I think I might be a bucket system guy...

[Linney]

Interesting, I use VYM as a stock not in bucket #2.

Good catch. Turns out I did the same thing -- I own VYM and I placed it in Bucket #3. I did leave Wellesley in Bucket #2 as I thought that was appropriate.

Here is how I decided to organize the buckets in my spreadsheet:

Bucket 1: 2-3 years spending. Cash, MM, Short-term CDs, Short-term bonds, I-bonds > 5 years old.

Bucket 2: 7-8 years spending. Intermediate & Total Bond, Longer-term CDs, Income funds (Wellesday), Rest of I-bonds

Bucket 3: Everything else

Other people's investment portfolios will look different and they would have to decide the placement for themselves. My ST Bonds are mostly treasury so they went into bucket 1. The I-bonds could have gone in either bucket 1 or 2 due to their nature (never lose value) so splitting them out by age is a bit arbitrary.

Like other posters I am using the bucket method to create another view of my portfolio, I am not using it as my primary method of managing it. I do like how it defines MIN and MAX for buckets 1 and 2 and that could be very useful for rebalancing in a severe downturn. I think it would be easier to sell bonds to buy stocks at dow 15,000 as long as I kept the MIN value intact.

 

[Onward]

IMO...

Buckets = mental accounting = unnecessary.

Also complex & cumbersome to implement when you get down the real mechanics of it.

 

[OldShooter]

... Buckets = mental accounting = unnecessary. ...

Really? Planning for retirement with separate accounts containing fungible money is mental accounting, too. Hence unnecessary?

Actually most of us spend our lives doing mental accounting, household budgeting being the prime example.

 

[COcheesehead]

IMO...

Buckets = mental accounting = unnecessary.

Also complex & cumbersome to implement when you get down the real mechanics of it.

It couldn’t be any easier.
And yes, it’s accounting, just not mental.

 

[Onward]

I mean the mental accounting bias whereby people believe their investments are safer when they're separated into different accounts. It's not any safer, though it may make you feel that it is.

I don't want to step on too many toes here, so I'll just leave it at that.

 

[OldShooter]

I mean the mental accounting bias whereby people believe their investments are safer when they're separated into different accounts. ...

Ah. I see the glitch.

The term "mental accounting" was invented by Richard Thaler (see his book, "Misbehaving"). It refers to segregating fungible money into categories and the consequent risk that the segregation might lead to overly rigid financial behavior. For example, a good segregation might be a savings account to accumulate the down payment on a house. A questionable one might be segregating money from dividends and interest from somethng called "principal."

So, @Onward, I at least didn't know that perceived safety was wrapped inside your use of the term "mental accounting." I do disagree with that, though. I find the bucket viewpoint to be very useful but it has nothing to do with safety.

 

[pb4uski]

I recall looking at buckets and as mentioned in another post it seemed to come back to a conventional AA at the end of the day.

What I didn't like about buckets was there seemed to be no specific rationale for refilling buckets. If the refilling was just a cascade then it isn't very different from a conventional AA. If it was refilling only where stocks exceed target the I can do that with a conventional AA by just having a decision rule to rebalance stocks only where they exceed target.

For me it was a pretty useless exercise.

 

[tdv2]

I recall looking at buckets and as mentioned in another post it seemed to come back to a conventional AA at the end of the day.

What I didn't like about buckets was there seemed to be no specific rationale for refilling buckets. If the refilling was just a cascade then it isn't very different from a conventional AA. If it was refilling only where stocks exceed target the I can do that with a conventional AA by just having a decision rule to rebalance stocks only where they exceed target.

For me it was a pretty useless exercise.

I'm guilty of having an "ER sequence of returns risk mitigation cash bucket" It's a mouthful, I know. Being ER'd for only 2 years and still having 3.5 years living expenses in the cash "bucket", I have not had to refill it yet. I debate with myself....what is the best criteria to use to refill? 2 years?, 3 years?. In some sense I sleep better knowing I have this but at the same time I realize maybe it isn't optimal. I have an strict AA (for Stock/Bond(includes cash)) that I stick to, but still view the cash portion as a separate bucket for some, unknown to me, reason.

 

[mystang52]

Before I ER'd I was intrigued by the Buckets approach for that sleep-at-night factor. I didn't see it, at least as I would have applied it, as complicated at all. My plan was 5 years' cash, and the rest in stock-bond allocation. Fortunately for me our pensions and SS cover all of our expenses, and then some, so no need for bucket approach. But I still think the general concept is worthwhile for many.

 

[COcheesehead]

I'm guilty of having an "ER sequence of returns risk mitigation cash bucket" It's a mouthful, I know. Being ER'd for only 2 years and still having 3.5 years living expenses in the cash "bucket", I have not had to refill it yet. I debate with myself....what is the best criteria to use to refill? 2 years?, 3 years?. In some sense I sleep better knowing I have this but at the same time I realize maybe it isn't optimal. I have an strict AA (for Stock/Bond(includes cash)) that I stick to, but still view the cash portion as a separate bucket for some, unknown to me, reason.

This guy has some good rules and forms to use to manage a bucket system. His entire blog is also very good.

https://www.theretirementmanifesto.com/how-to-build-a-retirement-paycheck/

 

[tdv2]

This guy has some good rules and forms to use to manage a bucket system. His entire blog is also very good.

https://www.theretirementmanifesto.com/how-to-build-a-retirement-paycheck/

Good info....His approach and the way he explains it has quite a few similarities in the way I visualize my situation....Short (cash), Medium (bonds), Long (stocks). The mix of the three still ends up being an individual choice based on personal risk tolerance.

 

[OldShooter]

... What I didn't like about buckets was there seemed to be no specific rationale for refilling buckets. .. .

... what is the best criteria to use to refill? ...

I am comfortable with not having rules for refilling. If you think about it, what this involves is trying to mechanistically time the market. Doomed.

So we have been managing based mostly on AA, as I mentioned in an earlier post. But now I am seeing the fixed portion of our AA as more like a bucket. I expect that we will spend from that bucket, maybe for a few years, until we judge that stock prices are "good enough" to do some replenishing. History tells us that this will happen. Will that decision on that day look wise in hindsight? I don't know and really don't care. I don't expect to be able to time the market.

A couple of years ago I read an article by a guy who set out to compare an AA strategy with a bucket strategy. In order to do that he hypothesized a fairly elaborate set of rules for bucket refilling. Then he ran the simulation. From the fact that his particular mechanism failed, he then declared buckets to be a failure. Obviously, he was not educated in logical thinking.

 

[DougJohnson]

I found the Retirement Manifesto's bucket strategy a useful tool to help me sleep at night.

That is the purpose of the bucket system. It was invented by Harold Evansky, a financial planner, as a tool for managing his clients. When they call him up in a panic he can say "You're good for X years. Do you think these troubles will last that long?"

As a number of folks have pointed out, the actual asset allocation is not much different. The bucket system just makes obvious how many years of withdrawals are safe.

-- Doug

 

[COcheesehead]

That is the purpose of the bucket system. It was invented by Harold Evansky, a financial planner, as a tool for managing his clients. When they call him up in a panic he can say "You're good for X years. Do you think these troubles will last that long?"

As a number of folks have pointed out, the actual asset allocation is not much different. The bucket system just makes obvious how many years of withdrawals are safe.

-- Doug

Yes, agree. The bucket system and an asset allocation are not mutually exclusive. They play well together.

The bucket system just helps when you look at your allocation and say oh no I have a million dollars at risk in a bear market, yet realize you won’t need to touch that part of your portfolio for 15+ years.

I have cash in each of my buckets. Cash I have allocated for purchases in that bucket when I find an appropriate investment. I also have an income property in bucket 2. So it gives me a bigger picture than just a brokerage account.

 

[Navigator]

I remember looking at the bucket system a couple of years ago. IIRC there were three criticisms of it:

1. It is difficult to implement. I am talking about the real bucket system, not the myriad of things people do and call it a”bucket system”.
2. If implemented perfectly, long term returns will be a bit less than using an equivalent asset allocation.
3. There tends to be a large “cash drag” on performance.

Of course having a large cash reserve looks good after a crash, but since these are rare, historically this strategy has not worked out well.

 

[BADGERWIN]

3

 

[audreyh1]

Cash is trash until cash is king.

I’m delighted to carry plenty of cash and absolutely do not worry about any long-term “cash drag”.

As long as your investment portfolio is large enough to support your long term needs/goals, having extra cash is just fine.

 

[PointBreeze]

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?

I’m 61, so hoping I’m in for a long haul, so yes, the "more than I need" excess goes into bucket 3 for me.

I have to say that being a bucket person really helped me psychologically weather my first real retirement storm these past few months. I knew I had enough cash for the next four years, so slept very well. Ahhhhh.....

 

[COcheesehead]

I remember looking at the bucket system a couple of years ago. IIRC there were three criticisms of it:

1. It is difficult to implement. I am talking about the real bucket system, not the myriad of things people do and call it a”bucket system”.
2. If implemented perfectly, long term returns will be a bit less than using an equivalent asset allocation.
3. There tends to be a large “cash drag” on performance.

Of course having a large cash reserve looks good after a crash, but since these are rare, historically this strategy has not worked out well.

I am not sure what a “real” bucket system is, but the one I follow

https://www.theretirementmanifesto.com/how-to-build-a-retirement-paycheck/

Took me less than 30 minutes to organize and put into a spreadsheet. I update it on the weekends in less than 5 minutes.

It’s not a strategy to maximize returns. It’s a strategy to maximize success.

 

[JoelT1]

This study questions the bucket system https://blog.iese.edu/jestrada/files/2019/01/BucketApproach.pdf

 

[COcheesehead]

This study questions the bucket system https://blog.iese.edu/jestrada/files/2019/01/BucketApproach.pdf

This study is for a 2 bucket strategy. The ones linked in this thread are 3 bucket.

The study has a premise of maximizing your return, which isn’t the goal for everyone.

 

[Navigator]

I just want to add some outside sources to back up my previous post. Let me also say that this is not to criticize anyone using this strategy, but only to add balance to the discussion.

Here is an article on how well the bucket system would have performed in the past, using historical return data. It basically reiterates what other studies have shown, that a 60/40 portfolio outperforms several bucket strategies over the long term.

https://www.marketwatch.com/story/do-bucket-strategies-stand-the-test-of-time-2019-02-12

Investopedia says that bucket strategies have good psychological benefits for many people, but can be hard to implement. One of these difficulties is a lack of tools to calculate allocations across buckets. Another is determining what is in each bucket because portfolio reporting software report in aggregate or by account. A third problem is figuring out how to rebalance buckets.

https://www.investopedia.com/articl...bucket-strategy-vs-systematic-withdrawals.asp

 

[OldShooter]

I just want to add some outside sources to back up my previous post. Let me also say that this is not to criticize anyone using this strategy, but only to add balance to the discussion.

Here is an article on how well the bucket system would have performed in the past, using historical return data. It basically reiterates what other studies have shown, that a 60/40 portfolio outperforms several bucket strategies over the long term.

https://www.marketwatch.com/story/do-bucket-strategies-stand-the-test-of-time-2019-02-12

Investopedia says that bucket strategies have good psychological benefits for many people, but can be hard to implement. One of these difficulties is a lack of tools to calculate allocations across buckets. Another is determining what is in each bucket because portfolio reporting software report in aggregate or by account. A third problem is figuring out how to rebalance buckets.

https://www.investopedia.com/articl...bucket-strategy-vs-systematic-withdrawals.asp

This completely misses the point for me. Of the mechanistic strawmen that these authors have tried, none worked as well as their alternative. This is the old, old, fallacy that believes that absence of evidence is evidence of absence.

For us, "buckets" is a useful view of our portfolio. See my post #18. We move money between buckets on an opportunistic, not mechanistic, basis, as IMO do the followers of the AA religion. This is the real world, which computer backtest simulations are not. My guess is that few here who ostensibly hold to a pure orthodox AA strategy have been executing according to that strategy during the current market tumult. And, guess what? We haven't done anything with our buckets either. None of us will ever know whether making different market moves would have been more optimal. Investing is like that.

 

[COcheesehead]

I just want to add some outside sources to back up my previous post. Let me also say that this is not to criticize anyone using this strategy, but only to add balance to the discussion.

Here is an article on how well the bucket system would have performed in the past, using historical return data. It basically reiterates what other studies have shown, that a 60/40 portfolio outperforms several bucket strategies over the long term.

https://www.marketwatch.com/story/do-bucket-strategies-stand-the-test-of-time-2019-02-12

Investopedia says that bucket strategies have good psychological benefits for many people, but can be hard to implement. One of these difficulties is a lack of tools to calculate allocations across buckets. Another is determining what is in each bucket because portfolio reporting software report in aggregate or by account. A third problem is figuring out how to rebalance buckets.

https://www.investopedia.com/articl...bucket-strategy-vs-systematic-withdrawals.asp

The “it’s hard” comment has been brought a couple times now. I am a putz with spreadsheets and I had it up and running in less than hour using Google Sheets and updates take 5 minutes on a weekend. My link up thread to the Retirement Manifesto includes the basic forms even.

Again it’s not a way to get the last buck out of your portfolio. Return optimization. It’s a way to make sure you have a buck left in your portfolio. Success optimization. People seem to miss that point.

 

[Navigator]

This is the real world, which computer backtest simulations are not. My guess is that few here who ostensibly hold to a pure orthodox AA strategy have been executing according to that strategy during the current market tumult. And, guess what? We haven't done anything with our buckets either. None of us will ever know whether making different market moves would have been more optimal. Investing is like that.

It is true that we don’t know what the future holds or what investments will do in the future. But we do know what markets behaved like in the past and that is the best evidence we have of what they will behave like in the future. Everyone who uses FIRECalc to help them decide if they can retire depends on “backtest simulations”. If you have better evidence to use, please provide it. I am certainly open to persuasion based on superior evidence.