Ray Lucia...Buckets of Money

[mathjak107]

The buckets are set up by time. Since bucket 2 is a 7 year buck heres what i have in mine
1-7 year treasury notes laddered

fidelity new market income

fidelity floating rate loans

fidelity strategic income

fidelity ultra short bond fund

fidelity strategic real return

apple hospitality un-listed reit paying 8.30% and gets sold in 6-7 years.

fidelity income manager

thats bucket 2 in all its splendor

 

[mathjak107]

No john , no market timing here. Only a rule that says dont sell stock into a down market and a method for preventing it. How you refill is up to you, its not critical as long as bucket 2 always has 3-5 years in it min.

Dont forget its not that your trying to time the market to maximize your gains, you only want to siphon a little out of bucket 3 every time your up 2 years in a row but again you dont have to. The security is in knowing that we never ever had a 14 year period where a diversified portfolio was down . Even 1966-81 stocks sucked but with dividends they still were slightly positive, real estate and reits took off like crazy, gold and commodities soared.

That means that even if you wait and empty bucket 1 and 2 ,14 years later even in our worst sell offs you should still be up enough to sell from bucket 3 without really hurting your income flow.

As a precauaution against a total market melt down if you did wait the full 14 years to refill he reccomends always having about 3-5 years in bucket 2 from gradual replenishments over the years to carry you thru a little bit so you can sell into hopefully a stronger market.

Nothing is 100% as there is always "THIS TIME ITS DIFFERENT" but its as close to a solid working plan with all the mechanics for generating a good income stream as i have seen yet.

Most planning leaves the mechanics of getting that income stream from your investments out.

 

[donheff]

If you rebalance periodically (at least annually), then you are more or
less doing this selling mindlessly. The idea of buckets is, instead, to do it
opportunistically.

I think this is essentially correct. Ray would advise that the "bucket" concept is easier to properly grasp that good alllocation practices. Drawing expenses from bucket 1 keeps you pulling from the corect asets for year to year expenses. I guess it is a withdrawal selection strategy as much as an asset allocation strategy.

Lets go with the 1M portfolio with a starting withdrawal rate of 4% equating to $40,000 per year. Using 3 buckets with bucket 1 and 2 each containing 7 years expenses, how would each the following buckets be invested in terms of allocations:

Bucket #1: $280,000
Bucket#2: $280,000
Bucket #3: $440,000

I viewed the amounts like you show here until Ray described his example of a guy with $1.1M. Buckets 1 and 2 were substantially less (I can't remember the exact amounts). Remember: you don't need a full 7 x yearly expenses because the bucket will be appreciating at a fixed or relatively safe rate.

 

[youbet]

No john , no market timing here. Only a rule that says dont sell stock into a down market and a method for preventing it. How you refill is up to you, its not critical as long as bucket 2 always has 3-5 years in it min.

I'm beginning to like this system! If I've spent most of bucket one and two and need to refill, I don't have to sell stock from bucket three to refill, but rather it's "up to you, it's not critical as long as bucket 2 always has 3-5 years in it." Now that I understand that buckets one and two can be replinished, in Ray's system, without selling from bucket three, I'm starting to see the difference between this and other withdrawal systems that use a cash-first approach. There is some unspecified source of funds for replenishment that doesn't involve working or selling equities. That's nice. Will volume two of his book specify what that source of funds is? Lottery winnings? Inheritance?

 

[hogwild]

Lets go with the 1M portfolio with a starting withdrawal rate of 4% equating to $40,000 per year. Using 3 buckets with bucket 1 and 2 each containing 7 years expenses, how would each the following buckets be invested in terms of allocations:

Bucket #1: $280,000
Bucket#2: $280,000
Bucket #3: $440,000

The amounts you would put in each bucket is determined by a formula (or can use the table provided in the book). I put the Excel type formula in a previous post. For an example using the $40,000 initial expense and using 7 year buckets and initial portfolio of $1MM:

bucket #1 $243,864
bucket #2 $199,466
bucket #3 $556,670

This will also vary on the inflation and return assumptions you make. In this example I used 3% inflation, 4% return for bucket #1 and 6% return for bucket #2.

 

[youbet]

Ray would advise that the "bucket" concept is easier to properly grasp that good alllocation practices.

Ding ding ding!!!

There ya go! There is absolutely nothing new or unique about Ray's system other than the jargon. The concept of withdrawal plans that utilize a conservative asset allocation scheme coupled with significant cash balances is hardly new. Ray has packaged it "for the masses" and to the extent that it helps folks grasp appropriate allocation practices, I'm all for it.

In my own withdrawal scheme, I've got short, medium and long allocation categories and if I substitute Ray's bucket jargon, it's surprisingly similar.

I think I was confused listening to you Ray fans because I kept looking for something new beyond the jargon, names and terminology.

 

[Rich_by_the_Bay]

I'd encourage some of the posters to read the book instead of trying to pick up the contents piecemeal here... . For example, the bucket allocations do take into account inflation adjustment as detailed in the book. I hear he has a new edition released or soon to be.

One thing I found useful was looking at bucket 1 as a self-annuitized chunk of cash, or actually using a 7 year SPIA. It gets you out of worrying about selling shares of stock, or living off gains and appreciation of equities -- he confines your sales to the most stable and least vulnerable compartment.

Another thing I like is the "enforced" discipline which lets equities ride for 10-14 years virtually untouched, or only lightly touched.

Nothing Lucia advocates cannot be achieved through other strategies. It's just that he formats it in such a way that it is more intuitive to me.

 

[youbet]

he confines your sales to the most stable and least vulnerable compartment.

Yep. I'm doing something similar, although not because of Ray. After reading the recommendations of several of the popular financial authors/"gurus," as I neared retirement, I increased my cash/near-cash holdings and use those to fund current expenses. I have about a year (5%) in MM and a few years in CD ladders, bond ladders and a short duration bond fund. I replinish by rebalancing and from dividends. That is, I sell equities that have appreciated from time to time. As in virtually all rebalancing schemes, there is no selling of equities in a down market.

Ray has done a nice job of packaging this common practice into an easily understandable format with catchy jargon. Good work on his part.

Another thing I like is the "enforced" discipline which lets equities ride for 10-14 years virtually untouched, or only lightly touched.

Nothing Lucia advocates cannot be achieved through other strategies. It's just that he formats it in such a way that it is more intuitive to me.

Actually, there is nothing he writes that is actually unique or new except the packaging. And, he's done a good job at that. It's clear from all his fans on this board that he laid it out in a manner they can understand and vision executing.

One thing I do wonder is whether you will actually have the same equities 14 years after you start, untouched. Or, will you discover infrequent opportunities to judiciously churn things a little based on the changing economy and opportunities?

Ray won't have to worry about that. In fourteen years, he'll be happily retired and out of the advising and authoring business.

 

[Brat]

Yes, but even Lucia likes 4% withdrawal.

I think you have captured the essence of the bucket system. Whether it is new or unique isn't important, there is little 'new' under the sun. What is important is that it is new to me and I get it.

Bucketing at 4% is like belt and suspenders, just the pants insurance those of us in retirement find useful.

Remember, some of us are aging and face the reality that we will need to simplify our investment process on down the road. Leaving instructions about this method will help to insure that our bills will be paid with our investments. This concept is easily communicated.

 

[youbet]

What is important is that it is new to me and I get it.

And there's nothing wrong with that.........

 

[youbet]

Remember, some of us are aging

Really? Wow! I'm sure glad that's not me!

 

[wildcat]

Just stopping by and reading up a bit. After perusing this post, I hope Ray and his "buckets" go to hell.

 

[youbet]

Wildcat......I'm sure Ray will take that with the good intentions you meant.

I just noticed on Yahoo:

"AP - The Dow Jones industrial average surged past its all-time trading high of 11,750.28 Tuesday, taking yet another step in its recovery from seven years of market turmoil."

For you Ray fans..... What is Ray telling you now? I know he's not a market timer, but he does recommend "dribbling" from bucket three into bucket two while the market is high. So, are you doing so now?

For you not-Ray fans...... I'm hanging tough but wondering if it isn't time to do a little rebalancing and harvest a little of this.

 

[d]

wondering if it isn't time to do a little rebalancing

it's always time to do a little rebalancing!

 

[REWahoo]

it's always time to do a little rebalancing!

So.... Are you suggesting we're all a little unbalanced?

 

[youbet]

So.... Are you suggesting we're all a little unbalanced?

 

[hogwild]

FYI, Ray's new book "Ready...Set...Retire!: Financial Strategies for the Rest of Your Life" is supposed to be out in March.

 

[JohnEyles]

Remember: you don't need a full 7 x yearly expenses because the bucket will be appreciating at a fixed or relatively safe rate.

But that rate won't be all that much higher than inflation, since buckets 1 and 2
are in pretty conservative investments, right ? So maybe 6 years (in today's dollars) ?

 

[d]

Are you suggesting we're all a little unbalanced?

moi?

 

[donheff]

For you Ray fans..... What is Ray telling you now? I know he's not a market timer, but he does recommend "dribbling" from bucket three into bucket two while the market is high. So, are you doing so now?

For you not-Ray fans...... I'm hanging tough but wondering if it isn't time to do a little rebalancing and harvest a little of this.

Both sentences call for the same thing.

 

[youbet]

Both sentences call for the same thing.

I was trying to make that obvious, but thanks for pointing it out!

 

[mathjak107]

For the last few years i pretty much had 3 portfolios going each with a different time frame in mind. I had a 1-3 year ,,,4-6 and 6 years and out. Dont ask me why i used those numbers, it was just seat of my pants. How much in each ? Again seat of my pants.

Rays system filled in the missing pieces with at least some formulas and mathamatics that had at least some basis. Not a new concept as i was already doing this but it brought the fit and finish to it.

 

[youbet]

Well there ya go mathjack, that's great. I'm glad Ray's system is making you feel more comfortable. Feeling comfortable is pretty darn nice.

I'm more comfortable taking a single portfolio point of view, so I'm doing that.

Could you respond to my earlier question I put out to any of Ray's followers? Given that the domestic equity markets are at or near highs, are you moving money from bucket three to bucket two at this time? Is Ray's system giving you any inputs on how much "dribbling" to be doing right now?

 

[Rich_by_the_Bay]

Could you respond to my earlier question I put out to any of Ray's followers? Given that the domestic equity markets are at or near highs, are you moving money from bucket three to bucket two at this time? Is Ray's system giving you any inputs on how much "dribbling" to be doing right now?

If I may, there seems to be a slight misunderstanding about buckets: Ray doesn't tell you what to buy for each bucket, so it is hard to answer your question from a "Ray Lucia" perspective. You do whatever you would do with any other system. Like the run-up? Then prune a bit. Prefer to ride it out? By all means sit tight. The buckets don't tell you specifically what to buy or when to sell, just the general type of asset to consider. Plenty of personalization once you get beyond that -- you can even decide to shorten your cash in favor of equities and still be bucketized.

Like others, I really like the basic framework, but my specific assets and sell/buy decisions will be very different from someone elses. It just keeps it clear what you are doing, for better or worse.

Hope that helps.

 

[youbet]

Hope that helps.

What I'm fishing for Rich, and I suppose I should launch a new thread, is whether folks are sensing equities are high and shifting out of them. Whether you call it refilling bucket one or two from bucket three, rebalancing, taking money off the table, changing your allocation percentages or whatever, anybody feeling like we may be near a top?