Withdrawal Strategies-Bucket study

[OldShooter]

AFIK, the bucket approach is not a religion. No pope. No doctrine. No risk of being burned at the stake or tortured for apostasy.

To me, an AA focus and a bucket focus are just mental accounting; thinking about fungible money in ways that are useful. https://en.wikipedia.org/wiki/Mental_accounting

So we look at our portfolio both ways. AA is useful especially when thinking about volatility. Buckets are useful when thinking about liability matching. An AA that holds only long bonds may become somewhat problematic from a liability matching point of view when real estate taxes are due on Tuesday, so both views are useful for planning.

People gripe that many bucketeers don't have hard and fast rules for moving funds among buckets, but typical AA rebalancing rules produce very small changes and, from history, AAs within a fairly wide range produce the same results anyway. So, nice clean rules but basically busywork. I am quite comfortable with a flexible refill policy; sell assets when things are looking good, up to the point where the next x years of liabilities are matched with suitable asset liquidity. Done. No sleep lost.

"Cash" is another problem in many threads here. Endless threads talk about holding "cash" without specifying what that word means. I have two twenties and a five in my wallet; that is cash. Everything else is "assets" with liquidity and risk characteristics selected to suit future liability matching.

Finally, I'll predict that all AA-ers will find their inner bucketeer when they get to a point where rebalancing would require that their fixed income tranche fall below their comfort point.

So, @winpplui, there is no "the bucket strategy." It is a way of thinking about liability matching that, depending on the practitioner, comes with a varying burden of rules. DW and I usually think in terms of two buckets, near and far, or possibly three: near, far, and estate. Refills? These are basically attempts at market timing, so we'll go with our best guess.

[RobLJ]

Saw your post just before I went to bed; you're right that most "bucketists" think of buckets as completely trickle-down (not trickle-up into the stock bucket).

But I was thinking (I think) of an article posted quite a while ago by Evensky (I think) in which he essentially advocates two buckets--a five year or so cash bucket then the rest stock/bonds. Presumably one would rebalance between the various stock and bond components. However, you are still right in that here there is no hint of drawing from cash to rebalance--just between the stock and bond components. (Edit: His approach is fairly similar to what OldShooter posted--I hadn't read it before posting this and is "behavioralist" in trying to keep his clients from panicking in downturns.)

I think Benz interviews him a lot. It is an interesting interview:
https://www.morningstar.com/articles...ement-planning
He appears a little more flexible on "bucketing" than most bucket systems, but your description is more accurate of most/all of them.

Quote:

Originally Posted by Out-to-Lunch It appears that you have a quite different notion of what a bucket strategy entails than I do. I don't see anything here to suggest that one would ever raid the cash bucket to buy stocks. https://www.morningstar.com/articles/840177/the-bucket-approach-to-retirement-allocation Rebalancing is the hallmark of a normal, NON-bucket strategy. The entire point of a bucket strategy is to avoid the kind of rebalancing you are discussing: (https://www.marketwatch.com/story/do...ime-2019-02-12 )

[rt-texas]

I'm also one of those people who uses the buckets as more of a mental strategy. Normal 65/30/5 AA but in my Excel sheets I have three buckets that help keep me disciplined. Next three years, 4-9 years and 10 till death do us part.

I just assign on paper where each fund or etf "belongs" so to speak. Helps me not lose sleep when things like March 2020 happens.

Have the next 9 years covered no issue, most downturns last max five years, so long term bucket no need to touch for a while.

[Puravida1]

Exactly right. But for me this is the key to FIRE. As its an Early retirement, you implicitly have the option to keep working. It takes confidence in your plans to be able to pull the plug on your working income and retire early. You have to really believe you are doing the right thing and wont run out of money. So its even more important to know how your plan was put together than the actual answer itself. Hence the mental accounting. Better than hiring an advisor who is paid a fee to tell you an answer that they know you want to hear. I know my approach does not exactly follow the standard strategies, but it is close enough to the text book advice and it lets me sleep easy.

[Out-to-Lunch]

Quote:

Originally Posted by Puravida1 Exactly right. But for me this is the key to FIRE. As its an Early retirement, you implicitly have the option to keep working. It takes confidence in your plans to be able to pull the plug on your working income and retire early. You have to really believe you are doing the right thing and wont run out of money. So its even more important to know how your plan was put together than the actual answer itself. Hence the mental accounting. Better than hiring an advisor who is paid a fee to tell you an answer that they know you want to hear. I know my approach does not exactly follow the standard strategies, but it is close enough to the text book advice and it lets me sleep easy.

Sounds good to me!

[Huston55]

Quote:

Originally Posted by Puravida1 I do like the conceptual appeal of the bucket strategy but its not really in conflict with a specific asset allocation. Heres what I do. 1) start with an annual budget - say 50k 2) Then I have a series of portfolios with different risk based asset allocations based on when I need the money i) 2 years expenses in Cash - bucket 1 ii) Next bucket has 3 years inflation adjusted expenses - bucket 2 - this has money needed 3 to 5 years from now so use a Conservative Asset Allocation iii) Next bucket has 5 years inflation adjusted expenses - bucket 3 - this has money needed 5 to 10 years from now so use a Moderately Conservative Asset Allocation iv) Next bucket has 5 years inflation adjusted expenses - bucket 4 - this has money needed 10 to 15 years from now so use a Moderate Asset Allocation v) Next bucket has 5 years inflation adjusted expenses - bucket 5 - this has money needed 15 to 20 years from now so use a Moderately Aggressive Asset Allocation vi) Everything left is in the last bucket - bucket 6 - this has money needed 20 years+ from now so use an Aggressive Asset Allocation 3) Map all your money into these buckets 4) Now take a step back and add up the total amount of money you have in your Asset classes across all the buckets. This is going to result in an overall Asset Allocation. Use this to invest. This strategy has the advantage of the simplicity of an overall Asset Allocation at the same time as the conceptual appeal of the buckets. I like how it is bottom up based on expenses rather than top down based on how much money you have. I also like the fact that it forces you to be more conservative when you don't have enough money and more aggressive when you have more than enough. Human nature pressures you to do the opposite.

This is more buckets than I'm used to seeing. I'm curious how you actually invest for six different buckets. Do you select different MFs/ETFs, do you blend adjoining buckets into the same MF/ETF? Pls share the nuts & bolts of how you create and maintain your buckets.

[Puravida1]

I use ETFs. The important thing is that there is no need to have different accounts or positions for each bucket. You are just assigning money from each Asset type in each bucket to part of each position. Its basically just a ladder of portfolios using the model portfolios published by the major financial institutions. So for example if you are supposed to have an amount of Large cap equity in three of the buckets you can use the same ETF for all three buckets and just own a single position.

[ncbill]

This is the only bucket strategy I'm considering:

https://earlyretirementnow.com/2018/...ibility-myths/

Note the "cash bucket" is never refilled once depleted...it's a method for reducing sequence of return risk (SORR) early in retirement.

[audreyh1]

Quote:

Originally Posted by ncbill This is the only bucket strategy I'm considering: https://earlyretirementnow.com/2018/...ibility-myths/ Note the "cash bucket" is never refilled once depleted...it's a method for reducing sequence of return risk (SORR) early in retirement.

Well, I always wondered about that. But Benz at Morningstar never mentioned it, so I assumed it was replenished when equities were hopping.

In contrast to your link, I’m pretty sure Benz considered the cash bucket part of the starting portfolio and not in addition to it.

[Out_the_Door]

Quote:

Originally Posted by rt-texas I'm also one of those people who uses the buckets as more of a mental strategy. Normal 65/30/5 AA but in my Excel sheets I have three buckets that help keep me disciplined. Next three years, 4-9 years and 10 till death do us part. I just assign on paper where each fund or etf "belongs" so to speak. Helps me not lose sleep when things like March 2020 happens. Have the next 9 years covered no issue, most downturns last max five years, so long term bucket no need to touch for a while.

I do exactly this but with a different asset allocation (65/25/10), and with a glidepath that will reduce my "cash and bond bucket" when my pension kicks in (5 years) and then again when SS kicks in (7 years)

[Puravida1]

This is a curious one. If its early retirement we are talking about a timeline of 30 to 40 years. The cash bucket they are talking about is only a couple of years long. So for the first two years you need 2 years cash for SORR risk and then after that you dont need any cash at all? What made SORR risk go away?

I think this highlights the need for building your own plan that you are comfortable with.