Early Retirement & Financial Independence Community

Early Retirement & Financial Independence Community (https://www.early-retirement.org/forums/)
-   FIRE and Money (https://www.early-retirement.org/forums/f28/)
-   -   are buckets really necessary? (https://www.early-retirement.org/forums/f28/are-buckets-really-necessary-106059.html)

Ole Red 29 10-19-2020 06:45 AM

are buckets really necessary?
 
Guys, is it really necessary to put 3 to 5 years of expenses in a laddered CD or some similar "safe" option? Isn't the reason to have bonds is that they are less volatile? Is the trade off risking selling bonds when they are slightly down vs making a lesser fixed average income from a CD? If so, wouldn't that indicate that having stocks and bonds is enough? I guess the risk is how far down would the bonds go?

I understand the bucket system, but have been slow to adopt it. I have been retired for 1-1/2 years. With all the financial actions triggered when I retired, we have had plenty of cash to live from until now. Now I am looking to fund 2021. I understand many people put one year of expenses in a checking account (some do savings and auto transfer to checking monthly) and then another 3 to 5 years in laddered CD's or some other "safe" option. I am good with having 1 year's spending in a checking or savings. I may be too lazy to do the second bucket without prompting.

thanks,

Toocold 10-19-2020 07:04 AM

I dont think it is necessary. Have a year or two worth of expenses and have the rest of your investments with a good AA that you feel comfortable. Now some people would consider the bond portion a bucket. Others say it's a ballast. It's all just mental gymnastics really, so that you don't sell when there is a huge drop in the market.

RunningBum 10-19-2020 07:09 AM

Buckets are not necessary. You might want to have some shorter term (less volatile) bonds for the 2-5 year range. Some do a bond ladder.

HawkeyeNFO 10-19-2020 07:20 AM

No buckets aren't required. Several people I know keep their money in envelopes. But maybe they use really big envelopes.

jazz4cash 10-19-2020 07:26 AM

No they are not necessary. Just a tool that some find helpful. Like an insurance policy you probably wonít need. The bigger your stash and the more immune you are to worrying about having to sell at depressed prices the less useful the tool is.

FLSUnFIRE 10-19-2020 07:27 AM

My thought is no. If you replenish your bucket(s) as you spend them, you are just getting a presumably lower return on money you may have had in a higher yielding asset class. If you don't replenish when your investments are down, you are market timing and you can do that without "buckets" and play with your AA as you wish. I proposed doing similar with a HELOC thus keeping fully invested when perceived valuations are down.


Personally, I DCAed into the market as savings allowed in my accumulation phase because I believe the market will give me the best return. I expect to do the same in reverse as I draw from my investments keeping fully invested and selling what I need to cover expenses/cashflow needs. Pulling out early and putting it into a "bucket" with lower expected returns doesn't make sense to me.


FLSunFIRE

Markola 10-19-2020 07:50 AM

No, itís just one method of organizing oneís assets, which some people like.

flyingaway 10-19-2020 08:06 AM

I count cash, CD, and bond funds, as fixed income. I do keep cash in the taxable accounts just for convenience. Some bond funds may have frequent trading restrictions.

Montecfo 10-19-2020 08:47 AM

I guess that owning any non equity investment is accepting a lower return than equities. But the reason we own them is to reduce overall volatility, so we are not selling stocks following a huge market selloff.

While equities have done better over long periods of time, unfortunately, we have no idea when a large market selloff might come. That is the danger.

The question of what to own instead of equities, if anything, depends on your comfort with that risk.

At present I choose mid and short-term bonds, CDs and MM accounts.

Buckets are not necessary but what those buckets might hold is important.

audreyh1 10-19-2020 08:53 AM

This is totally a personal choice. Whatever lets you sleep at night while remaining adequately invested - that’s the key.

I don’t use the bucket system. However, I have a fairly generous amount in short-term funds that can be used for any immediate need/want, whether emergency or not. I don’t worry about “cash drag” because our retirement portfolio annual withdrawal already more than covers our spending. At the end of each year I put any remaining unspent withdrawn income into these short-term funds.

SumDay 10-19-2020 09:05 AM

I use the bucket system because it helps me sleep at night, as audreyh1 said. Our portfolio annual withdrawal more than covers our spending as well. I wanted to manage our money myself, and found a blog post on the method which was easy for me to understand, so I went with it.

At some point I may get rid of the cash buckets, especially when DH's full SS begins in 2023. Time will tell. I can say I was pretty tickled with myself when $hit hit the fan in March. #FirstWorldProblems

youbet 10-19-2020 09:29 AM

Whenever we discuss "buckets," there seems to be some confusion as to exactly what that system is.

You can have an AA which includes cash and short term fixed investments without calling that portion a "bucket." To me, "buckets" means following the system where you replenish buckets (AA categories) following some algorithm or set of rules.

I've never used a formal "bucket" system and don't plan to as the replenishment algorithms seem poorly defined and inflexible. My current AA (in our early 70's) is 56/36/8. Given our other sources of income, we could withstand a prolonged downturn and/or significant need for liquidity without selling equities. I am looking for opportunities to reduce cash from 8% to 4% and increase equities from 56% to 60%.

In the blogpost Sumday references above, the author states "The main purpose of The Bucket Strategy is to avoid selling stocks during a bear market." I'm accomplishing that with my AA and re-balancing. Also, the author's description of replenishing bucket #1 sounds like AA rebalancing to me. So I don't get it.

I guess if the folksy term "buckets" makes someone more comfortable, more able to sleep at night, than talking about asset classes and sub-classes, why not? But it's not necessary and not something I've chosen to do.

OldShooter 10-19-2020 09:46 AM

First things first: Buckets are only "necessary" if that view is useful to you in managing your money. There is no higher authority than you.

I agree with some of the previous posters who do see buckets as a useful way to look at a portfolio. IMO that view crispens up questions like what sorts of short-term assets to hold and questions of withdrawal strategy. But at the same time, an AA view is useful too.

Again, my view: Looking at and managing our AA is useful when things are calm, keeping an eye on <5 year liquidity. If the SHTF, our fixed income assets are going to look a lot like a bucket. We'll draw from that bucket, paying little attention to AA, until things are calm again. Then we'll probably review our AA and consider whether we want to rebalance. Implicily, then, this is a 2-bucket approach.

(We will only rebalance during bad times if it doesn't result in the cash bucket going below our comfort level.)

sengsational 10-19-2020 09:50 AM

Right. If "buckets" means "asset allocation", then I'd say it's "essential". If "buckets" means setting up a completely separate account for STWGDTMWPARS (stuff that won't go down too much when people are running scared), then I'd say that's not essential.

jollystomper 10-19-2020 10:04 AM

The longer I am retired, the more I realize how much I want to simplify my financial situation. So I have never formerly followed "buckets". I just decide on our cash needs for the next 5 years (though with our current spending slowdown it may well be close to double) and keep it in the best yielding cash instrument we can find. We will "worry" about replenishing it when the time comes and/or based on any situations that might impact it.

youbet 10-19-2020 10:10 AM

Quote:

Originally Posted by OldShooter (Post 2499506)

I agree with some of the previous posters who do see buckets as a useful way to look at a portfolio. IMO that view crispens up questions like what sorts of short-term assets to hold and questions of withdrawal strategy.

Help me here.......

How would calling my cash allocation "bucket 1" crispen up questions like what sorts of short-term assets to hold and questions of withdrawal strategy.

My cash allocation is the easiest for me to understand what to hold. Right now, it the fixed and equity portion that's cloudiest.

kevink 10-19-2020 10:45 AM

Quote:

Originally Posted by youbet (Post 2499515)
Help me here.......

How would calling my cash allocation "bucket 1" crispen up questions like what sorts of short-term assets to hold and questions of withdrawal strategy.

My cash allocation is the easiest for me to understand what to hold. Right now, it the fixed and equity portion that's cloudiest.

IMHO the unprecedented interest-rate situation we're in at the moment makes things a lot less cloudy, though not in a good way vis-a-vis returns. I'm not going to re-post the recent Jonathan Clements post ("Game Over") about bonds I shared elsewhere, but this recent post about why even Short-Term Treasury funds are a poor choice now may be worthy of a look:

https://seekingalpha.com/article/437...vestment-sense

With "safe" bonds all the way out to 30 year duration offering negative real returns (and tons of interest-rate risk) it arguably makes sense to have safe cash (iBonds, the highest-paying 1 year FDIC insured online-bank CDs you can snag, Treasury MM funds - in that order) as one's only fixed income allocation - in which case the "bucket" will be a large one in all but the most aggressive allocations.

OldShooter 10-19-2020 10:52 AM

Quote:

Originally Posted by youbet (Post 2499515)
Help me here.......

How would calling my cash allocation "bucket 1" crispen up questions like what sorts of short-term assets to hold and questions of withdrawal strategy.

My cash allocation is the easiest for me to understand what to hold. Right now, it the fixed and equity portion that's cloudiest.

Well, everyone is different. Different size portfolio, different objectives for it, etc.

As Nassim Taleb would be quick to point out, there is no "worst case," there are only black swans. But I'm pretty sure he's not reading this forum, so ... "

For us I look at a worst case recovery from a serious market hit taking less than five years. So we look at about 3 years in SWVXX and some TIPS maturing within the 3 years. The rest is in TIPS maturing in 2026. By the time we need 3-5 year money, if we ever do, those TIPS will be close enough to maturity that we won't take much of a haircut if we have to sell early. Said another way, I don't think the whole 5 year bucket needs to be immediately accessible (a) because 5 years is plenty of time to sort things out and (b) most recoveries are shorter than 5 years. I guess one could consider 2-5 year money to be a second bucket but I am not that compulsive/YMMV.

Spending: When in AA mode, spend and rebalance per your chosen rules. When in bucket-sheltered mode, do not sell equities, consider whether rebalancing can be done without drawing down the fixed income tranche too far, and draw down bucket #1 as necessary to support your life style.

Re "cash" there are endless discussions here about what that means. For me it is the two twenties and one five that I have in my wallet. Outside of that I have various assets with varying liquidities selected to suit my expected needs. IOW I think "cash" not a useful portfolio concept.

HTH

FANOFJESUS 10-19-2020 10:53 AM

Quote:

Originally Posted by jollystomper (Post 2499511)
The longer I am retired, the more I realize how much I want to simplify my financial situation. So I have never formerly followed "buckets". I just decide on our cash needs for the next 5 years (though with our current spending slowdown it may well be close to double) and keep it in the best yielding cash instrument we can find. We will "worry" about replenishing it when the time comes and/or based on any situations that might impact it.

I have heard 5 years in cash the rest you can put in the market.

brett 10-19-2020 11:24 AM

We do not use buckets.

Simply do what works for you and what you are comfortable with.

There is no right and wrong way, no magic bullet.


All times are GMT -6. The time now is 07:35 AM.

Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.