Retirement portfolio: buckets or not?

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jefmafnl
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Retirement portfolio: buckets or not?

Post by jefmafnl »

Various strategies have been suggested in structuring a retirement portfolio to avoid "selling stocks while they're down."

1 For withdrawals (beyond income generated by portfolio), use bucket or buckets (presumably separate from the main retirement portfolio) containing withdrawal requirements for x years in money market funds, short-term CD's, short-term bonds, or short-term bond funds. x might be a number from 1 to 5. Use these funds for withdrawals, and replenish the bucket(s) from the main portfolio.

Possible disadvantages: might make overall portfolio too conservative; doesn't explain which funds from main portfolio are used to replenish bucket(s), and thus what happens to asset allocation (AA) or main portfolio.

2 For withdrawals (beyond income generated by portfolio), "if stocks are down" (?), use the bonds (or bonds + "cash") allocation of the main retirement portfolio.

Possible disadvantages: how does one judge whether "stocks are down"? Also, if done for several years, this would tend to make the AA of the main retirement portfolio more stock-heavy and thus more risky.

What about simply structuring the withdrawals to dynamically rebalance, i.e., to maintain (or adjust gradually downward, if desired) the stock / bond ratio of the portfolio?

Joel
jbk
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Post by jbk »

This is being covered in a current thread here: http://www.bogleheads.org/forum/viewtop ... 1274011769

Why start a new one?
livesoft
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Post by livesoft »

Here are a couple of past thread on your thoughts:

http://www.bogleheads.org/forum/viewtopic.php?t=46332

http://www.bogleheads.org/forum/viewtopic.php?p=632278
What about simply structuring the withdrawals to dynamically rebalance, i.e., to maintain (or adjust gradually downward, if desired) the stock / bond ratio of the portfolio?
So I completely agree with you.
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bob90245
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Re: Retirement portfolio: buckets or not?

Post by bob90245 »

jefmafnl wrote:Possible disadvantages: might make overall portfolio too conservative...
I think you have this backwards. Following the Bucket approach will make the portfolio more aggressive as the "safe" bucket is withdrawn first. Here is an illustration:

Image
Source: http://www.bobsfinancialwebsite.com/Har ... awals.html

And here is a demonstration from Buckets advocate Ray Lucia:

http://www.rjlwm.com/content/bomdemo.cfm
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
Topic Author
jefmafnl
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More conservative at first, more aggressive later...

Post by jefmafnl »

Thanks for the replies.

Bob, what I meant (and could have stated more clearly) was:

If the retirement AA (without the buckets) follows "traditional" guidelines (say, something like 60/40 at beginning of retirement), then the addition of buckets will make the total AA (buckets + retirement) more conservative.

Withdrawing from the buckets may (depending on how they're refilled) make the total AA steadily more aggressive.

The buckets seem to contradict the "keep it simple" mantra ...

Joel
Ron
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Re: More conservative at first, more aggressive later...

Post by Ron »

jefmafnl wrote:The buckets seem to contradict the "keep it simple" mantra ...

Joel
As a retiree and one who has (along with my wife) a "cash bucket" for current expenses, I can say that it does indeed make it "simple".

While I can fret all I want with the current market gyrations, I've learned that it is a false sense of urgency.

I don't need my equity/bond portfolio to live (and no, I don't have a pension nor drawing SS at this time). I have my cash (3-4 year gross income target) to get me over the "suspense" of the current market.

Decisions made under duress (such as a down market, drawing your income from your portfolio, and selling in panic during down periods) provide much more "duress", IMHO.

Just my opinion, for what it's worth...

- Ron
RadAudit
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Post by RadAudit »

Ron -

Good observation. I found that buying during down periods has its own stresses.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
Ron
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Post by Ron »

RadAudit wrote:Ron -

Good observation. I found that buying during down periods has its own stresses.
If you are buying during down periods, then good for you. It certainly helped in our own progress (BTW, paid off our last note/mortgage in late 1999 and then put that payment into the market during a down period).

Sometimes, you can't account for "dumb luck" :roll:

Of course, you still have the question at the time "did I buy too high, even in a depresssed period?"

That can't be answered till later (yeah, it's a bitc*).

Plan for the worst - hope for the best. That's always been our credo.

- Ron
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bob90245
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Re: More conservative at first, more aggressive later...

Post by bob90245 »

jefmafnl wrote:Bob, what I meant (and could have stated more clearly) was:

If the retirement AA (without the buckets) follows "traditional" guidelines (say, something like 60/40 at beginning of retirement), then the addition of buckets will make the total AA (buckets + retirement) more conservative.
Then you have a different definition of what is commonly refered to as the Bucket approach popularized by authors such as Ray Lucia and Paul Grangaard.

What you propose is to have a separate cash reserve that you arbitrarily named "Bucket".

So yes a separate cash reserve when combined with your 'retirement investments' (60/40) will start out more conservative as you suggest. However, what you are doing really is mental accounting. However, if that helps you visualize your approach, I'm not going to argue.
Last edited by bob90245 on Sun May 16, 2010 10:00 am, edited 1 time in total.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
Levett
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Post by Levett »

Ron wrote:

"Plan for the worst - hope for the best. That's always been our credo."

My favorite version of the above (not original with me) is:

"Optimism may well be a great life strategy. However, hope isn't a good investment strategy." :wink: Bob U.
There are some things that count that can't be counted, and some things that can be counted that don't count.
Ron
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Post by Ron »

bob u. wrote:(not original with me)
Heck, I view as you as "one of a kind" (e.g. "unique") :lol:

- Ron
williamg
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Post by williamg »

"What you propose is to have a separate cash reserve that you arbitrarily named "Bucket".""What you propose is to have a separate cash reserve that you arbitrarily named "Bucket"."

Lucia didn't copyright "bucket". My first bucket approach came from Frank Armstrong who used (if I recall correctly) a one year cash bucket and then a 2nd bucket of short term bonds equal to 5-7 years spending needs.
Sidney
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Post by Sidney »

williamg wrote:"What you propose is to have a separate cash reserve that you arbitrarily named "Bucket".""What you propose is to have a separate cash reserve that you arbitrarily named "Bucket"."

Lucia didn't copyright "bucket". My first bucket approach came from Frank Armstrong who used (if I recall correctly) a one year cash bucket and then a 2nd bucket of short term bonds equal to 5-7 years spending needs.
I don't think the comment was made with respect to the use of the label "bucket" but rather that the bucket-type investing is more mental accounting than reality.
I always wanted to be a procrastinator.
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bob90245
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Post by bob90245 »

williamg wrote:"What you propose is to have a separate cash reserve that you arbitrarily named "Bucket"."

Lucia didn't copyright "bucket". My first bucket approach came from Frank Armstrong who used (if I recall correctly) a one year cash bucket and then a 2nd bucket of short term bonds equal to 5-7 years spending needs.
My apologizes. I wasn't aware that Armstrong used a similar approach. In fact, my recollection is different. I have Armstrong's article where he talks about a "two bucket" approach and decision rules for when to take withdrawals from bonds and when to take withdrawals from stocks. Read it here:

http://www.sink-swim.com/uploads/docume ... rement.pdf
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
williamg
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Post by williamg »

Hi Bob - Didn't mean to sound snide :oops:

I read an Armstrong article in 1999 and retired in 2000 with it influencing our retirement planning. You are right about the 2 buckets. His article and latest book (i think) posits an annual review and withdrawal of cash for one year. I translated that one year into a third bucket.

Comment about being able to mentally categorize a portfolio into buckets for various strategies is quite true.
leonard
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Post by leonard »

People get too hung up on the analogy of "bucket".

Match the duration of your financial assets to the expected time you will need the cash flow, plus any reserves you need to feel comfortable about risk and emergencies.

If you do that, you can call them "buckets", "baskets", "barrels" or whatever - it won't matter.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
jebmke
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Post by jebmke »

leonard wrote:People get too hung up on the analogy of "bucket".

Match the duration of your financial assets to the expected time you will need the cash flow, plus any reserves you need to feel comfortable about risk and emergencies.

If you do that, you can call them "buckets", "baskets", "barrels" or whatever - it won't matter.
My chief complaint about using "buckets" or similar terms is that it tempts people to forget that money is largely fungible. This can result in making some pretty basic errors (like holding equity in tax-deferred accounts that are "retirement" accounts while holding bonds in taxable accounts "for liquidity"). Sometimes these errors can be disastrous for people personally.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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