Bogleheads

[hudson]

$300,000 in Three Buckets...to last 30+ years from age 66 to 96


Bucket 1 = $124,274, age 66 to 76, $1200/month, assume 3% return, use all
Bucket 2 = $92,888 grows to $167,012 assuming 6% growth, age 76 to 86, $1613/month, use all
Bucket 3 = 82,838, grows to $320,558 assuming 7% growth, renew buckets

Bucket 1 Looking for a 3% return
33.33% Vanguard Prime
33.33% Vanguard Intermediate Term Treasuries
33.33% Vanguard Inflation Protect Sec. Inv

Bucket 2 Assuming a 6% return
33.33% Vanguard Intermediate Term Treasuries
33.33% Vanguard Inflation Protect Sec. Inv
16.67% Vanguard Total Stock Market
16.66% Vanguard Vanguard FTSE All-World ex-US Index

Bucket 3 Assuming a 7% return
35% Vanguard Total Stock Market
35% Vanguard Vanguard FTSE All-World ex-US Index
10% Vanguard Small-Cap Index
10% Vanguard REIT Index Fund
10% Vanguard Long-Term Treasury Fund

How can I improve? I plan to read the other books that CyberBob recommended.


Thank you CyberBob and Ray Lucia (Buckets of Money)!
Note: The asset allocation strategy is from Diehards/Bogle/Ferri/Swedroe/Larrimore/Lindauer/Lebouef/Bernstein.

http://www.diehards.org/forum/....54df6fed6a
http://www.amazon.com/Buckets-....amp;sr=1-1

[market timer]

Have you considered inflation?

[hudson]

"Have you considered inflation?"

Somewhat...From Bucket 1 to Bucket two is an increase for inflation from $1200 per month to $1613 per month. Inflation protected bonds are included as well as stock mutual funds.

[market timer]

What happens to bucket 3 when you're 85? Still invested 90% in equities?

In terms of your returns, they look reasonable in expectation. The second bucket is probably expected to return less than 6%, while the first and third might be expected to return a little more than your targets of 3% and 7%.

[markh]

What am I missing?

isnt 3 percent of 124,000 about 3700 per year? how does it come out to 1200 per month

mark

[nisiprius]

[cherijoh]

[Rich_in_Tampa]

I think Ray would say:

Bucket one probably shouldn't have intermediate term bonds or even TIPS (safe as they are, they can fluctuate in value when owned through a mutual fund). Nothing longer than short term bonds is the guide there.

Bucket 2 should have nothing more volatile than something along the lines of a 60:40 balanced fund, so I would take the total stock market index and the FTSE EFT out of bucket 2. I like intermediate bonds, TIPs, and Wellesley here, by the way.

Bucket 3 is where your total stock, international idx, REIT fund, etc. belong and remain untouched for, say,14 years. Only one I don't see fitting in there is your LT bond fund - this is a growth bucket.

Yes, you burn through or "self-annuitize" bucket 1, then move bucket 2 to bucket 1 and repeat. In the interim you can do a little light rebalancing from 3 to 2 or 2 to one when returns beat expectations. But largely you leave bucket 3 alone. I am oversimplifying but that's the gist of it.

At the end of say 14 years you are almost entirely in stocks, but the 14 year hold virtually assures that you are well ahead at least historically. The long term growth, trumps any current ups and downs of the market when you are finally ready to reallocate that bucket. Just replenish buckets 1 and 2 using bucket 3 according to the original formulas (present value calculations based on historic returns for each bucket).

The sequence of withdrawing cash first, then bonds, then stocks as a withdrawal strategy (versus conventional pro-rata withdrawals with rebalancing, or selling whatever is high at that time) has support in academic studies - Spitzer et al, Journal of Financial Planning, June 2007.

While I am not a 100% adherent to the Lucia plan, I have something pretty close. Bogel meets Lucia, you might say. It is NOT for everyone, but I rather like it.
_________________
Rich

[4th&Goal]

I like the buckets strategy and Grangaard and Seguptha too (Though I may have butchered the spelling).
_________________
"I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left."
(Voltaire)

[mikenz]

[Skiffy]

Which retirement books talk about the "bucket" system for retirement spending?

[CyberBob]

[JDeeds]

Frank Armstrong proposed a similar strategy, but different in many ways from Lucia. Basically, he proposed that you keep 7-10 years of anticipated expenses in ST Bonds to draw from and the remainder in stocks. In good years, you would replenish your bonds portfolio from stock gains. The portfolios would be managed separately. This is very close to my plan, which I am implementing this year, although I am somewhat more conservative as this would result in a higher level of stocks than I am comfortable with.

http://www.investorsolutions.c....rement.pdf
_________________
Jim

[Rich_in_Tampa]

[mikenz]

Thanks for that.

What split do you have between taxable and tax-advantaged? Do you hold the stocks in taxable? If so you'd be drawing down the tax-advantaged accounts it seems.

Also, if the stocks in bucket 3 did really well for a few years, would you siphon off some of the gains prematurely, or simply stick with the plan for the full 14 years?

[Rich_in_Tampa]

[4th&Goal]

Rich,
What percentage of your portfolio is in Bucket #1?
_________________
"I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left."
(Voltaire)

[bobbyrx]

Ray Lucia does say somewhere in his book that you never actually burn through bucket #2 but keep replenishing bucket #1 with rebalancing from equity gains in bucket #3 (assuming that happens). I surmise then that bucket #2 becomes a sort of permanent buffer. This way of thinking suits my personal risk averse nature and has been working for me.

[ddb]

The bucket system seems unnecessarily complicated to me; kind of a "mental accounting" trap. When you combine all three buckets as you lay out, you have a certain aggregate asset allocation, and that's the thing that really matters (not how each bucket is separately allocated).

Having said that, instead of using bucket 1, why not purchase a single-premium immediate annuity with a 10-year guaranteed payout rate (not a lifetime payout). You can buy an income of $1200 per month (no inflation adjustments) for around $122,000. You have now removed all uncertaintly in bucket 1 and saved yourself a few thousand dollars, at the cost of potential upside. Seems pretty reasonable. Of course, the inherent IRR in such a product is only around 3-4%, so you may be uncomfortable locking yourself in to such a low return over ten years.

The above is not a recommendation to implement any particular product or strategy.

- DDB
_________________
"I know that your friends are my friends and, uh... I've thought about that. You can have 'em" - PB

[Rodc]

[4th&Goal]

[CyberBob]

[SteveB3005]

ddb writes,
instead of using bucket 1, why not purchase a single-premium immediate annuity with a 10-year guaranteed payout rate (not a lifetime payout). You can buy an income of $1200 per month (no inflation adjustments) for around $122,000.

This struck me as what could be an excellent tool for some people who have not saved a sizable sum for retirement. This could allow those people to delay taking Social Security till 70 years old and collect the substantially higher payout. The people who had not saved a lot would be more than likely working at least part time anyway and the $1200 a month would be a guaranteed monthly boost. What it would do is take the stress out of a possible market crash at that most inopportune time of right before retirement that would cripple what little savings they had.

[williamg]

[quote="Rodc"]

[retired at 48]

To: Hudson and Rich in Tampa

My reaction was similar to ddb and Rodc ...why not do same thing in one portfolio...but bucket concepts help clarify what one is doing.

I implemented a similar thing, having to get from age 48 (retired) to age 60 when a pension begins, and age 62 when ssi kicks in. I withdrew $48,000 per year from an IRA using an "annuitized withdrawal formula" , which per IRS regulations avoided the 10% early withdrawal penalty.

I essentially used the "bucket approach". and it worked.

Want more details, see my posting titled "First time poster's IRA at $1,000,000: shares wisdom learned."

Even with a planned downturn in my IRA, it went up!

Retired at 48

[JDeeds]

[ken250]

hudson,

I think the buckets with stocks in them are relying too heavily on growth.

I would adopt a value/dividend tilt on top of those low income broad stock indexes to supplement the bonds, REITs, cash, etc.

[4th&Goal]

[Rich_in_Tampa]

[nisiprius]

[Rich_in_Tampa]

[Rich_in_Tampa]

[Rich_in_Tampa]

[bobbyrx]

I too sensed that Lucia tends toward infrequent rebalancing except during stellar equity years when you would replenish bucket #1. I like this whole concept although, of course, it is a variation of mental accounting.

Nisiprius is correct that there have been 15 year periods when stocks went nowhere. But I would rather face such a period with 30-35% of my assets in an equity bucket #3 where I have a chance of eventual recovery than in a unified 60/40 equity/bond portfolio.

Bob

[Rich_in_Tampa]

[ddb]

Another problem I see with the bucket approach (as presented in this thread's original post) is as follows: if you are making your withdrawals for the first 10 years from a bucket which contains entirely cash and fixed income, then your portfolio-level asset allocation (all three buckets combined) is automatically becoming more aggressive (i.e. equity-oriented) each year, even if you rebalance buckets 2 and 3 back to their initial allocations each year. Makes no sense.

- DDB
_________________
"I know that your friends are my friends and, uh... I've thought about that. You can have 'em" - PB

[bobbyrx]

I think that if you replenish bucket #1 with outsized gains (hopefully) from bucket #3, you will achieve a degree of rebalancing.
But the whole bucket concept, which I am partial too, leads to me to ask a contrarian question.
We are supposed to be tilted more toward equities in early retirement and less so in old age. But I have always wondered whether the reverse is true. If I begin with a $40k draw from a $1million portfolio of equities and have the misfortune of retiring in 1973-1974 or 2000, my initial $40k will be about 5.7% instead of 4% in year one and my portfolio might enter a death-spiral if I don't retrench. But if I am heavier in bond buckets in early retirement and more in equities by age 80 and a dismal period occurs, I should be able to ride out the limited years left and still leave an estate. Or is this totally crazy?

[gkaplan]

I find the whole bucket approach overly complicated and unnecessary. On the other hand, I may feel differently when I retire.
_________________
Gordon

[JDeeds]

[Rich_in_Tampa]

[Rich_in_Tampa]

[CyberBob]

[ddb]

[mikenz]

This is a great thread. We should really ask the administrators for a separate Retirement forum.

I think I'll consider some form of a bucket strategy when I retire - I may have to have a backup plan for DW if something happens to me - like "sell everything and put it all into Wellesley" She'd never make any sense of any of this.

[4th&Goal]

[bob90245]

[CyberBob]

[Rodc]

[ddb]

[market timer]