Are Ray's Buckets of Money fatally flawed?

[ERD50]

Can someone give me a reference point for how much a retiree would start out with in these buckets? For example, for the default FireCalc conditions, 30 year, 4% SWR, 95% success rate. I guess I'd just like to understand what AA the starting point would be.

-ERD50

 

[ziggy29]

90 % of this thread is the bear market talking. 18 to 24 months into the next bull we'll be hearing a different song.

You may be right, but I think it's still a good opportunity for everyone to ask themselves whether they really *need* to take as much risk as they have been historically.

After all, the plan isn't always to maximize your expected portfolio size, but to minimize the chances of falling short of what you think you need for your goal.

Plus I think one of the reasons for this mess is because people forgot the lessons that a generation mostly gone learned nearly 80 years ago. It would be a shame if we forgot it again so soon.

 

[Rich_by_the_Bay]

Can someone give me a reference point for how much a retiree would start out with in these buckets? For example, for the default FireCalc conditions, 30 year, 4% SWR, 95% success rate. I guess I'd just like to understand what AA the starting point would be.

You can search prior threads on this for more background, but it is hard to answer your question since it depends on your preferences and particulars. But in a typical scenario, it looks something like 25% cash, 25% bonds, and 50% equities. It's how you withdraw that makes the difference.

 

[Bikerdude]

90 % of this thread is the bear market talking. 18 to 24 months into the next bull we'll be hearing a different song.

Ha

I agree. Its basic human nature to extrapolate the current market condition.

 

[W2R]

I agree. Its basic human nature to extrapolate the current market condition.

I sure did in early 2007. Now, that seems like such folly.

Ah, it would have been so nice if the 2003-2006 market had continued just a few more years...

 

[youbet]

I agree. Its basic human nature to extrapolate the current market condition.

Yep. Think back to threads 2 - 3 years ago. The thought for the day everyday was that we were probably working too long, wasting life's precious moments and would undoubtedly be able to have a nice 4% withdrawal rate and still see our portfolios remain stable or even grow in real terms. The biggest question was how to withdraw more to minimize the residual left at death without having temporary dips run you dry.....

What a difference in tone and attitude 2 - 3 years and a bear market brings on!

 

[ziggy29]

I agree. Its basic human nature to extrapolate the current market condition.

Maybe so, but I also think this market is making the rubber hit the road with respect to evaluating risk tolerance.

It's one thing to say you can stand a 40% market decline when you are talking about hypothetical money in some risk tolerance evaluation. It's quite another to actually lose that much in real money. As a result I do think some risk tolerances will be reevaluated and lot of people will realize they don't have as much of it as they thought.

We certainly do have "recency bias" in our thoughts about being invested, but many of those who lived through the 1930s saw that experience shape money and lifestyle decisions for the rest of their lives. Many of them became very frugal and extremely risk-averse for life. I suspect that to *some* degree, many people who lost a considerable amount of money in this market will be wondering, maybe after the market recovers somewhat, whether they can stomach these gut-wrenching losses again.

 

[simple girl]

Maybe so, but I also think this market is making the rubber hit the road with respect to evaluating risk tolerance.

It's one thing to say you can stand a 40% market decline when you are talking about hypothetical money in some risk tolerance evaluation. It's quite another to actually lose that much in real money. As a result I do think some risk tolerances will be reevaluated and lot of people will realize they don't have as much of it as they thought.

We certainly do have "recency bias" in our thoughts about being invested, but many of those who lived through the 1930s saw that experience shape money and lifestyle decisions for the rest of their lives. Many of them became very frugal and extremely risk-averse for life. I suspect that to *some* degree, many people who lost a considerable amount of money in this market will be wondering, maybe after the market recovers somewhat, whether they can stomach these gut-wrenching losses again.

It has certainly affected us that way. Still putting money into the market, but realizing our risk tolerance truly is not as high as we though it was. We have slightly adjusted our target asset allocation as a result.

 

[haha]

So Ziggy, you are saying "Yes emotion is real?" Or are you sayng that the people who came out of the 30s scared, and who therefore missed the colossal post war bull market were right?

What are you saying?

Ha

 

[Bikerdude]

Maybe so, but I also think this market is making the rubber hit the road with respect to evaluating risk tolerance.

It's one thing to say you can stand a 40% market decline when you are talking about hypothetical money in some risk tolerance evaluation. It's quite another to actually lose that much in real money. As a result I do think some risk tolerances will be reevaluated and lot of people will realize they don't have as much of it as they thought.

Amen to that brother.

 

[ziggy29]

So Ziggy, you are saying "Yes emotion is real?" Or are you sayng that the people who came out of the 30s scared, and who therefore missed the collosal post war bull market were right?

Wow, I have no idea what led you to that conclusion. It's not a matter of whether they are (or will be) "right", but simply an emotional reaction.

 

[W2R]

Maybe so, but I also think this market is making the rubber hit the road with respect to evaluating risk tolerance.

It's one thing to say you can stand a 40% market decline when you are talking about hypothetical money in some risk tolerance evaluation. It's quite another to actually lose that much in real money. As a result I do think some risk tolerances will be reevaluated and lot of people will realize they don't have as much of it as they thought.

We certainly do have "recency bias" in our thoughts about being invested, but many of those who lived through the 1930s saw that experience shape money and lifestyle decisions for the rest of their lives. Many of them became very frugal and extremely risk-averse for life. I suspect that to *some* degree, many people who lost a considerable amount of money in this market will be wondering, maybe after the market recovers somewhat, whether they can stomach these gut-wrenching losses again.

Nothing like being scared to death, to lower one's risk tolerance.

However, looking on the other side of that coin - - I am already concerned that my present asset allocation may be too conservative, if in fact there is a huge jump upwards after the recession is over, along with a lot of inflation. I know, I know. I just have to be different.

Oh well. Life is an adventure, and I am not *that* worried about it.

 

[teejayevans]

Can someone give me a reference point for how much a retiree would start out with in these buckets? For example, for the default FireCalc conditions, 30 year, 4% SWR, 95% success rate. I guess I'd just like to understand what AA the starting point would be.

-ERD50

It has nothing to do with % but more to do your withdrawal rate,
bucket 1: 7 years of withdrawals
bucket 2: 8 years of withdrawals, adjusted for inflation
bucket 3: whatever is leftover
TJ

 

[ERD50]

It has nothing to do with % but more to do your withdrawal rate,
bucket 1: 7 years of withdrawals
bucket 2: 8 years of withdrawals, adjusted for inflation
bucket 3: whatever is leftover
TJ

But that starts you off at an AA, and that's what I was trying to get some perspective on. So, very roughly 50-50, as RIT mentioned.

-ERD50

 

[unclemick]

Target Retirement 2015, waaay down but full auto gives SEC yield = 3.72% plus the Norwegian widow is putting on weight cause she doesn't even have to walk to the mailbox anymore.

And you know even though this thread is about Ray - :

Psst Wellesley = 5.5% SEC yield.

Sooo being down to ballpark 4%(counting the widow stocks) and a warm handgrenade, I am spared the emotional aspects of rebalancing as those Vanguard computers and auto deduct to Prime MM takes care of that.

heh heh heh - But watching Mr Market still ain't fun lately even though my defense is holding.

 

[Rich_by_the_Bay]

But that starts you off at an AA, and that's what I was trying to get some perspective on. So, very roughly 50-50, as RIT mentioned.

It's a sliding scale, though. If you set the SWR higher, return assumptions high, etc. the calculations and allocations change (it's really a set of future value calculations designed to make each bucket last the designated amount of time).

The 50:50: or time horizon mentioned by TeeJay are just examples using average assumptions.

 

[samclem]

Best idea we've come up with was to continue reinvesting dividends as long as our asset's share prices are below their long-term moving averages. When they rise above their MAs then we'll start taking dividends in cash and putting them in money markets or long-term CDs. At some point some of that cash may be permanently set aside, but I suspect that it'll go back to work when the share prices drop below their long-term MAs. I suppose part of the discipline of the strategy would be waiting for rock bottom or waiting for a CD to mature before dumping it into an underpriced asset. But instead I think we'd just keep trickling cash into whatever asset drops below 18%.

Would it make sense to put all dividends/distributions into a MM fund regardless of how the market is doing, then at year end use it for next year's living expenses--if there is extra, buy whatever asset class needs to be increased most in your allocation target. If more rebalancing is needed, sell whatever is above the target % and buy whatever is too low.
Doing this just once a year helps keep the emotion out of it for me. Also, it doesn't encourage me to check my balances often, which I think is a good thing. Finally, I'm a little lazy about these things, so it fits my personality.

 

[Ed_The_Gypsy]

Samclem,

I discovered that Nords and I are doing just that. This past year I started taking money out of the MM fund to buy a 5-year CD to start a CD ladder. Normally I rebalance from the MM fund, but everything seems to have gone down about the same so have not rebalanced this year.

Ed

 

[mathjak107]

according to the research done in jason zweigs book "your money your brain" we as humans hate loosing money more then we like making money.... many financial decisions were made by groups of people using brain scans and all had similiar reactions.

its human nature to panic on the drops.... funny thing the tests showed was once we expierenced the drop we were okay with it again and looking forward to the rise back..... but our fear of loosing still paralyzes most of us more

 

[ziggy29]

Would it make sense to put all dividends/distributions into a MM fund regardless of how the market is doing, then at year end use it for next year's living expenses

One could probably create a mechanical model to do this, but if I still had ten years of safer investments to draw from, I'd hate to not reinvest dividends at today's stock prices.

On the other hand, if I had less than five years left in my safer buckets, it might be something I'd reluctantly do instead of actively selling depressed stock positions.

 

[ERD50]

Would it make sense to put all dividends/distributions into a MM fund regardless of how the market is doing, then at year end use it for next year's living expenses...

Another variation is, use those dividends for expenses throughout the year. Then, rebalance as needed (at the end of the year, or when AA exceeds target by X%).

I haven't done the math, but between divs and draw down of the fixed as a normal process of re-balance, I would have many years before I would need to sell much of the equities. Buckets, or AA/re-balance - I'm thinking the differences are not really that significant.

-ERD50

 

[W2R]

Another variation is, use those dividends for expenses throughout the year. Then, rebalance as needed (at the end of the year, or when AA exceeds target by X%).

I haven't done the math, but between divs and draw down of the fixed as a normal process of re-balance, I would have many years before I would need to sell much of the equities. Buckets, or AA/re-balance - I'm thinking the differences are not really that significant.

-ERD50

That would work.

My plan is to put my dividends and LTCG in money market, and leave them there until the first week in January. Then, I'll withdraw my 4% (or less if required in order to have 4% in my savings account earmarked for that year's living expenses). After withdrawing I'll rebalance my portfolio (not counting the bank account). I also rebalance during the year if my AA gets more than X% off.

Each month I will move 1/12th of my living expenses from savings to checking, to simulate getting a steady paycheck each month so that I won't feel nervous about lack of same. I really like this idea!! It is SO consistent with my psychology that it "fits" me like a glove.

To make this slightly more relevant to Buckets of Money - - part of my asset allocation is my small Roth IRA, which is my "play money" account and invested pretty aggressively. I consider that to be a bucket of money with a 25 year time horizon so I won't get into it or even use it for rebalancing until that time. It is just going to sit there for 25 years and (hopefully) grow to be huge, producing lots of $$ to add to the other money I have for end of life expenses and for my heirs after I am gone. Meanwhile I can rebalance by juggling things in my other accounts.

 

[Gotadimple]

My plan is to put my dividends and LTCG in money market, and leave them there until the first week in January. Then, I'll withdraw my 4% (or less if required in order to have 4% in my savings account earmarked for that year's living expenses). After withdrawing I'll rebalance my portfolio (not counting the bank account). I also rebalance during the year if my AA gets more than X% off.

How were you planning on handling taxes, or is your total tax liability being handled by your pension? I take the monthly dividends and capital gains payouts and hold them in a MMA as you indicate, then withdraw in December having my tax liability deducted from the withdrawal. I rebalance in December just to put the entire portfolio in perspective.

Each month I will move 1/12th of my living expenses from savings to checking, to simulate getting a steady paycheck each month so that I won't feel nervous about lack of same.

Your bank won't do this for you? Or can you set up an automatic transfer using you're bank's online application? I have an automatic transfer going from my savings to my checking twice a month (similates my old paycheck plan) to cover my average expected expenses.

-- Rita

 

[Moemg]

My plan is to put my dividends and LTCG in money market, and leave them there until the first week in January. Then, I'll withdraw my 4% (or less if required in order to have 4% in my savings account earmarked for that year's living expenses).

Each month I will move 1/12th of my living expenses from savings to checking, to simulate getting a steady paycheck each month so that I won't feel nervous about lack of same. .

I also do a modified version of this plan bypassing the savings account . On Jan.1 I write down my 4% allowance then monthly I transfer a small amount from my MM to my checking . The rest stays in my MM for taxes , travel,gifts and unexpected expenses .

 

[W2R]

How were you planning on handling taxes, or is your total tax liability being handled by your pension? I take the monthly dividends and capital gains payouts and hold them in a MMA as you indicate, then withdraw in December having my tax liability deducted from the withdrawal. I rebalance in December just to put the entire portfolio in perspective.

My plan was to take the money for my taxes out of the 4%, after I get it... I would put money aside for taxes, just as I do now. I won't really need 4% to live on, so I am thinking that I shouldn't have much problem saving enough for taxes between January and April. If saving enough during that period turns out to be a problem then I'll definitely have to re-think! In that case I would probably just take it out of the remainder of the 4% (in savings) and divide what is left there by the number of months left, lowering my monthly "allowance" for the rest of the year.

Your bank won't do this for you? Or can you set up an automatic transfer using you're bank's online application? I have an automatic transfer going from my savings to my checking twice a month (similates my old paycheck plan) to cover my average expected expenses.

Sure, my bank would do it automatically if moving money by hand once a month is inconvenient. Good idea! I'll just see how it goes, I guess.