Christine Benz's Three Bucket System

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
CaliJim
Posts: 3050
Joined: Sun Feb 28, 2010 8:47 pm
Location: California, near the beach

Re: Christine Benz's Three Bucket System

Post by CaliJim »

You only need one bucket if it is big enough.

Save early and often.
-calijim- | | For more info, click this Wiki
Fundhunter
Posts: 181
Joined: Sun Mar 11, 2007 9:11 pm
Location: Atlanta

Re: Christine Benz's Three Bucket System

Post by Fundhunter »

dbr wrote:
Fundhunter wrote:
Not everybody on this board subscribes to the 3-fund portfolio. I do not, because of the recommended fixed income fund which is Total Bond Market, which contains a slug of long bonds. I agree with Larry Swedroe and his book that the relatively small increase in yield is not worth the very high interest rate risk that long bonds have. I have 3 different fixed income funds: short, intermediate and TIPS, and I rebalance between them, avoiding long bonds.
I don't consider that a meaningful deviation from the essence of a three fund portfolio even if it is literally a five fund portfolio. I do things like that myself and still recommend the "three fund" portfolio to most anyone.
Well how many funds is too many to still be a "3 fund portfolio"? I also overweight small cap and mid cap equities somewhat, so I do not use Total Stock Market Fund, but use 500 Index, Small Cap Index, and Mid Cap Index and rebalance between them. I agree with the "3 fund" concept of cheap Index funds for US, International and fixed income, but just do a little more slicing and rebalancing than holding just 3 funds.
cody69
Posts: 64
Joined: Sat May 03, 2014 7:46 am

Re: Christine Benz's Three Bucket System

Post by cody69 »

My understanding from reading Jim Otar's book and Jane B. Quinn's most recent How to Make Your Money Last, is the buckets are there to minimize the need to sell stocks at a loss when markets are down. The cash bucket pays expenses not covered by SS, pension and other non-investment income. During longer bear markets, short term bonds in the fixed income bucket are tapped to pay bills.

For those who do not see a need for buckets, what is your withdrawal strategy plan during retirement? Is it essentially the same (sell fixed income investments), or do you plan to sell and re-balance the portfolio -- how do you plan to handle this during a bear market?
Fundhunter
Posts: 181
Joined: Sun Mar 11, 2007 9:11 pm
Location: Atlanta

Re: Christine Benz's Three Bucket System

Post by Fundhunter »

Fundhunter wrote:
dbr wrote:
Fundhunter wrote:
Not everybody on this board subscribes to the 3-fund portfolio. I do not, because of the recommended fixed income fund which is Total Bond Market, which contains a slug of long bonds. I agree with Larry Swedroe and his book that the relatively small increase in yield is not worth the very high interest rate risk that long bonds have. I have 3 different fixed income funds: short, intermediate and TIPS, and I rebalance between them, avoiding long bonds.
I don't consider that a meaningful deviation from the essence of a three fund portfolio even if it is literally a five fund portfolio. I do things like that myself and still recommend the "three fund" portfolio to most anyone.
Well how many funds is too many to still be a "3 fund portfolio"? I also overweight small cap and mid cap equities somewhat, so I do not use Total Stock Market Fund, but use 500 Index, Small Cap Index, and Mid Cap Index and rebalance between them. I agree with the "3 fund" concept of cheap Index funds for US, International and fixed income, but just like to do a little more slicing and rebalancing than works holding just 3 funds.
Fundhunter
Posts: 181
Joined: Sun Mar 11, 2007 9:11 pm
Location: Atlanta

Re: Christine Benz's Three Bucket System

Post by Fundhunter »

cody69 wrote:My understanding from reading Jim Otar's book and Jane B. Quinn's most recent How to Make Your Money Last, is the buckets are there to minimize the need to sell stocks at a loss when markets are down. The cash bucket pays expenses not covered by SS, pension and other non-investment income. During longer bear markets, short term bonds in the fixed income bucket are tapped to pay bills.

For those who do not see a need for buckets, what is your withdrawal strategy plan during retirement? Is it essentially the same (sell fixed income investments), or do you plan to sell and re-balance the portfolio -- how do you plan to handle this during a bear market?
Well said. We will likely experience one or more bear markets in a long retirement, and you want to make the periodic withdrawals from the very conservative fixed income portion of the portfolio only (or "bucket number1") to avoid selling any equities that have taken a hit (reverse dollar cost averaging).
jebmke
Posts: 12283
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Christine Benz's Three Bucket System

Post by jebmke »

cody69 wrote:My understanding from reading Jim Otar's book and Jane B. Quinn's most recent How to Make Your Money Last, is the buckets are there to minimize the need to sell stocks at a loss when markets are down. The cash bucket pays expenses not covered by SS, pension and other non-investment income. During longer bear markets, short term bonds in the fixed income bucket are tapped to pay bills.

For those who do not see a need for buckets, what is your withdrawal strategy plan during retirement? Is it essentially the same (sell fixed income investments), or do you plan to sell and re-balance the portfolio -- how do you plan to handle this during a bear market?
If you have anything other than a very high or 100% equity portfolio, a normal re-balancing portfolio wouldn't be selling stocks in a down market. This is why this argument doesn't hold water (except for high equity holders). Normal re-balancers would sell fixed income to eat and to balance.
When you discover that you are riding a dead horse, the best strategy is to dismount.
dbr
Posts: 34851
Joined: Sun Mar 04, 2007 9:50 am

Re: Christine Benz's Three Bucket System

Post by dbr »

Fundhunter wrote:
Fundhunter wrote:
dbr wrote:
Fundhunter wrote:
Not everybody on this board subscribes to the 3-fund portfolio. I do not, because of the recommended fixed income fund which is Total Bond Market, which contains a slug of long bonds. I agree with Larry Swedroe and his book that the relatively small increase in yield is not worth the very high interest rate risk that long bonds have. I have 3 different fixed income funds: short, intermediate and TIPS, and I rebalance between them, avoiding long bonds.
I don't consider that a meaningful deviation from the essence of a three fund portfolio even if it is literally a five fund portfolio. I do things like that myself and still recommend the "three fund" portfolio to most anyone.
Well how many funds is too many to still be a "3 fund portfolio"? I also overweight small cap and mid cap equities somewhat, so I do not use Total Stock Market Fund, but use 500 Index, Small Cap Index, and Mid Cap Index and rebalance between them. I agree with the "3 fund" concept of cheap Index funds for US, International and fixed income, but just like to do a little more slicing and rebalancing than works holding just 3 funds.
I would present the three fund portfolio as the center point of a simple and adequate portfolio and let people modify things as they are convinced there is something to be gained by doing so. Some differences hardly amount to anything and others might be more significant. It is a continuum. It is a mistake to think investing is a matter of hitting bullseyes in asset allocation or even less in fund picking.
cody69
Posts: 64
Joined: Sat May 03, 2014 7:46 am

Re: Christine Benz's Three Bucket System

Post by cody69 »

you want to make the periodic withdrawals from the very conservative fixed income portion of the portfolio only (or "bucket number1") to avoid selling any equities that have taken a hit (reverse dollar cost averaging).
This is what I view the bucket system to be designed to accomplish and makes sense to me. Yet with the number of Bogleheads that are not favorable toward buckets, I'm interested to understand their plan for funding retirement.
a normal re-balancing portfolio wouldn't be selling stocks in a down market. This is why this argument doesn't hold water (except for high equity holders). Normal re-balancers would sell fixed income to eat and to balance.
I see your point, when stocks are down, the fixed income percentage rises. I'm trying to understand the withdrawal strategy for those who advocate a standard portfolio -- is it conceptually different from the bucket system that has expenses paid from the fixed income/cash bucket?
User avatar
dratkinson
Posts: 5271
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Christine Benz's Three Bucket System

Post by dratkinson »

You don't want to deplete (be withdrawing from) equities during an extended market correction. As most corrections recover within ~4-years, if you can weather the correction, then you avoid the issue. How you do it is up to you.

Options:

1. Bucket system. Quinn, in her book How to Make Your Money Last, advocates something similar to Benz (but seems to be simpler).
--2yrs of cash (but it earns nothing),
--2yrs ST bonds (to get you though expected market recovery),
--Your other investments. (Refill buckets 1+2 when the market recovers and you can sell high.)

2. If you can live on a <=2.5% SWR (safe withdrawal rate) in retirement, then your principle should never be depleted. This includes retirement withdrawals during temporary market corrections.

3. If you are a PAW (prodigious accumulator of wealth, another author's term) and live below your means, then problem is also avoided in retirement.


Disclosure. I'm shooting for option #2, but know I could be wrong, so planning to give myself a healthy cash/bond reserve fund. To do that I favor "daily accrual" (IT/LT) muni bond funds (25%+ fed tax bracket) because they are exempt from the IRS 6-mo holding period requirement to protect tax-exempt dividends (one less thing to worry about). Meaning they could stand in for Benz's/Quinn's buckets 1+2 if needed, while at the same time doing double-duty as an important part of my retirement asset allocation.

Others might say I'm just using munis to build up a really big emergency fund. I believe that to be a correct characterization, also.

I have >6-mo of cash in checking/savings/mmkt to round out my plan. (I prefer less cash, more bonds to minimize cash drag.)

And though I plan to withdraw money in the order---cash, taxable bonds (munis), taxable equities, tax-advantaged investments---I don't consider myself as having a bucket system.


Bottom line. Do whatever floats your boat. Mix and match above concepts, and whatever else you learn, to suit what resonates with you personally, so you create a plan that avoids the problem of depleting your equities during an extended market correction in retirement. You're the only one who must be satisfied with your answer.


P.S. While this topic is about conceptual ways of avoiding being forced to sell equities during a market crash in retirement, don't forget than workers have another bucket, their "human capital", so live on their salary (plus a healthy emergency fund) to avoid selling during a market crash.


Edit: Completeness.
Last edited by dratkinson on Fri Mar 31, 2017 3:16 pm, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
Mortgasm
Posts: 271
Joined: Mon Feb 06, 2012 7:54 pm

Re: Christine Benz's Three Bucket System

Post by Mortgasm »

Stocks, Bonds, cash in a re-balanced portfolio function just like buckets.

If her bucket system were turned into a single integrated portfolio is would look like this.

CASH - Year One and Two (8%)
BOND -VBIRX Vanguard Short Term Bond Index (7%)
BOND - VTAPX Vanguard Short Term Inflation Protected Securities (7%)
BOND- VBTLX Vanguard Total Bond Market Index (15%)
BOND - VWIAX Vanguard Wellesey Income Fund (8%)
STOCK - VDIGX Vanguard Dividend Growth Fund (22%)
STOCK - VTSAX Vanguard Total Stock Market Index (10%)
STOCK - VFWAX Vanguard FTSE All-World ex-US Index (10%)
STOCK -VWEAX Vanguard High Yield Corporate Bond (8%)
STOCK -VGPMX Vanguard Precious Medals & Mining (5%)

Any difference is a mirage. Both bucket and integrated have the same result.

In a bucket system, I would withdraw the cash (4% for a whole year) and then sell stocks and/or bonds to replenish the cash.
In an integrated portfolio I would just sell the stocks and bonds (4%) directly and skip the cash replacement step.
jebmke
Posts: 12283
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Christine Benz's Three Bucket System

Post by jebmke »

cody69 wrote:I see your point, when stocks are down, the fixed income percentage rises. I'm trying to understand the withdrawal strategy for those who advocate a standard portfolio -- is it conceptually different from the bucket system that has expenses paid from the fixed income/cash bucket?
I haven't really looked at various bucket strategies. If one drains cash first AND rebalances it is pretty close. I don't hold cash due to the drag on returns so mechanically it is similar. If the cash bucket is refilled from the bond bucket then mathematically the two strategies are similar. The risk is that you get carried away and forget to fill from bonds to equity. Then they are different.
When you discover that you are riding a dead horse, the best strategy is to dismount.
cody69
Posts: 64
Joined: Sat May 03, 2014 7:46 am

Re: Christine Benz's Three Bucket System

Post by cody69 »

Any difference is a mirage. Both bucket and integrated have the same result.
That's pretty much how I see it as well... more similarities than differences when you break it down. My take is Bryant and Otar's use buckets as a pedagogy to instruct their readers on the methodology. Many Bogleheads don't need these tools and are comfortable applying the same approach without the need to construct the buckets.
Do whatever floats your boat.
Agree... multiple roads will get you there.
User avatar
willthrill81
Posts: 23611
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Christine Benz's Three Bucket System

Post by willthrill81 »

cody69 wrote:I see your point, when stocks are down, the fixed income percentage rises. I'm trying to understand the withdrawal strategy for those who advocate a standard portfolio -- is it conceptually different from the bucket system that has expenses paid from the fixed income/cash bucket?
Mathematically, the models I've run indicate that keeping 1-4 years of cash in a portfolio, presumably to ride out bear markets without selling equities, is actually a long-term drag on the portfolio. Yes, it's likely better to spend cash than sell battered equities, but it's also better to have equities than cash when times are good (historically they outweigh the bad times about 3 to 1) to maximum returns. Consequently, a portfolio with cash seems likely to do worse over the long-haul, but I completely understand that many do this purely for psychological benefit, and that's nothing to sneeze at.

Regarding the generation of income in retirement, my plan is to sell off whatever is needed to generate my intended 4.5% flexible WR as part of my rebalancing. So if stocks are down significantly, I'll be selling less of them and more of bonds, commodities, etc. as part of the rebalancing action anyway.

Personally, I have no intention of ever using cash in my portfolio. The closest I can see myself getting to that point is with TIPS or something similar so that I'm at least treading water with inflation.

Even right now, I don't like to see lots of cash just sitting around doing nothing. That's why I have a significant portion of my emergency fund in a Roth IRA (had 'space' for contributions not too long ago for it) invested in Wellesley Income.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
AlohaJoe
Posts: 5766
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Christine Benz's Three Bucket System

Post by AlohaJoe »

Mortgasm wrote:Stocks, Bonds, cash in a re-balanced portfolio function just like buckets.

Any difference is a mirage. Both bucket and integrated have the same result.
This is only true if buckets are refilled every year. There are plenty of bucket strategies that don't do that -- for instance, you could refill the bucket every 5 years, or when CAPE is below 20, or if the stock market was up more than 5%, or if you're just feeling lucky. All of that leads to a dynamic asset allocation.

Bucket and integrated are different. It is only a "mirage" if your bucket strategy forces you to have a fixed asset allocation. No bucket strategy intends to work that way -- the whole point of a bucket is to have a dynamic asset allocation so that it varies when the market is bad. But most of those who write about buckets do a terrible, horrible, no good job of explaining exactly how they're supposed to work in reality so readers like you & me are left guessing what the heck the author is actually proposing.
dbr
Posts: 34851
Joined: Sun Mar 04, 2007 9:50 am

Re: Christine Benz's Three Bucket System

Post by dbr »

In fact the typical buckets plan tends to produce a saw-tooth asset allocation rather than a flat one. Generally a result can be a somewhat higher allocation to stocks than the investor nominally sets. Actually proving that there is a meaningful benefit remains to be seen.
Mortgasm
Posts: 271
Joined: Mon Feb 06, 2012 7:54 pm

Re: Christine Benz's Three Bucket System

Post by Mortgasm »

AlohaJoe wrote:
Mortgasm wrote:Stocks, Bonds, cash in a re-balanced portfolio function just like buckets.

Any difference is a mirage. Both bucket and integrated have the same result.
This is only true if buckets are refilled every year. There are plenty of bucket strategies that don't do that -- for instance, you could refill the bucket every 5 years, or when CAPE is below 20, or if the stock market was up more than 5%, or if you're just feeling lucky. All of that leads to a dynamic asset allocation.

Bucket and integrated are different. It is only a "mirage" if your bucket strategy forces you to have a fixed asset allocation. No bucket strategy intends to work that way -- the whole point of a bucket is to have a dynamic asset allocation so that it varies when the market is bad. But most of those who write about buckets do a terrible, horrible, no good job of explaining exactly how they're supposed to work in reality so readers like you & me are left guessing what the heck the author is actually proposing.

Yes, that makes sense.

And I also suspect the opposite is true, that those that say they have a fixed strategy/integrated portfolio are in fact practicing dynamic asset allocation depending on the cycle.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Christine Benz's Three Bucket System

Post by The Wizard »

cody69 wrote:My understanding from reading Jim Otar's book and Jane B. Quinn's most recent How to Make Your Money Last, is the buckets are there to minimize the need to sell stocks at a loss when markets are down. The cash bucket pays expenses not covered by SS, pension and other non-investment income. During longer bear markets, short term bonds in the fixed income bucket are tapped to pay bills.

For those who do not see a need for buckets, what is your withdrawal strategy plan during retirement? Is it essentially the same (sell fixed income investments), or do you plan to sell and re-balance the portfolio -- how do you plan to handle this during a bear market?
I withdraw $3000/month from combined portfolio on a pro rata (proportional) basis.
If stocks are "down" then higher amounts automatically get withdrawn from my non stocks and less from my stock funds.
But if stocks were to fall too much, I would rebalance a bit back into stocks.

These two operations produce roughly the same result as maintaining my 50/50 AA by taking $3000 from my better performing asset class each month, but I don't have to fuss with my portfolio each month to decide where to withdraw from.

And with +/-3% bands on my 50/50 AA, I seldom really need to rebalance more than once a year.

I also keep zero in cash in my investment portfolio, just a few $K in my checking account.

Furthermore, when are stocks "down"?
Let's say the S&P 500 gains 300 points in recent months and then drops 200 points over the next two months.
Are stocks now down?
Or does one use the 200day Moving Average? Or a different Moving Average?

Excessive complication in withdrawal schemes, similar to accumulation investment schemes, isn't good.
Keep it simple...
Attempted new signature...
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Christine Benz's Three Bucket System

Post by The Wizard »

Mortgasm wrote:Stocks, Bonds, cash in a re-balanced portfolio function just like buckets.

If her bucket system were turned into a single integrated portfolio is would look like this.

CASH - Year One and Two (8%)
BOND -VBIRX Vanguard Short Term Bond Index (7%)
BOND - VTAPX Vanguard Short Term Inflation Protected Securities (7%)
BOND- VBTLX Vanguard Total Bond Market Index (15%)
BOND - VWIAX Vanguard Wellesey Income Fund (8%)
STOCK - VDIGX Vanguard Dividend Growth Fund (22%)
STOCK - VTSAX Vanguard Total Stock Market Index (10%)
STOCK - VFWAX Vanguard FTSE All-World ex-US Index (10%)
STOCK -VWEAX Vanguard High Yield Corporate Bond (8%)
STOCK -VGPMX Vanguard Precious Medals & Mining (5%)

Any difference is a mirage. Both bucket and integrated have the same result.

In a bucket system, I would withdraw the cash (4% for a whole year) and then sell stocks and/or bonds to replenish the cash.
In an integrated portfolio I would just sell the stocks and bonds (4%) directly and skip the cash replacement step.
Good points.
But some folks are attracted to smoke and mirrors and more moving parts.
Better to stick with Simplicity with possibly a Variable Withdrawal concept...
Attempted new signature...
User avatar
willthrill81
Posts: 23611
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Christine Benz's Three Bucket System

Post by willthrill81 »

The Wizard wrote:
cody69 wrote:My understanding from reading Jim Otar's book and Jane B. Quinn's most recent How to Make Your Money Last, is the buckets are there to minimize the need to sell stocks at a loss when markets are down. The cash bucket pays expenses not covered by SS, pension and other non-investment income. During longer bear markets, short term bonds in the fixed income bucket are tapped to pay bills.

For those who do not see a need for buckets, what is your withdrawal strategy plan during retirement? Is it essentially the same (sell fixed income investments), or do you plan to sell and re-balance the portfolio -- how do you plan to handle this during a bear market?
I withdraw $3000/month from combined portfolio on a pro rata (proportional) basis.
If stocks are "down" then higher amounts automatically get withdrawn from my non stocks and less from my stock funds.
But if stocks were to fall too much, I would rebalance a bit back into stocks.

These two operations produce roughly the same result as maintaining my 50/50 AA by taking $3000 from my better performing asset class each month, but I don't have to fuss with my portfolio each month to decide where to withdraw from.

And with +/-3% bands on my 50/50 AA, I seldom really need to rebalance more than once a year.

I also keep zero in cash in my investment portfolio, just a few $K in my checking account.

Furthermore, when are stocks "down"?
Let's say the S&P 500 gains 300 points in recent months and then drops 200 points over the next two months.
Are stocks now down?
Or does one use the 200day Moving Average? Or a different Moving Average?

Excessive complication in withdrawal schemes, similar to accumulation investment schemes, isn't good.
Keep it simple...
+1

It's amazing the lengths that people will go to in an attempt to avoid selling stocks when they're down, but you correctly point out that determining that can be more complicated than it seems. Further, as others have already pointed out, with a reasonable split between stocks and bonds, you're unlikely to be selling stocks when they're down anyway because you'll be selling your bonds to buy more stocks (your bond allocation will likely provide your spending cash during such times as well).

That being said, I do wonder whether keeping a year or two of expenses in cash is worth the psychological benefit, at least for some. Mathematically, it's only a drag on your returns, but if it's only 4-8% of your portfolio, the drag would be small and could be offset by the mental 'security' of not digging into your portfolio when its value is down (i.e. for the prior year).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Christine Benz's Three Bucket System

Post by The Wizard »

willthrill81 wrote: ...That being said, I do wonder whether keeping a year or two of expenses in cash is worth the psychological benefit, at least for some. Mathematically, it's only a drag on your returns, but if it's only 4-8% of your portfolio, the drag would be small and could be offset by the mental 'security' of not digging into your portfolio when its value is down (i.e. for the prior year).
It's comforting to have liquid assets of some sort available in retirement, yes.
Four years into retirement, I'm not planning to borrow money ever again, so I do need to accumulate after-tax funds for my next vehicle purchase, travel trailer purchase, or whatever. While I could build up my savings account, this doesn't quite "do it" for me.
So I'm accumulating in the Total Stock Market fund in my taxable account instead.
I'm not recommending that other people necessarily do the same...
Attempted new signature...
User avatar
willthrill81
Posts: 23611
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Christine Benz's Three Bucket System

Post by willthrill81 »

The Wizard wrote:
willthrill81 wrote: ...That being said, I do wonder whether keeping a year or two of expenses in cash is worth the psychological benefit, at least for some. Mathematically, it's only a drag on your returns, but if it's only 4-8% of your portfolio, the drag would be small and could be offset by the mental 'security' of not digging into your portfolio when its value is down (i.e. for the prior year).
It's comforting to have liquid assets of some sort available in retirement, yes.
Four years into retirement, I'm not planning to borrow money ever again, so I do need to accumulate after-tax funds for my next vehicle purchase, travel trailer purchase, or whatever. While I could build up my savings account, this doesn't quite "do it" for me.
So I'm accumulating in the Total Stock Market fund in my taxable account instead.
I'm not recommending that other people necessarily do the same...
I can see the benefits of keeping some money in TIPS or an inflation-adjusted account rather than cash, but the 'comfort' of having a known, guaranteed income for a year or two does sound appealing.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
dbr
Posts: 34851
Joined: Sun Mar 04, 2007 9:50 am

Re: Christine Benz's Three Bucket System

Post by dbr »

willthrill81 wrote: I can see the benefits of keeping some money in TIPS or an inflation-adjusted account rather than cash, but the 'comfort' of having a known, guaranteed income for a year or two does sound appealing.
Anyone with a plan to manage spending at a few percent of total assets for an extended period of time can hardly fail to be certain of enough money to withdraw the next year or two expenses from any set of assets. Having that withdrawal waiting in cash is completely pointless. At least, what the point of it is needs a lot more examination, which in most cases will show that this is a mirage and the comfort is illusory.
User avatar
willthrill81
Posts: 23611
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Christine Benz's Three Bucket System

Post by willthrill81 »

dbr wrote:
willthrill81 wrote: I can see the benefits of keeping some money in TIPS or an inflation-adjusted account rather than cash, but the 'comfort' of having a known, guaranteed income for a year or two does sound appealing.
Anyone with a plan to manage spending at a few percent of total assets for an extended period of time can hardly fail to be certain of enough money to withdraw the next year or two expenses from any set of assets. Having that withdrawal waiting in cash is completely pointless. At least, what the point of it is needs a lot more examination, which in most cases will show that this is a mirage and the comfort is illusory.
If you look above, you'll see that I agree that, mathematically, cash is nothing but a drag on your portfolio. But like many other aspects of investing (i.e. historically, it makes no sense for anyone more than 30 years away from retirement to not be 100% equities), there are potential psychological issues at work here that individuals will need to assess for themselves. The Wizard is a prime example of this.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
dbr
Posts: 34851
Joined: Sun Mar 04, 2007 9:50 am

Re: Christine Benz's Three Bucket System

Post by dbr »

willthrill81 wrote:
dbr wrote:
willthrill81 wrote: I can see the benefits of keeping some money in TIPS or an inflation-adjusted account rather than cash, but the 'comfort' of having a known, guaranteed income for a year or two does sound appealing.
Anyone with a plan to manage spending at a few percent of total assets for an extended period of time can hardly fail to be certain of enough money to withdraw the next year or two expenses from any set of assets. Having that withdrawal waiting in cash is completely pointless. At least, what the point of it is needs a lot more examination, which in most cases will show that this is a mirage and the comfort is illusory.
If you look above, you'll see that I agree that, mathematically, cash is nothing but a drag on your portfolio. But like many other aspects of investing (i.e. historically, it makes no sense for anyone more than 30 years away from retirement to not be 100% equities), there are potential psychological issues at work here that individuals will need to assess for themselves. The Wizard is a prime example of this.
Are you mixing up cash and liquid (wrt the Wizard)? This is a comment often made as if a holding in an equity mutual fund is somehow not liquid. It might be that there are forms of cash that are less liquid than a mutual fund at a broker.
User avatar
willthrill81
Posts: 23611
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Christine Benz's Three Bucket System

Post by willthrill81 »

dbr wrote:
willthrill81 wrote:
dbr wrote:
willthrill81 wrote: I can see the benefits of keeping some money in TIPS or an inflation-adjusted account rather than cash, but the 'comfort' of having a known, guaranteed income for a year or two does sound appealing.
Anyone with a plan to manage spending at a few percent of total assets for an extended period of time can hardly fail to be certain of enough money to withdraw the next year or two expenses from any set of assets. Having that withdrawal waiting in cash is completely pointless. At least, what the point of it is needs a lot more examination, which in most cases will show that this is a mirage and the comfort is illusory.
If you look above, you'll see that I agree that, mathematically, cash is nothing but a drag on your portfolio. But like many other aspects of investing (i.e. historically, it makes no sense for anyone more than 30 years away from retirement to not be 100% equities), there are potential psychological issues at work here that individuals will need to assess for themselves. The Wizard is a prime example of this.
Are you mixing up cash and liquid (wrt the Wizard)? This is a comment often made as if a holding in an equity mutual fund is somehow not liquid. It might be that there are forms of cash that are less liquid than a mutual fund at a broker.
He seemed to be agreeing with the "hold some cash" statement I was initially referring to. But maybe I misunderstood him.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Christine Benz's Three Bucket System

Post by The Wizard »

willthrill81 wrote: He seemed to be agreeing with the "hold some cash" statement I was initially referring to. But maybe I misunderstood him.
I don't intend to hold a lot of cash in retirement. Let me clarify.
Going into retirement in 2013 the bulk of my financial assets were in my tax deferred 403(b), with a modest Roth IRA and next to nothing in my taxable account aside from my checking account.

At this point, I try to keep $5000 to $10,000 in my checking account which is enough to cover routine expenses plus quarterly property taxes and sporadic travel expenses.

Beyond that, I move excess retirement income, from the 403(b) and SS, into my Vanguard taxable account, presently into VTSMX (total stock), though in previous years I've used VBILX (int. bond).
My intent for this money is to provide funds for occasional big ticket items. Retirees with decently sized taxable accounts to start with might do things differently.

But when I say liquid funds in retirement, I mean funds without additional tax liability. Withdrawing additional funds from my 403(b) this year to buy a new car is a terrible idea due to excessive tax. Better to average it over five years or more...
Attempted new signature...
pascalwager
Posts: 1903
Joined: Mon Oct 31, 2011 8:36 pm

Re: Christine Benz's Three Bucket System

Post by pascalwager »

Bank cash provides 1.25% interest today. What is a better alternative when term and default risk are considered? Maybe buckets 1 and 2 should be all cash.
16% TSM | 16% TISM | 7% LV | 7% SV/SC | 7% ISV/ISC | 7% EM | 20% TIPS | 20% STIG | Bonds 9.1 years duration
SpaceCowboy
Posts: 954
Joined: Sun Aug 12, 2012 12:35 am

Re: Christine Benz's Three Bucket System

Post by SpaceCowboy »

If I remember the discussion on McClung's Making Your Money Last and extensive work by
AlohaJoe wrote:
a 2 bucket system with bonds and equities works pretty well. Drawdown from the bonds bucket and refill from the equities bucket when equities have risen >20% from initial retirement value. I think that's the quick summary.
I basically use the dividends in taxable, CD ladder proceeds and then sell equities in taxable coupled with a rebalance in tax deferred to offset to make my twice annual withdrawals.
Post Reply