Ray Lucia's new book

[WilliamG]

What rules of thumb do you use/plan to use in re-balancing buckets along the way? I currently have a 50/35/15 asset allocation that I like to think of somewhat in a bucket structure. Would a time independent re-balancing strategy using allocation ranges not work here? E.g,
Stock 45-55%
Bond 30-40%
Reserve 12-18%
You live out of reserve and then quarterly evaluate ranges and only shift between buckets when out of range.

 

[Rich_by_the_Bay]

What rules of thumb do you use/plan to use in re-balancing buckets along the way? I currently have a 50/35/15 asset allocation that I like to think of somewhat in a bucket structure.

Careful - a true bucket system is very different from a "bucket sorta like these are my buckets" system when it comes to rebalancing.

For example, in a true bucket system, your cash bucket is intended to shrink by 4% a year or so, burning up completely in the process. You basically don't rebalance into it other than every 7 years or so (or whatever your selected interval is).

There is some rebalancing between buckets 2 and 3, but that is intended to be light. Finally, you do rebalance within bucket 3 in the traditional way - when it's well out of kilter, or every year or two.

 

[WilliamG]

Thanks for the reply Rich. Yes, I just got off Ray's web site after running his demo and I see your point.

Still, I kinda like this approach. Rebalancing on ranges allows the long and intermediate allocations (buckets) to run a little bit without a mechanical rebalancing on time while also not letting the overall portfolio get too strangely disproportioned. If you route most dividends and interest to bucket 1, rebalances should be infrequent but hopefully the min-max on each bucket will cause a shift at opportune times (rather than when a clock runs out) .

 

[mathjak107]

dividends and interest are already figured into sustaining bucket 1. the origional capital you put in is say 7 years less what ever the interest and dividends you would accumulate over time. to make things work all you need as an example is 4% on bucket 1, 5% on bucket 2 , 7-8% on 3 .

your risk now only need match the buckets goal.

 

[WilliamG]

"dividends and interest are already figured into sustaining bucket 1."

That means bucket 3 & 2 dividends are routed to bucket 1 rather than re-invested? Regardless, it still seems like some method to gradually/ sporadically move money to bucket 1 over time without waiting for it to completely deplete would be desirable.

 

[mathjak107]

"dividends and interest are already figured into sustaining bucket 1."

That means bucket 3 & 2 dividends are routed to bucket 1 rather than re-invested? Regardless, it still seems like some method to gradually/ sporadically move money to bucket 1 over time without waiting for it to completely deplete would be desirable.

bucket 1 dividends and interest are figured initially in bucket 1. the other buckets can compound. i find the easiest way to refill buckets is whenever you have some nice gains take some profits out of 3 and refill 1 and 2 restoring them to another 14 year time frame.

 

[WilliamG]

"i find the easiest way to refill buckets is whenever you have some nice gains take some profits out of 3 and refill 1 and 2 restoring them to another 14 year time frame."

Well then you're doing what I would feel more comfortable with. Somehow you must decide when to pull the trigger on plumping buckets to another 14 year timeframe, but basically the buckets are just another manner of crafting a portfolio's allocation.

ps - have read a couple of articles lately recommending less rather than more re-balancing activity. the buckets seems to be an approach which will result in relatively infrequent tinkering which I think is probably a good thing.

 

[Rich_by_the_Bay]

Well then you're doing what I would feel more comfortable with. Somehow you must decide when to pull the trigger on plumping buckets to another 14 year timeframe, but basically the buckets are just another manner of crafting a portfolio's allocation.

William, if that's what you are comfortable with by all means go for it. But understand that it is not what's being touted by Lucia. He recommends a rather restrained approach to rebalancing, particularly in re: B1.

So do your thing but if you want to give due consideration to the traditional bucket approach you should give it a good read.

I am not promoting any specific plan but I am sensing that you may be more of an Armstrong than a Lucia.

 

[mathjak107]

the reason i wouldnt wait until buckets were empty to refill is that while it may be true you have very little chance of being down in a 14 year period ,what if the market was down 40% like in the early 2,000's. id rather refill gradually in good times and give up a little bucket 3 gains then wait and gamble on the market not being in a long term drop when a bucket was empty.

in fact ray talks about if your gains are higher then anticipated take the excess and move it down a rung. by the same token if you end up with more in 1 or 2 take the excess when bucket 3 fails to achieve its goal and buy more

 

[WilliamG]

"But understand that it is not what's being touted by Lucia."

Point taken. I have only looked at the demo at his site and was intrigued by "bucket structuring". Am just looking for more specificity in what parameter(s) should trigger bucket shifts as described by mathjak. I read Frank Armstrong in 1999 the year before I retired and liked his two bucket analogy for avoiding selling stocks in a down market. Not much in specifics there either. Just thought putting some sort of guideline on min-max of each bucket might be useful in flagging possible shifts, but didn't intend to hi-jack thread off subject.

 

[Rich_by_the_Bay]

I have only looked at the demo at his site and was intrigued by "bucket structuring".

Yep, the web site cartoon is too simplistic. FWIW, Lucia does recommend not letting your B2 get down below 2 yrs worth of expenses, so that's one broad indicator of when to rebalance buckets.

As for rebalancing between B3 and B2 or even within B3, it returns to the generic question of how often to rebalance (you might search under "rebalance" for other threads here). Personally, I will wait until something is more than 5-10% off its target, but in any case no more frequently than annually. Hope that helps, unscientific though it may be.

 

[modhatter]

I think the whole premis of Ray's book is to use your cheap money, while letting those investments with higher returns due their compounding, thus deriving the most return for the portfolio.

The problem lies I think in the timing. Again, I know all we have to go by is past performance. However, a 14 year period for your bucket #3 could start with a market drop of 30 percent followed by a up market and at the end of your 14 years another market drop. Not a good time to have to replenish bucket #2 or 1. And now on top of that your principal is gone in Bucket #1.

I do believe if the timing is RIGHT, that this approach will lend greater profits. However, if the timing and market is not so great, you could end of in worse shape. Hard to tell without running the scenerio through actual time periods. I think the biggest difficulty I have with this approach is spending principal. I do realize that it all works fine in the end if you are gaining over all. I just wonder how this approach will work in periods of a long extended flat market or two severe dips during your 14 year time frame.

 

[Rich_by_the_Bay]

The problem lies I think in the timing. Again, I know all we have to go by is past performance. However, a 14 year period for your bucket #3 could start with a market drop of 30 percent followed by a up market and at the end of your 14 years another market drop. Not a good time to have to replenish bucket #2 or 1. And now on top of that your principal is gone in Bucket #1.

I do believe if the timing is RIGHT, that this approach will lend greater profits.

It's market timing if you're counting on withdrawing only when the market is up. I think Lucia's point is that short term ups and downs pale in importance when the money has sat there for the last 14 years.

Example: $500k in B3 at 8% for 14 years grows to $1.47mm. If a very bad year happens to occur then, and markets are down 10%, you take out maybe $350k to replenish bucket 2, and lose $35k (10% of the amount transferred to b2) compared to what you would have taken out if the markets were neutral (any other loss is paper loss only - it'll bounce back eventually). Alot of money, true, but just a blip on the 14 year radar, and of course it's just as likely you might be UP 15% for the year. You just don't worry about market gyrations when you have that long a period.

And you will have done some light rebalancing along the way so the effect isn't even as aburpt as above. Hey, a catastrophic market will hurt everyone, buckets or not. But Lucia's plan is an "anti-timing" one in the big picture.

The system is designed such that the duration of time the money is left alone corresponds to how long that asset class has needed (at the most) historically to even itself out in its returns. Sure there will be variation depending on the market, but it'll likely be a ripple rather than an earthquake over a 14 year ride.

 

[ziggy29]

What rules of thumb do you use/plan to use in re-balancing buckets along the way? I currently have a 50/35/15 asset allocation that I like to think of somewhat in a bucket structure. Would a time independent re-balancing strategy using allocation ranges not work here? E.g,
Stock 45-55%
Bond 30-40%
Reserve 12-18%
You live out of reserve and then quarterly evaluate ranges and only shift between buckets when out of range.

Ray Lucia's "buckets" don't allocate fixed percentages to asset classes, but "years of income."

Someone who only needs 1% of their retirement portfolio might only have 5-10% of it in Bucket 1, whereas someone who needs 4% of it might keep 20-30% in Bucket 1.

This probably makes more sense than a traditional fixed allocation such as 70/30 or 60/40; someone who needs only 1% per year probably doesn't need 40% in bonds and can easily afford a more aggressive mix. As I (and others) said before, though, the fly in the ointment is that there is an element of market timing to this in terms of deciding when to move from Bucket 3 to Bucket 2, and from Bucket 2 to Bucket 1.

 

[mathjak107]

good point , we are talking years worth of money in allocations between buckets not in terms of gains. this strategy is not about gains, its about meeting the goal you need to sustain the income you need. theres a big difference . i only need to achieve 7% annual average return to meet my goal so i can pull the income i want. i dont have to put any more capital than needed to do this at risk. i can run each of buckets 1 and 2 a full 7 years each. i never have to sweat if this time the drop thats coming will be year 2000 again.

 

[modhatter]

I am reading the book now, and I can tell you that there is one point that I didn't like. Ray states in his book on a couple of occasions that the future gains for the stock market are probably not going to equal what they did in the past and estimates total returns more along the 6.5 to 7% range.

Yet when he makes his comarisons of using the traditional 4 or 5% withdrawl method compared to his bucket stratagy, he always uses a 10% gain in bucket # 3 with a substantial ending balance to demonstrate what good shape you will be in at the end of 14 or 15 yrs.

I feel this is misleading, and he needs to be consistant with his numbers in his probable scenerios. Over all, I am not critisizing the book or stratagy. I think it is a very conservative and safer withdrawel plan for retired investors. But you always hope that the author for the book you just paid good money for is on the up and up, and truly believes in what they are advocating, and not just compiling words to make millions off another book.

But in all fairness, I have not finished the book, and I may have missed something. So stay tuned and I'LL BE BACK.

 

[ats5g]

Does Lucia, or even Grangaard for that matter, provide any actual historical simulations to back up their claims that the bucketing approach is better than X,Y, or Z approach? I read "The Grangaard Strategy" and "Buckets of Money" and have yet to see this data.

Anyone?

- Alec

 

[walkinwood]

I have not read his book, but looked at his website to get an idea of the buckets.

I find it hard to reconcile this with studies on the Safe Withdrawal Rate. Those studies have shown that you need 50-70% of your assets in equities to sustain a 4% initial SWR.

I'm doing these calculations in my head, so they're simplistic.

For a 7 year bucket 1, you'd need to put almost 30% of my portfolio in bucket 1 ($1M port. 7yrs at 4% = $280K. Assume return matches inflation). That leaves me with the 70% for bucket 2 & 3.

From the discussion above, it sounds like bucket 2 needs a good dollop of tips/bonds. That may get you to below the 50-70% in equities you need to sustain the 4% SWR.

It seems to me that it would work only if you put your more conservative equities in bucket 2 (say domestic large cap) and all your riskier (small/international) equities in bucket 3.

 

[Rich_by_the_Bay]

I have not read his book, but looked at his website to get an idea of the buckets.

I find it hard to reconcile this with studies on the Safe Withdrawal Rate. Those studies have shown that you need 50-70% of your assets in equities to sustain a 4% initial SWR.

Seems to be a lot of firey chatter about this book from people who haven't read it.

The allocations work. You annuitize bucket 1, so 4% x 7 years works out to less than 4 x your anticipated annual expense. It burns itself out at 7 years (or whatever interval you select). And you eventually annuitize your bucket 2 which, while it needs to be up-adjusted for inflation, has a 7 year headstart.

Buckets 1 and 2 combined come to about 50% or a little less of your assets in typical scenarios; they accordian a bit over long periods of time. Bucket 3 (50% or more of your total nest egg) sits in equities for a lllloooonnnnggg time.

Read the book. You may or may not like it, but at least you'll know what it says.

 

[mathjak107]

I am reading the book now, and I can tell you that there is one point that I didn't like. Ray states in his book on a couple of occasions that the future gains for the stock market are probably not going to equal what they did in the past and estimates total returns more along the 6.5 to 7% range.

Yet when he makes his comarisons of using the traditional 4 or 5% withdrawl method compared to his bucket stratagy, he always uses a 10% gain in bucket # 3 with a substantial ending balance to demonstrate what good shape you will be in at the end of 14 or 15 yrs.

I feel this is misleading, and he needs to be consistant with his numbers in his probable scenerios. Over all, I am not critisizing the book or stratagy. I think it is a very conservative and safer withdrawel plan for retired investors. But you always hope that the author for the book you just paid good money for is on the up and up, and truly believes in what they are advocating, and not just compiling words to make millions off another book.

But in all fairness, I have not finished the book, and I may have missed something. So stay tuned and I'LL BE BACK.

based on rays calulations to make my plan work he figured 4% on bucket 1 ... 5% bucket 2......... 6% bucket 3a growth and income...... and bucket 3b is 8% . i dont remember seeing 10% used in any calculation,. i only remember him refrencing the fact that the markets have returned around 10% on average

 

[modhatter]

OK, your making me work and go back through the book to find stuff. Pg. 98 doesn't mention the 10%, but does says:

"Take the period 1966 to 1982. Let's say you had 1 million invested in a 60-40 mix of stocks and T-Bills, and you wanted to withdraw 5 % annually ($50,000 per year), plus 3 percent for inflation. You would've been able to do that for a number of years. But by the end of 2003, there would've been vertually no money left in the account ($30,000 to be exact)

If the same individual bucketized-investing 40 percent inT-Bills, 20 percent in a 7 percent yielding Reit (assuming no future growth), and 40% in stocks - he or she would have been significantly better off. That person would've taken the REIT earnings (7 percent) and fullly depleted the T-bill prtfolio for income over theseveral years, then began selling off the REITS, and then finally sold the stocks (S&P 500) The result, if that hypothetical strategy had been adapted in 1966, would have given the investor an income of about $150,000 in calandar year 2003. And his investments would have grown the astonishing sum of $4.7 million." Note: he says in 2003 - 37 years later. What about the 15 year time frame his book talks about.

As then he goes on to say:
"Remember, in 1966 the Dow stood at about 1,000 and by 1982, it was still around 1,000. While there were dividends paid, the market hadn't appreciated for 16 years. Those were devastating times, especially for retirees needing income from their portfolio.

So, then instead of looking at 37 years, which most retirees don't have, where instead would the investor have been at the end of those 16 years with that flat market between 1966 and 1982? He had to add quite a number of years for it to look so good.

Then on page 131 he has made a sort of chart called "JOHN & CHRIS'S BUCKET PLAN" He shows:
$140,000 in bucket #1 earning 4.5%
$120,000 in bucket #2 earning 6%
$390,000 in bucket #3 earning 10%
With a net value left in Bucket #3 after 15 years of $1,630,000

Now, my argument is, you don't make charts using the numbers that you have previously said you do not feel are attainable(10%) when you have said earlier on that you will probably only see future returns in the (6.5 to 7%) for stocks.

As far as how he know this system works, you can only take his word for it as all he says is "I have back tested it". There is no way to tell if this is fact or fiction. Either you believe him or you don't. I wish there was a way we could "back test" this stratagy ourselves.

The only difference in Ray's way is telling you to spend down your principal in bucket #1, giving your other two buckets time to grow bigger, which other advisors would not suggest doing. Who's right?

 

[mathjak107]

you can run the calculator on the website, 8% is max in his calculations.

theres lots of numbers thrown about in the book just for illustrations but arent the real working numbers. its like 10% is the figure thrown about for the average market returns but no one is ever average. average american family is 4.4 people but i never met a family like that ha ha ha

 

[modhatter]

Mathjak107,

Run calculations on what calculator. Are you talking FireCalc?

And thus far, I have not seen 8% used in any of his charts, but have not finished book.

 

[mathjak107]

no, the calculator on rays site for how much in each bucket and what you need in return to make it work

Raymond J. Lucia Companies, Inc. - Buckets of Money Planner

 

[chinaco]

Lucia's approach is not any different than most traditional allocation techniques. Cash, Bonds, Stock. Near term money for 5+ years in short-term instruments (safe).


I have not read his books so I cannot comments on some of the proposed micro-mechanics of replenishing the buckets. But based on his slide-show at his site. The main feature that is a little different is that he does not rebalance/diversify the stock investment until about 14 years. He lets the bond investment ride for 7 years then moves to cash.

I have read some articles that indicate that longer rebalancing periods more efficient (taxes and let the stock value grow).

Does Lucia describe how he works the stock cashout in year 14. The Demo kinda indicates that it happens at one time. Of course, there are a number of implications. Moving that amount of money might tigger AMT, plus year 14 might be the time a big stock market correction occurs. Does he talk about this in his book?