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I think I might be a bucket system guy...
Old 04-18-2020, 07:27 PM   #1
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I think I might be a bucket system guy...

So, my plan was to launch at the end of last year, but I chose OMY as I determined I was not quite ready (psychologically) to cut the cord. For years, I have bought into the Total Return approach, but a I started running "what if" scenarios with our current crisis and am discovering the bucket system may be the right approach for me. I have been a 60/40 guy with some consideration drifting as low as 50/50 or 55/45 buying into the "won the game, why play" philosophy.
Doing a little reading, it appears even using a relatively conservative 3 bucket system approach I end up landing at a similar place with my AA as a Total Return investor, but the bucket system allows me to play Jedi mind tricks so I sleep well. Where I struggle some is what do you do if you have more than what you arguably need? Do you take the excess and throw it into bucket 3 which gives you a more aggressive AA? Or do you just follow a preset AA in tandem with your bucket structure? I can see an argument for both. For those who bucket, do you add more to bucket 3 if your cup runnith over or do you just ratchet down your SWR and run a shadow AA?
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I think I might be a bucket system guy...
Old 04-18-2020, 07:40 PM   #2
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I think I might be a bucket system guy...

I’m 54 and DW is 57 and most of our stash is tied up in tax advantaged accounts we can’t touch until 59.5. My j*b is getting iffy and DW is about to get laid off, so I have made the 403b and TSP accounts we can get our hands on using the Rule of 55 much more conservative than the rest of the stash. There is enough there to bridge till DW turns 59.5. Seems prudent.
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Old 04-18-2020, 08:26 PM   #3
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To me it all sort of came back to the same thing. Let's say that your WR is 4%. Bucket 1 is 1-2 years of withdrawals so 4-8%. Bucket 2 is 8 years of withdrawals so that is 32%. Bucket 3 is the remaining 64-60%. Boil it all down and you're still ~60/40... just another way of getting there.

My understanding is that everything beyond about 10 years of withdrawals is in Bucket 3.
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Old 04-18-2020, 08:41 PM   #4
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Since my retirement portfolio allocation is half fixed income (AA 50/50) I already feel like buckets 2 and 3 are covered even using total return approach. I just use normal rebalancing rules to move between them. So it’s rebalancing, not bucket rules.

And I withdraw annually for income which I suppose could be bucket 1. I also tend to keep at least 2 years worth of expenses in short-term funds in addition to the annual withdrawal. So that’s definitely like a bucket 1.

To me the AA approach could always be viewed from a bucket perspective though the replenishing rules are different.
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Old 04-18-2020, 08:50 PM   #5
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Where I struggle some is what do you do if you have more than what you arguably need? Do you take the excess and throw it into bucket 3 which gives you a more aggressive AA? Or do you just follow a preset AA in tandem with your bucket structure? I can see an argument for both. For those who bucket, do you add more to bucket 3 if your cup runnith over or do you just ratchet down your SWR and run a shadow AA?
This is a big question and it comes down to personal preference. A lot of people here seem to prefer reinvesting what they don’t spend, which is effectively lowers their withdrawal rate. I do the opposite as I prefer to have the extra funds available now rather than reinvesting them for more (or less) later.

This is analogous to a wealthy investor deciding whether to invest aggressively or conservatively. If either way meets their goals then it comes down to personal preference.
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Old 04-18-2020, 09:13 PM   #6
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Doing a little reading, it appears even using a relatively conservative 3 bucket system approach I end up landing at a similar place with my AA as a Total Return investor, but the bucket system allows me to play Jedi mind tricks so I sleep well. Where I struggle some is what do you do if you have more than what you arguably need?
I found the Retirement Manifesto's bucket strategy a useful tool to help me sleep at night. With all the recent market gyrations I worry about having enough cash and income-oriented investments to ride out the storm. It's hard not to keep selling more and more equities each time the market rises back up to create a larger and larger buffer of safety.

I created a spreadsheet modeled after the one in this article:

https://www.theretirementmanifesto.c...ment-paycheck/

except that I defined my bucket #1 as 2-3 years spending, bucket #2 as 7-8 years spending, and the rest (equities) goes into bucket #3. Just like you, the result was compatible with my total return AA.

In the end, I decided to continue to use my existing asset allocation spreadsheet to manage my investments and rebalance as needed. But when I have trouble sleeping at night after the markets plunge 7% in one day, I take a peek at the bucket spreadsheet and sleep a bit better.
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Old 04-18-2020, 09:39 PM   #7
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I always know how many years of typical expenses I have in the fixed income portion of my retirement portfolio, and I take that into account when I rebalance. This was a strategy from day 1.
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Old 04-19-2020, 06:16 AM   #8
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I found the Retirement Manifesto's bucket strategy a useful tool to help me sleep at night. With all the recent market gyrations I worry about having enough cash and income-oriented investments to ride out the storm. It's hard not to keep selling more and more equities each time the market rises back up to create a larger and larger buffer of safety.

I created a spreadsheet modeled after the one in this article:

https://www.theretirementmanifesto.c...ment-paycheck/

except that I defined my bucket #1 as 2-3 years spending, bucket #2 as 7-8 years spending, and the rest (equities) goes into bucket #3. Just like you, the result was compatible with my total return AA.

In the end, I decided to continue to use my existing asset allocation spreadsheet to manage my investments and rebalance as needed. But when I have trouble sleeping at night after the markets plunge 7% in one day, I take a peek at the bucket spreadsheet and sleep a bit better.
Yep, reading his blog recently, particularly taking into account the current crisis, is what has me rethinking this slight change in strategy. As someone who will be 100% dependent on my investments (no pensions or other income sources), I think the bucket approach in RE will sit better with me. While in the pre-RE phase, I believe the feeling of having some control in accumulation/working has always made me more comfortable with the Total Return approach since all I was focused on was my level of comfort with volatility and no immediate plans to draw-down. In the end, while mind games, I think this little bit of change in thinking will give me the extra comfort I may want once I shut down the machine 100%.
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Old 04-19-2020, 06:21 AM   #9
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This is a big question and it comes down to personal preference. A lot of people here seem to prefer reinvesting what they don’t spend, which is effectively lowers their withdrawal rate. I do the opposite as I prefer to have the extra funds available now rather than reinvesting them for more (or less) later.

This is analogous to a wealthy investor deciding whether to invest aggressively or conservatively. If either way meets their goals then it comes down to personal preference.
Yep, this is the one little tweak between the Total Return and Bucket system. I suppose if you were a Bucket-purest, you would take your "excess" and put in bucket 3 which might push your equity AA portion higher than you think or would generally prefer. Is that the right decision... maybe, but as you said, personal preference. Again, we are back to the "won the game, why play" question.
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Old 04-19-2020, 06:39 AM   #10
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I always know how many years of typical expenses I have in the fixed income portion of my retirement portfolio, and I take that into account when I rebalance. This was a strategy from day 1.
IIRC you also only review your WR (using new portfolio-years-spending) with an intent to adjust (up or down if needed) every 5 years - using 5 years for “smoothing” to avoid annual up or down adjustments. I always thought that was smart, and I’m doing the same, and I’ve given you credit for the idea right or wrong.
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Old 04-19-2020, 06:59 AM   #11
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Yep, reading his blog recently, particularly taking into account the current crisis, is what has me rethinking this slight change in strategy. As someone who will be 100% dependent on my investments (no pensions or other income sources),
You won't have SS?
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Old 04-19-2020, 07:08 AM   #12
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You won't have SS?
Hopefully, at least a portion of it, but not counting on it in my numbers. I'm 56, so not totally confident I will see 100% of what is projected by age 70 or whenever I elect to take it.
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Old 04-19-2020, 07:25 AM   #13
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Yep, this is the one little tweak between the Total Return and Bucket system. I suppose if you were a Bucket-purest, you would take your "excess" and put in bucket 3 which might push your equity AA portion higher than you think or would generally prefer. Is that the right decision... maybe, but as you said, personal preference. Again, we are back to the "won the game, why play" question.
Well that depends. See, if your retirement stash can safely provide more, what not take it instead of reinvesting it? What is not “purest” about that? Maybe it’s some bucket approach rule I don’t understand - maybe they simply deplete bucket 1 via spending and occasionally replenish from bucket 2.

But what about thinking about what you might could spend annually versus your assets? That’s where I prefer taking an SWR type approach which tells me how much I can spend if I want - i.e. how much my retirement stash can reasonably support in terms of annual withdrawals.
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Old 04-19-2020, 07:28 AM   #14
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IIRC you also only review your WR (using new portfolio-years-spending) with an intent to adjust (up or down if needed) every 5 years - using 5 years for “smoothing” to avoid annual up or down adjustments. I always thought that was smart, and I’m doing the same, and I’ve given you credit for the idea right or wrong.
I don’t think that’s entirely me as I am perfectly fine with the annual ups and downs in my income. It’s my actual spending that doesn’t change much - grows more slowly.

Not that I don’t review and expect to gradually adjust WR as we age.
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Old 04-19-2020, 07:30 AM   #15
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I use a bucket system, comprising of a core living fund (including travel), bridge ER fund, retirement fund, and an insurance/one in a life time experiences. For bucket 4, which I equate to the traditional bucket #3, I debated on whether to go 100% equities or 100% FI. Frankly I couldn't decide so I thought my normal AA seemed like a good compromise. I could be convinced otherwise.
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Old 04-19-2020, 07:35 AM   #16
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I found the Retirement Manifesto's bucket strategy a useful tool to help me sleep at night. With all the recent market gyrations I worry about having enough cash and income-oriented investments to ride out the storm. It's hard not to keep selling more and more equities each time the market rises back up to create a larger and larger buffer of safety.



I created a spreadsheet modeled after the one in this article:



https://www.theretirementmanifesto.c...ment-paycheck/



except that I defined my bucket #1 as 2-3 years spending, bucket #2 as 7-8 years spending, and the rest (equities) goes into bucket #3. Just like you, the result was compatible with my total return AA.



In the end, I decided to continue to use my existing asset allocation spreadsheet to manage my investments and rebalance as needed. But when I have trouble sleeping at night after the markets plunge 7% in one day, I take a peek at the bucket spreadsheet and sleep a bit better.


Interesting, I use VYM as a stock not in bucket #2.
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Old 04-19-2020, 08:07 AM   #17
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Well that depends. See, if your retirement stash can safely provide more, what not take it instead of reinvesting it? What is not “purest” about that? Maybe it’s some bucket approach rule I don’t understand - maybe they simply deplete bucket 1 via spending and occasionally replenish from bucket 2.

But what about thinking about what you might could spend annually versus your assets? That’s where I prefer taking an SWR type approach which tells me how much I can spend if I want - i.e. how much my retirement stash can reasonably support in terms of annual withdrawals.
I suppose in simple terms, what I mean by "Bucket-purest" is if you buy into Bucket 3 as being "Long term Growth", effectively an equity mix, and you have your Buckets 1 & 2 replenished following your Bucket rules, then in theory, any excess funds go into Bucket 3 for long term growth.

At the same time, I get the desire to re-balance on top of this to meet a specific AA from time to time which is probably what i will do, despite the fact it may make my Bucket 2 that much more conservative.

Just a general observation in comparing the 2 approaches. I get both sides, but just suggesting, in theory, once you get comfortable with your total stash, income needs, and SWR, perhaps you could ignore the traditional annual re-balance to a set AA and find yourself being more aggressive than you thought you might be, yet completely at peace since your Buckets 1 & 2 are loaded per your plan. Food for thought.
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Old 04-19-2020, 08:40 AM   #18
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I always know how many years of typical expenses I have in the fixed income portion of my retirement portfolio, and I take that into account when I rebalance. This was a strategy from day 1.
Yes. There are many art objects that can be viewed from different angles. Portfolios are one.

Looking at portfolio AA is one angle. Looking at the same portfolio's bucket sizes is another. Our approach right now (72YO) is to look at our fixed income as both part of an acceptable AA and as a bucket that if necessary can probably sustain us for the rest our our lives. We also view the whole situation as lucky, lucky, lucky!
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Old 04-19-2020, 09:02 AM   #19
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Yes. There are many art objects that can be viewed from different angles. Portfolios are one.

Looking at portfolio AA is one angle. Looking at the same portfolio's bucket sizes is another. Our approach right now (72YO) is to look at our fixed income as both part of an acceptable AA and as a bucket that if necessary can probably sustain us for the rest our our lives. We also view the whole situation as lucky, lucky, lucky!
I agree with this approach. I have my AA, but I overlay a bucket template on top to see what funds I have available for short term, bucket 1, which I have going out 5 years, income producing to refill bucket 1, going out 10 years and then bucket 3 is long term.

You can view your portfolio in multiple ways without being a slave to any one strategy. It just gives you different perspectives.
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Old 04-19-2020, 09:13 AM   #20
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I suppose in simple terms, what I mean by "Bucket-purest" is if you buy into Bucket 3 as being "Long term Growth", effectively an equity mix, and you have your Buckets 1 & 2 replenished following your Bucket rules, then in theory, any excess funds go into Bucket 3 for long term growth.

Just a general observation in comparing the 2 approaches. I get both sides, but just suggesting, in theory, once you get comfortable with your total stash, income needs, and SWR, perhaps you could ignore the traditional annual re-balance to a set AA and find yourself being more aggressive than you thought you might be, yet completely at peace since your Buckets 1 & 2 are loaded per your plan. Food for thought.
I think you have to ask yourself long term growth for what? What ultimately is the goal for that money? Is it to pass on to heirs? Is it to have higher income when you are older?

Different investors have different goals.

If Bucket 1 and 2 are way large, you still want to know your goals for all that money. Some people will decide, OK, I’ll use more now. Some people will decide to try to pass more on to heirs, or to give more generously to charity.

Another food for thought - what really defines your income needs?
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