Ray Lucia's new book

[modhatter]

I am reading the book now, and I can tell you that there is one point that I didn't like. Ray states in his book on a couple of occasions that the future gains for the stock market are probably not going to equal what they did in the past and estimates total returns more along the 6.5 to 7% range.

Yet when he makes his comarisons of using the traditional 4 or 5% withdrawl method compared to his bucket stratagy, he always uses a 10% gain in bucket # 3 with a substantial ending balance to demonstrate what good shape you will be in at the end of 14 or 15 yrs.

I feel this is misleading, and he needs to be consistant with his numbers in his probable scenerios. Over all, I am not critisizing the book or stratagy. I think it is a very conservative and safer withdrawel plan for retired investors. But you always hope that the author for the book you just paid good money for is on the up and up, and truly believes in what they are advocating, and not just compiling words to make millions off another book.

But in all fairness, I have not finished the book, and I may have missed something. So stay tuned and I'LL BE BACK.

[ats5g]

Does Lucia, or even Grangaard for that matter, provide any actual historical simulations to back up their claims that the bucketing approach is better than X,Y, or Z approach? I read "The Grangaard Strategy" and "Buckets of Money" and have yet to see this data.

Anyone?

- Alec

[walkinwood]

I have not read his book, but looked at his website to get an idea of the buckets.

I find it hard to reconcile this with studies on the Safe Withdrawal Rate. Those studies have shown that you need 50-70% of your assets in equities to sustain a 4% initial SWR.

I'm doing these calculations in my head, so they're simplistic.

For a 7 year bucket 1, you'd need to put almost 30% of my portfolio in bucket 1 ($1M port. 7yrs at 4% = $280K. Assume return matches inflation). That leaves me with the 70% for bucket 2 & 3.

From the discussion above, it sounds like bucket 2 needs a good dollop of tips/bonds. That may get you to below the 50-70% in equities you need to sustain the 4% SWR.

It seems to me that it would work only if you put your more conservative equities in bucket 2 (say domestic large cap) and all your riskier (small/international) equities in bucket 3.

[Rich_by_the_Bay]

Quote:

Originally Posted by walkinwood I have not read his book, but looked at his website to get an idea of the buckets. I find it hard to reconcile this with studies on the Safe Withdrawal Rate. Those studies have shown that you need 50-70% of your assets in equities to sustain a 4% initial SWR.

Seems to be a lot of firey chatter about this book from people who haven't read it.

The allocations work. You annuitize bucket 1, so 4% x 7 years works out to less than 4 x your anticipated annual expense. It burns itself out at 7 years (or whatever interval you select). And you eventually annuitize your bucket 2 which, while it needs to be up-adjusted for inflation, has a 7 year headstart.

Buckets 1 and 2 combined come to about 50% or a little less of your assets in typical scenarios; they accordian a bit over long periods of time. Bucket 3 (50% or more of your total nest egg) sits in equities for a lllloooonnnnggg time.

Read the book. You may or may not like it, but at least you'll know what it says.

[mathjak107]

Quote:

Originally Posted by modhatter I am reading the book now, and I can tell you that there is one point that I didn't like. Ray states in his book on a couple of occasions that the future gains for the stock market are probably not going to equal what they did in the past and estimates total returns more along the 6.5 to 7% range. Yet when he makes his comarisons of using the traditional 4 or 5% withdrawl method compared to his bucket stratagy, he always uses a 10% gain in bucket # 3 with a substantial ending balance to demonstrate what good shape you will be in at the end of 14 or 15 yrs. I feel this is misleading, and he needs to be consistant with his numbers in his probable scenerios. Over all, I am not critisizing the book or stratagy. I think it is a very conservative and safer withdrawel plan for retired investors. But you always hope that the author for the book you just paid good money for is on the up and up, and truly believes in what they are advocating, and not just compiling words to make millions off another book. But in all fairness, I have not finished the book, and I may have missed something. So stay tuned and I'LL BE BACK.

based on rays calulations to make my plan work he figured 4% on bucket 1 ... 5% bucket 2......... 6% bucket 3a growth and income...... and bucket 3b is 8% . i dont remember seeing 10% used in any calculation,. i only remember him refrencing the fact that the markets have returned around 10% on average

[modhatter]

OK, your making me work and go back through the book to find stuff. Pg. 98 doesn't mention the 10%, but does says:

"Take the period 1966 to 1982. Let's say you had 1 million invested in a 60-40 mix of stocks and T-Bills, and you wanted to withdraw 5 % annually ($50,000 per year), plus 3 percent for inflation. You would've been able to do that for a number of years. But by the end of 2003, there would've been vertually no money left in the account ($30,000 to be exact)

If the same individual bucketized-investing 40 percent inT-Bills, 20 percent in a 7 percent yielding Reit (assuming no future growth), and 40% in stocks - he or she would have been significantly better off. That person would've taken the REIT earnings (7 percent) and fullly depleted the T-bill prtfolio for income over theseveral years, then began selling off the REITS, and then finally sold the stocks (S&P 500) The result, if that hypothetical strategy had been adapted in 1966, would have given the investor an income of about $150,000 in calandar year 2003. And his investments would have grown the astonishing sum of $4.7 million." Note: he says in 2003 - 37 years later. What about the 15 year time frame his book talks about.

As then he goes on to say:
"Remember, in 1966 the Dow stood at about 1,000 and by 1982, it was still around 1,000. While there were dividends paid, the market hadn't appreciated for 16 years. Those were devastating times, especially for retirees needing income from their portfolio.

So, then instead of looking at 37 years, which most retirees don't have, where instead would the investor have been at the end of those 16 years with that flat market between 1966 and 1982? He had to add quite a number of years for it to look so good.

Then on page 131 he has made a sort of chart called "JOHN & CHRIS'S BUCKET PLAN" He shows:
$140,000 in bucket #1 earning 4.5%
$120,000 in bucket #2 earning 6%
$390,000 in bucket #3 earning 10%
With a net value left in Bucket #3 after 15 years of $1,630,000

Now, my argument is, you don't make charts using the numbers that you have previously said you do not feel are attainable(10%) when you have said earlier on that you will probably only see future returns in the (6.5 to 7%) for stocks.

As far as how he know this system works, you can only take his word for it as all he says is "I have back tested it". There is no way to tell if this is fact or fiction. Either you believe him or you don't. I wish there was a way we could "back test" this stratagy ourselves.

The only difference in Ray's way is telling you to spend down your principal in bucket #1, giving your other two buckets time to grow bigger, which other advisors would not suggest doing. Who's right?

[mathjak107]

you can run the calculator on the website, 8% is max in his calculations.

theres lots of numbers thrown about in the book just for illustrations but arent the real working numbers. its like 10% is the figure thrown about for the average market returns but no one is ever average. average american family is 4.4 people but i never met a family like that ha ha ha

[modhatter]

Mathjak107,

Run calculations on what calculator. Are you talking FireCalc?

And thus far, I have not seen 8% used in any of his charts, but have not finished book.

[mathjak107]

no, the calculator on rays site for how much in each bucket and what you need in return to make it work

Raymond J. Lucia Companies, Inc. - Buckets of Money Planner

[chinaco]

Lucia's approach is not any different than most traditional allocation techniques. Cash, Bonds, Stock. Near term money for 5+ years in short-term instruments (safe).


I have not read his books so I cannot comments on some of the proposed micro-mechanics of replenishing the buckets. But based on his slide-show at his site. The main feature that is a little different is that he does not rebalance/diversify the stock investment until about 14 years. He lets the bond investment ride for 7 years then moves to cash.

I have read some articles that indicate that longer rebalancing periods more efficient (taxes and let the stock value grow).

Does Lucia describe how he works the stock cashout in year 14. The Demo kinda indicates that it happens at one time. Of course, there are a number of implications. Moving that amount of money might tigger AMT, plus year 14 might be the time a big stock market correction occurs. Does he talk about this in his book?

[mathjak107]

Quote:

Originally Posted by chinaco Lucia's approach is not any different than most traditional allocation techniques. Cash, Bonds, Stock. Near term money for 5+ years in short-term instruments (safe). I have not read his books so I cannot comments on some of the proposed micro-mechanics of replenishing the buckets. But based on his slide-show at his site. The main feature that is a little different is that he does not rebalance/diversify the stock investment until about 14 years. He lets the bond investment ride for 7 years then moves to cash. I have read some articles that indicate that longer rebalancing periods more efficient (taxes and let the stock value grow). Does Lucia describe how he works the stock cashout in year 14. The Demo kinda indicates that it happens at one time. Of course, there are a number of implications. Moving that amount of money might tigger AMT, plus year 14 might be the time a big stock market correction occurs. Does he talk about this in his book?

the video is oversimplified ,ray dosnt recommend you wait until buckets are empty to refill
the buckets are refilled gradually thru the years the markets are up......

the strategy is very different from just say a 60/40 hodge podge. buckets can have dedicated portfolios just for that time frame with well defined amounts . until you have tried it you cant imagine how nice and easy it is to implement and use.

rebalancing is mostley just within that bucket, so if emerging markets funds have had a long healthy run and you wanted that to be a certain % of your stock bucket then maybe you will sell the excess and buy more small cap or whatever fell below the % you wanted it to be.

[chinaco]

Quote:

Originally Posted by mathjak107 the video is oversimplified ,ray dosnt recommend you wait until buckets are empty to refill the buckets are refilled gradually thru the years the markets are up...... the strategy is very different from just say a 60/40 hodge podge. buckets can have dedicated portfolios just for that time frame with well defined amounts . until you have tried it you cant imagine how nice and easy it is to implement and use.

Then what differentiates his technique from the traditional 5+ years (expenses) in short-term, a portion in Bonds, A portion in stock. Then rebalance based on timing or trigger? I think his C/B/S allocations in the demo seem to indicate that the allocations in each (cash and Bonds) are approx 7x expenses. The stock allocation seems to be the remainder.

I think I understand what you are indicating with the dedicated portfolios for a time frame. But if one is rebalancing along the way between stocks and bonds I am not seeing the difference in the technique.

I could be all wet on the statement I am about to make... But here goes anyway.

I have read multiple books on the subject over the last 20 years (as most on this board have done). It kinda looks like Lucia is just repackaging the basic approach (academic approach) to managing a balanced portfolio in the draw-down phase. Since he is a money manager and fin planner, he must figure out a marketing description (selling approach) that is simple enough for customers (that are not savvy) to describe the traditional approach in a way that makes sense... hence the analogy of a bucket. His book is a form of Marketing, plus it serves as a mechanism to legitimize him....(well know author on the subject, on and on). The radio show is marketing (as everyone here knows). He has his marketing act down. His approach seems sound (it better be or many of us are scr3wed). But I do not believe he has come up with anything new. He has just repackaged the description of the existing (known) approach for customer consumption. Sounds like he has outline some basic rules/mechanics to the rebalancing (his signature twist on it). He has to try to differentiate himself (in a sea of financial advisers). But it seems like he does not provide new emerging insight into the problem.

If his book helps people get your mind around the problem... then it has provided some value.

[mathjak107]

you rebalance between buckets based not on gains but on years worth of money. thats the big difference. you can balance between what you have in the buckets if you so choose but not necessary unless you have sector funds or areas that really sored ala tech heavy funds in the 90's.


the whole idea is that rays plan revolves around getting a certain average return from each bucket with a risk level to match that income you desire.

in my case i need about 7%.

my retirement portfolio in real numbers has

420,000 in bucket 1

334,000 in 2

335,000 in 3a (growth and income funds

587,000 in 3b growth funds

right now im not retired so bucket 1 is holding the money for our retirement home and money for 3 up-coming weddings . it just so happens that the amount in 1 works out to 7 years income if i was retired so rays calculation works fine.


whats nice is i subscribe to fidelity monitor newsletter and use their income model portfolio in its entirety to fill bucket 2. its a nicely thought out well rounded dedicated income portfolio dedicated to just that .

i use their growth and income model to fill bucket 3a

i use fidelity insights growth model for 3b, been using that one for over 20 years.

once a week i get updates of any newsletter changes and thats it, good times or bad i dont worry about a thing anymore.

[mathjak107]

think of it this way ,in a 60/40 mix if stocks jumped to 70/30 you sell some stock and buy more bonds.

in rays system if you didnt need to refill bucket 1 as it still had 6 years worth of money in it because the bull run happened just after you started this system then there is no rebalancing between buckets yet. you can wait .

you could though choose to maybe fine tune your stock bucket, if small cap had a great run and is now heavier than you want then buy more mid-cap or large cap but you need not buy bonds . thats the difference

[Brat]

Since this approach is designed for retirees AMT is less likely to be an issue, and equities qualify for capital gains treatment if held outside an IRA providing the most favorable tax treatment.

No one can predict the future so no one can predict if year 14 is a bear year. But this will be after a 14 year run. Just for giggles, if you have access to the data, find a stinky year and go back 14. What was the total return over the period?

[Rich_by_the_Bay]

Quote:

Originally Posted by Brat No one can predict the future so no one can predict if year 14 is a bear year. But this will be after a 14 year run. Just for giggles, if you have access to the data, find a stinky year and go back 14. What was the total return over the period?

Exactly. Market down 5% that year, up 210% for the past 14 years? Who cares!

[mathjak107]

yep thats why it works, 14 years pretty much guarantees that even in a fairly normaL bear market you will be fine if you have to sell some funds

[modhatter]

No it doesn't guarantee it. As I understand the market from 1966 to 1982 was flat NO GAINS. That was a 16 year time frame, and it could happen again.

[Rich_by_the_Bay]

Quote:

Originally Posted by modhatter No it doesn't guarantee it. As I understand the market from 1966 to 1982 was flat NO GAINS. That was a 16 year time frame, and it could happen again.

No dividends??

[mathjak107]

highly unlikely that we would ever have a extended period like that again, the markets were very thinly traded and didnt include much of the public or the world for that matter. i would never base a plan on anything that remote happening again