Bucket Strategy Question - When to Draw from Bonds & Stocks

[DawgMan]

Year 1 retired and had moved from a pure Total Return approach to more of a 2 Bucket approach. At the beginning of the year I started to effectively ladder 10 years worth of individual bonds based on a higher than average spend (further flexibility built in due to over 50% highly discretionary). In my case, I felt like this approach helped me feel a little more comfortable seeing 10 years worth of spend secure and then letting everything else run in equities for both growth and maximizing legacy. This approach will probably have me swinging between a 60/40 - 75/40 AA at any given time depending upon market performance. Simple plan is to draw on bonds in years when stocks are down and draw on stock to cover spending/replenish bonds when stocks are up. My initial plan was not to touch stocks until they recovered/hit a new high from the previous high/or starting benchmark, or in my case, my portfolio balance as of 12/31/21. That said, I realize the Bulls, as measured by a 20% increase from the end of a Bear market start the party, but may take a few years to recover to a new high. The chart below illustrates this.

For those of you who use a Bucket system, what are your rules for pulling from the equity bucket? Only when it hits a new high/positive annual returns or are you hitting it once it is defined as a Bull market, despite not hitting a new high?

 

[jazz4cash]

I don’t see how it makes any difference whether you draw from stocks or bonds if you are rebalancing. I draw from bucket #3 which is a ladder of fixed income including CDs that are tough to rebalance. Selling individual bonds would be tough for me also since they are down too. Right now I’d be more inclined to widen rebalance bands but so far I’m still within target allocation per IPS.

 

[pb4uski]

While I don't use the bucket system, I could see a decision rule of backfilling the longest rung of the ladder if equities are higher than the beginning of the year or higher than some target level of equities... if equities are less than the target then defer backfiling the longest rung until equities exceed the target.

 

[ncbill]

Only bucket approach I'd use is this one:

https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/

It involves saving an additional 2.5x (so 27.5x total) in a cash bucket that is never refilled once empty...but the cost is modest for the benefit.

 

[DawgMan]

While I don't use the bucket system, I could see a decision rule of backfilling the longest rung of the ladder if equities are higher than the beginning of the year or higher than some target level of equities... if equities are less than the target then defer backfiling the longest rung until equities exceed the target.

So this was my thought in moving from a pure TR, rebalance to set AA every year. While I can appreciate the "won the game, why keep playing" approach, I tend to lean into "keep playing" approach based on taking some level of reasonable risk since there is a high probability of a large legacy. In my case, looking at historical data such as the chart provided, other than the Great Depression which took over 22 years to recover (not sure any real strategy would have been effective then!?), it appears you are looking at an average of 22 months to recover and run with the Bulls. Having 10 years of Bank in laddered bonds obviously goes beyond that, but mentally "makes me feel safer" to let the balance run in equities, even if/when they run higher than my previous 60/40 AA I had previously. I will still rebalance my planned equity mix each year, but only replenish the bonds once equities recover. Perhaps 20, 30 years from now I will look back and see that both approaches ended up achieving similar results. Time will tell.

 

[DawgMan]

Only bucket approach I'd use is this one:

https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/

It involves saving an additional 2.5x (so 27.5x total) in a cash bucket that is never refilled once empty...but the cost is modest for the benefit.

I suppose I get the attraction to this when starting out, effectively providing 2.5 years of runway in the event the market goes Bear year 1 (which is my case). I did not read the whole article, but I am guessing if you burn through the 2.5 years out of the gate, you are at the mercy of the markets and WR based on a certain AA?

 

[Montecfo]

Everyone has this issue to some extent. When to liquidate investments to create cash.

As an active investor, I am regularly generating cash when I sell or lighten on a position. I add to my cash "bucket" (if you wish to call it that) as needed from proceeds. And this tends to happen more in strong markets.

Over the past few years, I have had more funds in bond proxies such as CDs or MM, due to low bond yields and duration risk. As those have run their course there tends to be ample cash for the cash "bucket" as well.

 

[audreyh1]

To get annual cash, I sell a fixed x% of my portfolio every Jan based on the prior Dec 31 value. Exactly which assets get sold depends entirely on rebalancing the remainder back to my fixed AA.

This is pretty simple really.

I also have a large enough fixed income allocation that I don’t have to worry about many years worth of liquidity.

 

[ncbill]

I suppose I get the attraction to this when starting out, effectively providing 2.5 years of runway in the event the market goes Bear year 1 (which is my case). I did not read the whole article, but I am guessing if you burn through the 2.5 years out of the gate, you are at the mercy of the markets and WR based on a certain AA?

In the example its a "4% rule" withdrawal rate...IIRC, 80/20 AA for the main portfolio.

Which survives for 50 years (not just 30) with the "cash bucket" (an additional 2.5x of portfolio, "cash" = 3 month T-Bill)

Once emptied, never refilled:

"...we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater.

Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account again.

So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement."

 

[DawgMan]

In the example its a "4% rule" withdrawal rate...IIRC, 80/20 AA for the main portfolio.

Which survives for 50 years (not just 30) with the "cash bucket" (an additional 2.5x of portfolio, "cash" = 3 month T-Bill)

Once emptied, never refilled:

"...we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater.

Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account again.

So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement."

Interesting that 2.5 years of cash with an 80/20 AA will buy you 20 more years However, if would seem that if you retired this year and we continue with another 20% drop in 2023 you might quickly hit a traditional probability of an 80/20 AA as opposed to 50 yrs. I need to dig into the article.

Perhaps my approach is more conservative, but for now, that's my plan (subject to change as I go).

 

[ncbill]

Interesting that 2.5 years of cash with an 80/20 AA will buy you 20 more years However, if would seem that if you retired this year and we continue with another 20% drop in 2023 you might quickly hit a traditional probability of an 80/20 AA as opposed to 50 yrs. I need to dig into the article.

Perhaps my approach is more conservative, but for now, that's my plan (subject to change as I go).

Remember, historically annual equity returns have not been independent.

So, rather than 20% drops year after year what is more likely is a 20% drop followed by a significant gain the next year.

Which is why I commented on another thread that I don't try to invent scenarios that are worse than actual history.