3 to do that. Obviously, bucket 3 does not truly remain untouched in this strategy.

My take is to truly let bucket 1 almost deplete. If the market has done well, I'll fill it from B2 and prune B3 a bit to give B2 a drink. If the market is bleak, I'll sit tight a bit longer, using B2 to buy me a few years more in B1 (to live off of). Somewhere in that 10-14 year period, at least some part of the B3 allocation will be up nicely, and can be used to replenish B2.

I think you have to rebalance among the buckets here and there, but you don't want to be hasty about it. The closer you can get to 14 years between bucket re-allocation, the better; you just don't want to be forced to do so in a strongly down market, so

 

[mathjak107]

I dont think it matters either way. If you wait until empty the laws of large numbers almost , repeat almost always will give you about a 7% return with his breakdown. By doing it every up year you may take some potential growth money out of bucket 3 but by the same token you may sell higher at some of the sales by catching a market peak then by waiting until the end.

 

[donheff]

MY plan is to channel some money into buckets 1 and 2 every year the markets up

Yeah, that is how I viewed it. I think I would do that and keep buckets 1 and 2 full as long as consecutive good years continue. Once a downturn starts, however, I am not sure that I would start pulling from 3 on the first good year. After reading all these posts I am thinking if we could get Ray to articulate his method better he might say something like "channel some money into 2 any time 3 is up sufficiently to make the historical (from the point you bucketized) bucket 3 average annual ROI better than the 'safe' rates in bucket 2." At the same time pour any excess generated in 2 into 1. From that point on start again as at the beginning. Still not sure how quickly and deeply to start pouring once the recovery gets to the point I described.

Ray needs to provide some examples to optimize the strategy. But I am liking his buckets again.

 

[Rich_by_the_Bay]

Another approach could be to rebalance B3 by sweeping the gains on the winning asset allocations directly into B2 when the whole market is up, while rebalancing internally within B3 when it is down or lagging. Still feel better leaving B3 to itself. Maybe apply the rebalancing strategy only after B1 is gone.

One of you who gets Ray's radio show live should call in on this: they love bucket questions.

 

[d]

for what is presented as a simple approach ... there sure seems to be a lot of confusion on how it is supposed to work! nonetheless, ray's getting a lot of ink on this forum.

 

[razztazz]

for what is presented as a simple approach ... there sure seems to be a lot of confusion on how it is supposed to work! nonetheless, ray's getting a lot of ink on this forum

That's what I was thinking. Reminds me of that Elliot wave thing. It's so simply everybody has their own way of interpreting it.

I still don't see the diff between 3 buckets and 2 buckets.ie 50% money markets (or CDs, or short term bonds) and 50% reasonably placed equities

No difference except maybe the 3 buckets is apparently hard to understand and the old 2 bucket way is easy.

 

[Brat]

I see it as much simpler. 1 is the CD, quality bond type part of your investments, 2 would be the equity-income type (such as a balanced fund) - funds that Forbes gives an B+ or better in down markets, 3 is where you put growth stuff with a high StD.

Right now my bucket 1 is low and 2 very heavy. Bucket 1 will be filled in the next year or two. If my returns in 2 start dropping (which would likely happen in a down market) I will bring 2 down by filling 1, then 3.

 

[Hydroman]

Five pages of discussion and it still is not clear to me.

Lets go with the 1M portfolio with a starting withdrawal rate of 4% equating to $40,000 per year. Using 3 buckets with bucket 1 and 2 each containing 7 years expenses, how would each the following buckets be invested in terms of allocations:

Bucket #1: $280,000
Bucket#2: $280,000
Bucket #3: $440,000

It is also not clear to me whether the intial fill of buckets 1 and 2 should be calculated with pre-inflation dollars as above or should the 7 years expenses in each bucket be adjusted for inflation, meaning the starting deposits will be much higher then the above. I am thinking that if bucket 1 is cash and bucket 2 is low risk investments then buckets 1 & 2 are not going to keep pace with inflation and thus the initial deposit of 7 years expenses in each will need to be adjusted for inflation otherwise the funds will not last 14 years.

If it is simple, make it simpler for this simple guy.

Thanks

 

[haha]

I guess any interval combined with Bob Clyatt's suggestion of maintaining some part/part-time work would turn out just fine.....

Practically any semi-sane approach would be made much more secure by the ability to earn current wages at reasonable hourly rates.

If your bucket's got a hole in it, best refill from some source other than another bucket which may also have a hole in it.

Face it- workers have to survive if the economy is to survive. On the other hand, retirees of any age are redundant.

Ha

 

[JohnEyles]

It seems to me that the fundamental premise of buckets is that
instead of spending down your portfolio proportionally to its allocation
(which is what happens if you rebalance every year), you'll do much better
by spending the more conservative parts of your portfolio first, and then
gradually dribbling money from riskier to more conservative investments
(in other words, selling equities in Bucket 3 in order to replenish 2 and 1).

If you rebalance periodically (at least annually), then you are more or
less doing this selling mindlessly. The idea of buckets is, instead, to do it
opportunistically. But, isn't this just another name for "market timing" ?
Maybe so, maybe not. If the decision is made emotionally, then yes.
But sensible rules could be imagined, e.g. always sell from 3 when its
annualized performance (since the beginning) is equal to the long-horizon
gain you'd assumed from the get-go. Lucia seems to be side-stepping this
issue of exacly what these rules are. Maybe it's in the book ...

What would be REALLY cool would be if FIRECalc had an option (in the
"How Is It Invested ?" tab) that allows for a bucketized system. The main
difference, of course, is that instead of rebalancing every year (as FIRECalc
does), the movement of money would occur opportunistically according
to such rules. If bucketing works (and I've become pretty convinced it's
a good idea while writing this) , then FIRECalc should show better SWRs !