Trying to nail down asset allocation for second bucket

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TheTimeLord
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Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 9:36 am

Our retirement savings has 2 buckets. The first that contains enough safe fixed income assets to from today to FRA very comfortably. The second bucket is everything else and will be what is used to supplement SS and modest pensions after FRA. Each additional month either myself, my spouse or both work I transfer a month's projected expenses from the first bucket to the second bucket. Given that the second bucket won't be touched for 10+ years and the combination of SS and pensions should more than meet our basic expenses but not all our wants or surprise medical and care expenses what would be an appropriate AA for the second bucket. Currently, I am vacillating between asset allocations between 50/50 and 70/30. For those who view this as mental accounting, just answer the question for someone 10+ years away from retiring at FRA.
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Doc
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Re: Trying to nail down asset allocation for second bucket

Post by Doc » Sat Dec 09, 2017 9:55 am

You just have one overall AA. Then put some portion of that in your "just in case" bucket. What assets you use depends on your personal needs and assumed safety concerns but your overall AA is not changed by that choice.

When we were in your situation I decided that my "just in case" bucket was going to be ten years spending needs in a TIPS ladder. Then if all hell broke loose I would have ten years for the markets to recover. (Unfortunately TIPS were not a very good choice but that's another storey.)
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TheTimeLord
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Re: Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 10:04 am

Doc wrote:
Sat Dec 09, 2017 9:55 am
You just have one overall AA. Then put some portion of that in your "just in case" bucket. What assets you use depends on your personal needs and assumed safety concerns but your overall AA is not changed by that choice.

When we were in your situation I decided that my "just in case" bucket was going to be ten years spending needs in a TIPS ladder. Then if all hell broke loose I would have ten years for the markets to recover. (Unfortunately TIPS were not a very good choice but that's another storey.)
My motivation for the first bucket is to make sure I have the ability to do what I want to do in my early retirement years when I believe I have the greatest likelihood of being healthy, active and energetic. That bucket can be viewed as an extremely large liability matching bucket.
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Re: Trying to nail down asset allocation for second bucket

Post by Call_Me_Op » Sat Dec 09, 2017 10:07 am

I have a similar AA. In bucket 1 I have safe fixed income, including cash. In bucket 2, it's all equities, broadly diversified, index funds and ETFs.
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Re: Trying to nail down asset allocation for second bucket

Post by Doc » Sat Dec 09, 2017 10:08 am

TheTimeLord wrote:
Sat Dec 09, 2017 10:04 am
My motivation for the first bucket is to make sure I have the ability to do what I want to do in my early retirement years when I believe I have the greatest likelihood of being healthy, active and energetic. That bucket can be viewed as an extremely large liability matching bucket.
I would suggest a ten year Treasury ladder. But then your "longer" bucket would have less fixed income so that your overall AA is not affected. As you start spending your ladder you rebalnce in the other bucket.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Trying to nail down asset allocation for second bucket

Post by Call_Me_Op » Sat Dec 09, 2017 10:15 am

I view this type of AA as a "risk barbell." It consists of very low risk assets and very high risk assets. One of its strengths is the risk level of the portfolio is very obvious. If you are more conservative (like me), the risk "bucket" will be less than 50% of the portfolio.
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Re: Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 10:16 am

Doc wrote:
Sat Dec 09, 2017 10:08 am
TheTimeLord wrote:
Sat Dec 09, 2017 10:04 am
My motivation for the first bucket is to make sure I have the ability to do what I want to do in my early retirement years when I believe I have the greatest likelihood of being healthy, active and energetic. That bucket can be viewed as an extremely large liability matching bucket.
I would suggest a ten year Treasury ladder. But then your "longer" bucket would have less fixed income so that your overall AA is not affected. As you start spending your ladder you rebalnce in the other bucket.
Looking at my overall AA, I feel it is overly conservative but I have tried to discipline myself as to not chase returns so I will not make any radical adjustments. Since the AA in the first bucket won't change (0/100) and money flows from the first to second bucket for each month I remain employed I was looking for an appropriate AA to re-invest those funds and new contributions into the second bucket considering the 10+ year time horizon and the security provided by SS and pensions at FRA.
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TheTimeLord
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Re: Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 10:23 am

Call_Me_Op wrote:
Sat Dec 09, 2017 10:15 am
I view this type of AA as a "risk barbell." It consists of very low risk assets and very high risk assets. One of its strengths is the risk level of the portfolio is very obvious. If you are more conservative (like me), the risk "bucket" will be less than 50% of the portfolio.
Maybe this will make sense maybe if will seem like drivel but what I hope to accomplish is reducing, as much as possible, the risk to my desired lifestyle between retirement and FRA because of my belief that those years have the most physical potential. But also take appropriate risk in saving for the years following FRA given the time horizon and the income floor SS and pensions put in place, since that floor exceeds my project basic living expenses.
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Re: Trying to nail down asset allocation for second bucket

Post by dbr » Sat Dec 09, 2017 10:36 am

I don't know how your asset allocation should change over time in the period from retirement to the onset of significant income. I have an intuition that it shouldn't change by very much. The issue would be strongly affected by what fraction of your assets you need to consume to get through the initial period. This would be affected in turn by the relative size of that future income compared to the portfolio involved.

I don't think mentally separating the portfolio into a "safe" and a future bucket helps in any way to understand the best plan. What is required is a model that looks at both the return and the risk of different asset allocations under a varying withdrawal rate and a varying asset allocation. The whole conversation about the "bond tent" which I think Wade Pfau has discussed is an example of that kind of problem.

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Re: Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 10:41 am

dbr wrote:
Sat Dec 09, 2017 10:36 am
I don't know how your asset allocation should change over time in the period from retirement to the onset of significant income. I have an intuition that it shouldn't change by very much. The issue would be strongly affected by what fraction of your assets you need to consume to get through the initial period. This would be affected in turn by the relative size of that future income compared to the portfolio involved.

I don't think mentally separating the portfolio into a "safe" and a future bucket helps in any way to understand the best plan. What is required is a model that looks at both the return and the risk of different asset allocations under a varying withdrawal rate and a varying asset allocation. The whole conversation about the "bond tent" which I think Wade Pfau has discussed is an example of that kind of problem.
It definitely goes along the "Bond Tent" line with a rising glide path. For me I can't imagine how frustrating it would be to retire then not be able to do the activities I planned because of a negative sequence of returns. That would be far more frustrating than anything I have encountered in the workplace. I also freely admit the market's long run is playing into my difficulty in getting more aggressive. Rightly or wrongly that is something I mentally have to deal with.
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Re: Trying to nail down asset allocation for second bucket

Post by dbr » Sat Dec 09, 2017 10:49 am

TheTimeLord wrote:
Sat Dec 09, 2017 10:41 am
dbr wrote:
Sat Dec 09, 2017 10:36 am
I don't know how your asset allocation should change over time in the period from retirement to the onset of significant income. I have an intuition that it shouldn't change by very much. The issue would be strongly affected by what fraction of your assets you need to consume to get through the initial period. This would be affected in turn by the relative size of that future income compared to the portfolio involved.

I don't think mentally separating the portfolio into a "safe" and a future bucket helps in any way to understand the best plan. What is required is a model that looks at both the return and the risk of different asset allocations under a varying withdrawal rate and a varying asset allocation. The whole conversation about the "bond tent" which I think Wade Pfau has discussed is an example of that kind of problem.
It definitely goes along the "Bond Tent" line with a rising glide path. For me I can't imagine how frustrating it would be to retire then not be able to do the activities I planned because of a negative sequence of returns. That would be far more frustrating than anything I have encountered in the workplace. I also freely admit the market's long run is playing into my difficulty in getting more aggressive. Rightly or wrongly that is something I mentally have to deal with.
You have no idea that you are not going to be able to do the activities you planned because of a "negative sequence of returns." I believe this outcome is most strongly affected by your rate of spending and least strongly affected by your asset allocation. In that case the best strategy is not to hold a lot of fixed income but rather to spend less or to have saved more. The real risk management tool here is to not retire so soon. If you consider that an unreasonable choice, then you have to decide on your priorities.

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Re: Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 10:58 am

dbr wrote:
Sat Dec 09, 2017 10:49 am
TheTimeLord wrote:
Sat Dec 09, 2017 10:41 am
dbr wrote:
Sat Dec 09, 2017 10:36 am
I don't know how your asset allocation should change over time in the period from retirement to the onset of significant income. I have an intuition that it shouldn't change by very much. The issue would be strongly affected by what fraction of your assets you need to consume to get through the initial period. This would be affected in turn by the relative size of that future income compared to the portfolio involved.

I don't think mentally separating the portfolio into a "safe" and a future bucket helps in any way to understand the best plan. What is required is a model that looks at both the return and the risk of different asset allocations under a varying withdrawal rate and a varying asset allocation. The whole conversation about the "bond tent" which I think Wade Pfau has discussed is an example of that kind of problem.
It definitely goes along the "Bond Tent" line with a rising glide path. For me I can't imagine how frustrating it would be to retire then not be able to do the activities I planned because of a negative sequence of returns. That would be far more frustrating than anything I have encountered in the workplace. I also freely admit the market's long run is playing into my difficulty in getting more aggressive. Rightly or wrongly that is something I mentally have to deal with.
You have no idea that you are not going to be able to do the activities you planned because of a "negative sequence of returns." I believe this outcome is most strongly affected by your rate of spending and least strongly affected by your asset allocation. In that case the best strategy is not to hold a lot of fixed income but rather to spend less or to have saved more. The real risk management tool here is to not retire so soon. If you consider that an unreasonable choice, then you have to decide on your priorities.
I will have to ponder this post a while. I honestly am not following how if I need $100,000 (or whatever amount) to do the activities I want and have that $100,000 in safe fixed income that the financial ability to do those activities isn't pretty effectively shielded from a negative sequence of returns. The reason for 2 buckets is so I don't count on even a penny from the first bucket being available at FRA when I start to utilize the second bucket.
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dbr
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Re: Trying to nail down asset allocation for second bucket

Post by dbr » Sat Dec 09, 2017 11:07 am

TheTimeLord wrote:
Sat Dec 09, 2017 10:58 am
dbr wrote:
Sat Dec 09, 2017 10:49 am
TheTimeLord wrote:
Sat Dec 09, 2017 10:41 am
dbr wrote:
Sat Dec 09, 2017 10:36 am
I don't know how your asset allocation should change over time in the period from retirement to the onset of significant income. I have an intuition that it shouldn't change by very much. The issue would be strongly affected by what fraction of your assets you need to consume to get through the initial period. This would be affected in turn by the relative size of that future income compared to the portfolio involved.

I don't think mentally separating the portfolio into a "safe" and a future bucket helps in any way to understand the best plan. What is required is a model that looks at both the return and the risk of different asset allocations under a varying withdrawal rate and a varying asset allocation. The whole conversation about the "bond tent" which I think Wade Pfau has discussed is an example of that kind of problem.
It definitely goes along the "Bond Tent" line with a rising glide path. For me I can't imagine how frustrating it would be to retire then not be able to do the activities I planned because of a negative sequence of returns. That would be far more frustrating than anything I have encountered in the workplace. I also freely admit the market's long run is playing into my difficulty in getting more aggressive. Rightly or wrongly that is something I mentally have to deal with.
You have no idea that you are not going to be able to do the activities you planned because of a "negative sequence of returns." I believe this outcome is most strongly affected by your rate of spending and least strongly affected by your asset allocation. In that case the best strategy is not to hold a lot of fixed income but rather to spend less or to have saved more. The real risk management tool here is to not retire so soon. If you consider that an unreasonable choice, then you have to decide on your priorities.
I will have to ponder this post a while. I honestly am not following how if I need $100,000 (or whatever amount) to do the activities I want and have that $100,000 in safe fixed income that the financial ability to do those activities isn't pretty effectively shielded from a negative sequence of returns. The reason for 2 buckets is so I don't count on even a penny from the first bucket being available at FRA when I start to utilize the second bucket.
You haven't accounted for the loss of return that affects how much you will have for the rest of your retirement. That is partly reflected in how much you have to set aside in this bucket, which is robbed from the other bucket of future assets. In general the more certain you want the outcome of a plan to be the lower the overall wealth and income you have will be. It is, of course, no great trick to be highly certain if one has enough wealth to cover all the spending one wants. You may be a person who is too wealthy and worked too long and saved too much, not that there is anything wrong with that.

And, as I said, I don't actually know that there is a definitely best way to configure this. I am pretty sure there would be differences depending on the details.

You should keep in mind that the overall outcome over the years is a result of the actual totality of spending and asset allocation. Setting aside one amount that is very conservative and setting aside another amount that is very aggressive is not different from setting aside one amount that is moderate. The only difference is in scheduling that the asset allocation is shifting from a more conservative to a more aggressive asset allocation over the time from retirement to onset of income while the spending is shifting from more to less at a point. It is just not obvious how the relative balance of return and variability of return is actually going to work out. It is certainly not obvious how it is going to work out simply based on the fact that you have some money that is "safe," nor do you have a quantification of what "sequence of return risk" even is.

How about this: While some retirement failures can result from the bad luck of getting a terrible sequence of returns most retirement successes are the result of the sequence of returns being good. Why would you defeat the benefit of getting good sequences of returns? An example of that is the normal simple minded constant rate of real spending in which the only really bad asset allocations are the one's where one has too much in "safe" investments because the lack of return is a bigger hazard than the hazard of a poor sequence of returns. You have to figure out why a profile of higher withdrawals from a portfolio changing to lower withdrawals from a portfolio somehow reverses that basic problem and whether asset allocation has a strong enough effect to even matter.
Last edited by dbr on Sat Dec 09, 2017 11:22 am, edited 2 times in total.

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Re: Trying to nail down asset allocation for second bucket

Post by TomatoTomahto » Sat Dec 09, 2017 11:17 am

My first bucket is 100% FI, mostly in tax-deferred, and should easily pay residual expenses (I.e., expenses less SS, pensions, and deferred comp) for 30 years.

The second bucket is 100% equities, mostly PRIMECAP, TSM, and TISM. There are some leftover other funds from the past and one share of BRK.A; capital gains keeps us from simplifying.

I think the usefulness of a percentage-based AA is questionable after you’ve won the game.

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Re: Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 11:18 am

dbr wrote:
Sat Dec 09, 2017 11:07 am
TheTimeLord wrote:
Sat Dec 09, 2017 10:58 am
dbr wrote:
Sat Dec 09, 2017 10:49 am
TheTimeLord wrote:
Sat Dec 09, 2017 10:41 am
dbr wrote:
Sat Dec 09, 2017 10:36 am
I don't know how your asset allocation should change over time in the period from retirement to the onset of significant income. I have an intuition that it shouldn't change by very much. The issue would be strongly affected by what fraction of your assets you need to consume to get through the initial period. This would be affected in turn by the relative size of that future income compared to the portfolio involved.

I don't think mentally separating the portfolio into a "safe" and a future bucket helps in any way to understand the best plan. What is required is a model that looks at both the return and the risk of different asset allocations under a varying withdrawal rate and a varying asset allocation. The whole conversation about the "bond tent" which I think Wade Pfau has discussed is an example of that kind of problem.
It definitely goes along the "Bond Tent" line with a rising glide path. For me I can't imagine how frustrating it would be to retire then not be able to do the activities I planned because of a negative sequence of returns. That would be far more frustrating than anything I have encountered in the workplace. I also freely admit the market's long run is playing into my difficulty in getting more aggressive. Rightly or wrongly that is something I mentally have to deal with.
You have no idea that you are not going to be able to do the activities you planned because of a "negative sequence of returns." I believe this outcome is most strongly affected by your rate of spending and least strongly affected by your asset allocation. In that case the best strategy is not to hold a lot of fixed income but rather to spend less or to have saved more. The real risk management tool here is to not retire so soon. If you consider that an unreasonable choice, then you have to decide on your priorities.
I will have to ponder this post a while. I honestly am not following how if I need $100,000 (or whatever amount) to do the activities I want and have that $100,000 in safe fixed income that the financial ability to do those activities isn't pretty effectively shielded from a negative sequence of returns. The reason for 2 buckets is so I don't count on even a penny from the first bucket being available at FRA when I start to utilize the second bucket.
You haven't accounted for the loss of return that affects how much you will have for the rest of your retirement. That is partly reflected in how much you have to set aside in this bucket, which is robbed from the other bucket of future assets. In general the more certain you want the outcome of a plan to be the lower the overall wealth and income you have will be. It is, of course, no great trick to be highly certain if one has enough wealth to cover all the spending one wants. You may be a person who is too wealthy and worked too long and saved too much, not that there is anything wrong with that.
I agree that the elimination of near term risk can and likely will have a negative effect on long term reward, but that is just the price of risk management. But from my viewpoint I have accounted for the effect on the rest of my retirement by segregating the funds and only considering the second bucket as a source or funds for the rest of our retirement.
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TheTimeLord
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Re: Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 11:20 am

TomatoTomahto wrote:
Sat Dec 09, 2017 11:17 am
My first bucket is 100% FI, mostly in tax-deferred, and should easily pay residual expenses (I.e., expenses less SS, pensions, and deferred comp) for 30 years.

The second bucket is 100% equities, mostly PRIMECAP, TSM, and TISM. There are some leftover other funds from the past and one share of BRK.A; capital gains keeps us from simplifying.

I think the usefulness of a percentage-based AA is questionable after you’ve won the game.
So do you guys place 100% of new contributions into equities?
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Re: Trying to nail down asset allocation for second bucket

Post by Sandtrap » Sat Dec 09, 2017 11:27 am

I've done a hybrid approach to compartmentalizing "buckets". But, only within the overall portfolio allocation.
This might be helpful or a useful example:
I have set aside 2 funds, Wellington and Balanced Index in my trust for my hares. Then, mentally, outside of that is my retirement 3 fund LMP portfolio which is tilted so that the entire allocation is at 30/70 across the board. My IPS has instructions to rebalance the retirement fund to 30/70 once the 2 balanced funds are distributed at my passing. The remainder goes into an educational trust for descendent hares. The portfolio is unified, but "mentally" compartmentalized. New contributions go either into each of the balanced funds or in the educational fund allotment. The entirety is in one trust.
So I understand your compartmentalization but am unclear why the allocation is different in one place from another?
j :D

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Re: Trying to nail down asset allocation for second bucket

Post by Call_Me_Op » Sat Dec 09, 2017 11:32 am

dbr wrote:
Sat Dec 09, 2017 10:36 am
I don't think mentally separating the portfolio into a "safe" and a future bucket helps in any way to understand the best plan. What is required is a model that looks at both the return and the risk of different asset allocations under a varying withdrawal rate and a varying asset allocation. The whole conversation about the "bond tent" which I think Wade Pfau has discussed is an example of that kind of problem.
I do not view it as a SAFE and "future" bucket - but rather as a SAFE and RISKY bucket. This is more than just mental accounting - it reflects how the assets are invested. The value in having this clear risk delineation is in understanding the amount of risk you are taking.

In my case, I rebalance between these two "buckets." This is really nothing more than a balanced portfolio that "takes its risk on the equity side."
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Re: Trying to nail down asset allocation for second bucket

Post by TravelforFun » Sat Dec 09, 2017 11:36 am

Semi-retired here. I have two buckets too but use them differently than you. Bucket 1 has 10 years worth of annual expenses in bonds which is about 30% of my asset, and Bucket 2 is 100% stocks.

In bad years, I take money from Bucket 1 to supplement my income. I good years, I take money from Bucket 2 to live on, and in very good years, I take money from Bucket 2 to live on and to replenish Bucket 1 if necessary.

My AA varies as the market pendulum swings but the equilibrium point is 70/30. My Bucket 1 should allow me to ride out market storms.

TravelforFun

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Re: Trying to nail down asset allocation for second bucket

Post by jebmke » Sat Dec 09, 2017 11:41 am

TravelforFun wrote:
Sat Dec 09, 2017 11:36 am
Semi-retired here. I have two buckets too but use them differently than you. Bucket 1 has 10 years worth of annual expenses in bonds which is about 30% of my asset, and Bucket 2 is 100% stocks.

In bad years, I take money from Bucket 1 to supplement my income. I good years, I take money from Bucket 2 to live on, and in very good years, I take money from Bucket 2 to live on and to replenish Bucket 1 if necessary.

My AA varies as the market pendulum swings but the equilibrium point is 70/30. My Bucket 1 should allow me to ride out market storms.

TravelforFun
This sounds basically like a 70/30 overall with wide re-balance bands.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Trying to nail down asset allocation for second bucket

Post by TomatoTomahto » Sat Dec 09, 2017 11:42 am

TheTimeLord wrote:
Sat Dec 09, 2017 11:20 am
TomatoTomahto wrote:
Sat Dec 09, 2017 11:17 am
My first bucket is 100% FI, mostly in tax-deferred, and should easily pay residual expenses (I.e., expenses less SS, pensions, and deferred comp) for 30 years.

The second bucket is 100% equities, mostly PRIMECAP, TSM, and TISM. There are some leftover other funds from the past and one share of BRK.A; capital gains keeps us from simplifying.

I think the usefulness of a percentage-based AA is questionable after you’ve won the game.
So do you guys place 100% of new contributions into equities?
Mostly, yes. We do reinvest dividends (not sure if you’re counting that as new). We also put $24k of 401k contributions into FI (TBM and some Stable Value) annually while DW is working. It’s funny how the brokerages send us emails warning us that we might be too conservative; obviously they don’t see the rest of our assets.

Yes, in broad strokes, 100% of new contributions goes to equities.

I really enjoy not having to calculate my AA. More than likely, the equity portion is my kids’ inheritance. Shhhh; don’t tell them.

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Re: Trying to nail down asset allocation for second bucket

Post by delamer » Sat Dec 09, 2017 11:49 am

Sandtrap wrote:
Sat Dec 09, 2017 11:27 am
I've done a hybrid approach to compartmentalizing "buckets". But, only within the overall portfolio allocation.
This might be helpful or a useful example:
I have set aside 2 funds, Wellington and Balanced Index in my trust for my hares. Then, mentally, outside of that is my retirement 3 fund LMP portfolio which is tilted so that the entire allocation is at 30/70 across the board. My IPS has instructions to rebalance the retirement fund to 30/70 once the 2 balanced funds are distributed at my passing. The remainder goes into an educational trust for descendent hares. The portfolio is unified, but "mentally" compartmentalized. New contributions go either into each of the balanced funds or in the educational fund allotment. The entirety is in one trust.
So I understand your compartmentalization but am unclear why the allocation is different in one place from another?
j :D
Lucky bunnies (otherwise known as hares)!

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Re: Trying to nail down asset allocation for second bucket

Post by delamer » Sat Dec 09, 2017 11:57 am

The difference between a 50% stock allocation and a 70% stock allocation probably is not going to be very large, so maybe 60% is the way to go if you are vacillating.

The other issue is what percent the first bucket makes up of your total assets. While your way of accounting for pre-FRA income needs definitely has appeal, don't ignore them when determining your post-FRA allocation.

TravelforFun
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Re: Trying to nail down asset allocation for second bucket

Post by TravelforFun » Sat Dec 09, 2017 12:32 pm

jebmke wrote:
Sat Dec 09, 2017 11:41 am
TravelforFun wrote:
Sat Dec 09, 2017 11:36 am
Semi-retired here. I have two buckets too but use them differently than you. Bucket 1 has 10 years worth of annual expenses in bonds which is about 30% of my asset, and Bucket 2 is 100% stocks.

In bad years, I take money from Bucket 1 to supplement my income. I good years, I take money from Bucket 2 to live on, and in very good years, I take money from Bucket 2 to live on and to replenish Bucket 1 if necessary.

My AA varies as the market pendulum swings but the equilibrium point is 70/30. My Bucket 1 should allow me to ride out market storms.

TravelforFun
This sounds basically like a 70/30 overall with wide re-balance bands.
And it is.

TravelforFun

Dandy
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Re: Trying to nail down asset allocation for second bucket

Post by Dandy » Sat Dec 09, 2017 12:41 pm

I would opt for 50/50 (or a even a bit more conservative). I have 2 portfolios (buckets) - the first is "safe" fixed income to age 90 (20 years) and the rest, the "risk" portfolio is invested 66/34. Overall I have a 43/57 allocation.

If you basically have your life style supported by pension and SS there is usually very little need, for most, to take on more risk. One reason my risk portfolio has 66% equities is that most are housed in a taxable account with large potential cap gains. So, I prefer not to generate more tax liability -- looks as if there maybe some stepped up value for my heirs.

For those who have enough in retirement the shift might be to more asset preservation vs growth - not an easy change from the goal in the accumulation stage or in the midst of a very long and profitable bull market.

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Re: Trying to nail down asset allocation for second bucket

Post by The Wizard » Sat Dec 09, 2017 12:45 pm

A 50/50 AA for your remaining portfolio is hard to disagree with.

I prefer to focus on cash flow streams in retirement, not just withdrawals from portfolio.
So when I retired seven years prior to start of SS, I did something both similar to and different from the OP. I partitioned my portfolio into two parts, but I purchased Immediate Annuities for lifetime monthly income with the first part. The second part (my remaining portfolio) I kept invested at approximately 50/50 AA.

Another difference is that I did/do monthly pro rata withdrawals from my 50/50 portfolio in lieu of the amount I'll receive from SS at age 70. These withdrawals are in the 4-5% per year range.

Roughly 2/3 of my initial retirement income came from those annuity income streams, 1/3 from portfolio withdrawals.

As I approach starting full SS in a little over two years, my remaining portfolio is becoming less crucial to my basic income needs.
So I've started letting my AA edge upward from 50% stocks to 60% as Mr Market allows.

Point is, more risk is possible at start of retirement. As time goes on and lifetime income streams start bearing more of the load, you can adjust your AA to be more agressive, if that suits your willingness...
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Re: Trying to nail down asset allocation for second bucket

Post by fear/greed » Sat Dec 09, 2017 2:19 pm

TomatoTomahto wrote:
Sat Dec 09, 2017 11:42 am
TheTimeLord wrote:
Sat Dec 09, 2017 11:20 am
TomatoTomahto wrote:
Sat Dec 09, 2017 11:17 am
My first bucket is 100% FI, mostly in tax-deferred, and should easily pay residual expenses (I.e., expenses less SS, pensions, and deferred comp) for 30 years.

The second bucket is 100% equities, mostly PRIMECAP, TSM, and TISM. There are some leftover other funds from the past and one share of BRK.A; capital gains keeps us from simplifying.

I think the usefulness of a percentage-based AA is questionable after you’ve won the game.
So do you guys place 100% of new contributions into equities?
Mostly, yes. We do reinvest dividends (not sure if you’re counting that as new). We also put $24k of 401k contributions into FI (TBM and some Stable Value) annually while DW is working. It’s funny how the brokerages send us emails warning us that we might be too conservative; obviously they don’t see the rest of our assets.

Yes, in broad strokes, 100% of new contributions goes to equities.

I really enjoy not having to calculate my AA. More than likely, the equity portion is my kids’ inheritance. Shhhh; don’t tell them.
If you would, please explain something about this that I don't understand: The two statements I bolded in your comment seem to contradict each other - you say you're annually adding $24k of bonds (what you call "FI" - at first I mistook that for "Financial Independence"... d'oh...), and then you say "100% of new contributions goes to equities." Other than reinvesting dividends, it sounds like 100% of what's going into the 401k is bonds (not touching on what may be invested elsewhere), so I'm confused... Thanks.

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Re: Trying to nail down asset allocation for second bucket

Post by marcopolo » Sat Dec 09, 2017 2:58 pm

fear/greed wrote:
Sat Dec 09, 2017 2:19 pm
TomatoTomahto wrote:
Sat Dec 09, 2017 11:42 am
TheTimeLord wrote:
Sat Dec 09, 2017 11:20 am
TomatoTomahto wrote:
Sat Dec 09, 2017 11:17 am
My first bucket is 100% FI, mostly in tax-deferred, and should easily pay residual expenses (I.e., expenses less SS, pensions, and deferred comp) for 30 years.

The second bucket is 100% equities, mostly PRIMECAP, TSM, and TISM. There are some leftover other funds from the past and one share of BRK.A; capital gains keeps us from simplifying.

I think the usefulness of a percentage-based AA is questionable after you’ve won the game.
So do you guys place 100% of new contributions into equities?
Mostly, yes. We do reinvest dividends (not sure if you’re counting that as new). We also put $24k of 401k contributions into FI (TBM and some Stable Value) annually while DW is working. It’s funny how the brokerages send us emails warning us that we might be too conservative; obviously they don’t see the rest of our assets.

Yes, in broad strokes, 100% of new contributions goes to equities.

I really enjoy not having to calculate my AA. More than likely, the equity portion is my kids’ inheritance. Shhhh; don’t tell them.
If you would, please explain something about this that I don't understand: The two statements I bolded in your comment seem to contradict each other - you say you're annually adding $24k of bonds (what you call "FI" - at first I mistook that for "Financial Independence"... d'oh...), and then you say "100% of new contributions goes to equities." Other than reinvesting dividends, it sounds like 100% of what's going into the 401k is bonds (not touching on what may be invested elsewhere), so I'm confused... Thanks.

I think the $24K is essentially a rounding error relative to their entire new contributions. :moneybag :moneybag
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Re: Trying to nail down asset allocation for second bucket

Post by TomatoTomahto » Sat Dec 09, 2017 3:32 pm

Marco...polo
Marco...polo
Tag, you’re it.
Sorry for the humble brag; I’ve been trying to avoid them. It’s not really a humble brag if it requires an assist, is it?

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Re: Trying to nail down asset allocation for second bucket

Post by cfs » Sat Dec 09, 2017 3:36 pm

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Re: Trying to nail down asset allocation for second bucket

Post by cfs » Sat Dec 09, 2017 3:37 pm

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Last edited by cfs on Sat Dec 09, 2017 3:40 pm, edited 1 time in total.
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Re: Trying to nail down asset allocation for second bucket

Post by cfs » Sat Dec 09, 2017 3:38 pm

TheTimeLord wrote:
Sat Dec 09, 2017 9:36 am
. . . Our retirement savings has 2 buckets . . .
WARNING, don't try this at home. I have a safe and a risky bucket (some call this LMP), for this conversation let's call it bucket 1 and 2. Because I don't need the money my bucket 2 is 100% equities. Disclosure, retired since 2014, receiving social security and pensions, portfolio withdrawal and spending rate zero. Wishing all forum members and visitors a Merry Christmas, and thanks for reading.
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Re: Trying to nail down asset allocation for second bucket

Post by marcopolo » Sat Dec 09, 2017 3:40 pm

TomatoTomahto wrote:
Sat Dec 09, 2017 3:32 pm
Marco...polo
Marco...polo
Tag, you’re it.
Sorry for the humble brag; I’ve been trying to avoid them. It’s not really a humble brag if it requires an assist, is it?
It's all good.
No reason to feel bad about your success.
We are all here to learn and share our experiences.
Open and honest exchanges only add to the conversation.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Trying to nail down asset allocation for second bucket

Post by nedsaid » Sat Dec 09, 2017 3:44 pm

TheTimeLord wrote:
Sat Dec 09, 2017 9:36 am
Our retirement savings has 2 buckets. The first that contains enough safe fixed income assets to from today to FRA very comfortably. The second bucket is everything else and will be what is used to supplement SS and modest pensions after FRA. Each additional month either myself, my spouse or both work I transfer a month's projected expenses from the first bucket to the second bucket. Given that the second bucket won't be touched for 10+ years and the combination of SS and pensions should more than meet our basic expenses but not all our wants or surprise medical and care expenses what would be an appropriate AA for the second bucket. Currently, I am vacillating between asset allocations between 50/50 and 70/30. For those who view this as mental accounting, just answer the question for someone 10+ years away from retiring at FRA.
Pretty much, what you want to do is to have enough cushion to let your stocks rebound after a bear market. The last thing you want to do is sell stocks at the bottom of a bear market in order to pay bills. A couple things can be done. I think a bucket strategy can be useful. Another approach is to take your distributions from stocks when the stock market is doing well and taking your distributions from bonds when stocks are doing poorly. Whatever works.
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Re: Trying to nail down asset allocation for second bucket

Post by fear/greed » Sat Dec 09, 2017 3:48 pm

marcopolo wrote:
Sat Dec 09, 2017 2:58 pm
I think the $24K is essentially a rounding error relative to their entire new contributions. :moneybag :moneybag
:sharebeer
Got it. Thanks for cluing me in with the money bags.

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Re: Trying to nail down asset allocation for second bucket

Post by TomatoTomahto » Sat Dec 09, 2017 4:51 pm

marcopolo wrote:
Sat Dec 09, 2017 3:40 pm
It's all good.
No reason to feel bad about your success.
We are all here to learn and share our experiences.
Open and honest exchanges only add to the conversation.
I don’t feel bad about our success, but took to heart a thread a while back about how some new members felt uneasy about the income and asset disparities here. We need new members to keep the forum vibrant. While I am by nature open and honest (my wife kids me about it; we call it the engineer’s pathological honesty), I don’t want my posts to make anyone feel bad (except when I’m snarky and then it’s intentional).

ETA: and, while I’m apologizing, I also have tried to use fewer abbreviations, but still use TSM, TISM, FI, etc. :oops:

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Re: Trying to nail down asset allocation for second bucket

Post by flyingaway » Sat Dec 09, 2017 6:15 pm

IMHO, you are trying too hard to optimize your portfolio which makes it too complicated (mentally). As I said before, OMYs will take care of everything, i.e., if you don't want to retire after FI, you don't have to spend time optimizing your portfolio to the fine details.

If I have a 70/30 (stock/bond) allocation (I am moving there), I will consider 70% as the equivalent 2nd bucket (100% stocks) and 30% as the equivalent 1st (safe) bucket (100% bonds).

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Re: Trying to nail down asset allocation for second bucket

Post by TheTimeLord » Sat Dec 09, 2017 7:47 pm

flyingaway wrote:
Sat Dec 09, 2017 6:15 pm
IMHO, you are trying too hard to optimize your portfolio which makes it too complicated (mentally). As I said before, OMYs will take care of everything, i.e., if you don't want to retire after FI, you don't have to spend time optimizing your portfolio to the fine details.

If I have a 70/30 (stock/bond) allocation (I am moving there), I will consider 70% as the equivalent 2nd bucket (100% stocks) and 30% as the equivalent 1st (safe) bucket (100% bonds).
There is nothing complicated about it I have it all laid out in a simple spreadsheet that is fed from my weekly asset allocation calculations. I am just trying to finalize the AA I plug in for the 2nd bucket. As I said originally, it is the same as answering the question for someone who is 10+ years away from retiring at FRA. The first bucket should just be ignored as it serves no purpose after FRA.
For those who view this as mental accounting, just answer the question for someone 10+ years away from retiring at FRA.
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Re: Trying to nail down asset allocation for second bucket

Post by Devil's Advocate » Sat Dec 09, 2017 7:54 pm

dbr wrote:
Sat Dec 09, 2017 10:49 am
TheTimeLord wrote:
Sat Dec 09, 2017 10:41 am
dbr wrote:
Sat Dec 09, 2017 10:36 am
I don't know how your asset allocation should change over time in the period from retirement to the onset of significant income. I have an intuition that it shouldn't change by very much. The issue would be strongly affected by what fraction of your assets you need to consume to get through the initial period. This would be affected in turn by the relative size of that future income compared to the portfolio involved.

I don't think mentally separating the portfolio into a "safe" and a future bucket helps in any way to understand the best plan. What is required is a model that looks at both the return and the risk of different asset allocations under a varying withdrawal rate and a varying asset allocation. The whole conversation about the "bond tent" which I think Wade Pfau has discussed is an example of that kind of problem.
It definitely goes along the "Bond Tent" line with a rising glide path. For me I can't imagine how frustrating it would be to retire then not be able to do the activities I planned because of a negative sequence of returns. That would be far more frustrating than anything I have encountered in the workplace. I also freely admit the market's long run is playing into my difficulty in getting more aggressive. Rightly or wrongly that is something I mentally have to deal with.
You have no idea that you are not going to be able to do the activities you planned because of a "negative sequence of returns." I believe this outcome is most strongly affected by your rate of spending and least strongly affected by your asset allocation. In that case the best strategy is not to hold a lot of fixed income but rather to spend less or to have saved more. The real risk management tool here is to not retire so soon. If you consider that an unreasonable choice, then you have to decide on your priorities.
That's like preaching to the choir!

:D
DA

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Re: Trying to nail down asset allocation for second bucket

Post by itstoomuch » Sat Dec 09, 2017 8:00 pm

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Last edited by itstoomuch on Sat Dec 09, 2017 9:08 pm, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Trying to nail down asset allocation for second bucket

Post by Sandtrap » Sat Dec 09, 2017 8:47 pm

itstoomuch wrote:
Sat Dec 09, 2017 8:00 pm
We use 4 income buckets that have varying degrees of freedom, risks, but all easily accessible for Income. Will soon have a fifth bucket that I haven't decided how to handle as a fifth income stream or consolidate into the other buckets. :confused

Ans to Quest. It's mental accounting. Buckets are not significantly different.
I started out with the "buckets" analogy early on but quickly dumped it for another "mental math" process that seems more comprehensive. You and I both have diverse income streams that include rental income. However, I've always considered by R/E business and rental income as a "business" and not as an "investment bucket" It seems the "buckets" analogy works for FI presentations but not for "Bogleheads". Is this correct? How are you conceptualizing you 4-5 buckets?
Thanks for helping me understand.
j :D

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Re: Trying to nail down asset allocation for second bucket

Post by itstoomuch » Sat Dec 09, 2017 9:24 pm

^ sandtrap
The one rental came about in an inheritance which we used to buy a rental property for Income and not so much for Investment. We we're heavy in equities and the rental worked as a diversifier
The second rental is short-term to be used as a permanent retirement home. Our current house may or may not be used as a rental. Undecided.
A property that has been idle is under contract. How we proceed is unclear. It is the "#5" bucket.
The RE functions as a Income stream to us and as a business for son who is the unpaid PM/advisor. It's is experience for him as it is somewhat related to his job. He will never get a complaint from the CEO for doing RE.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Trying to nail down asset allocation for second bucket

Post by itstoomuch » Sat Dec 09, 2017 9:42 pm

^how I handle the buckets:
We watched WSW with Louis R. in the mid 70s+.
Wellington, Wellsley fund mangers were regularly featured along with JBogle. Likewise, Magellan and Contra Fund managers were also featured. We owned to the W and Fido funds for long periods. We did own the Index, but the 60/40 concept and W/F funds were hard to beat for decades.

Imagine the buckets grouped together and a bathtub underneath the buckets.The bathtub is our annual Income. Each bucket have different "investments" types. Each bucket has a sipgot and I have a ladle. I control the spigot and use the ladle to reallocate between buckets. Each bucket should behave differently under different economic situations. Currently all the buckets are growing which isn't a bad outcome.

The question that all of us is concerns is: What happens when the status quo changes? Hopefully we will need income streams from just two buckets.

In our RE market, the revenue is very steady and should handle inflation and recession well.
The bucket of GLWB Iongevity-Income annuities have a small inflation feature and a flexible fund selection. For a fee, the annuity gives me a call and put feature.
The SS and pension Income flows into it's bucket and out thru the spigot unrestricted.
The Discretionary is pure discretionary. Recently we turned on that spigot for the down payment for the #2 rental.
Rental Income flows into the rental bucket. This spigot is turned on enough to satisfy rental expenses and our monthly income along with the SS income.
Last edited by itstoomuch on Sat Dec 09, 2017 10:19 pm, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Trying to nail down asset allocation for second bucket

Post by Sandtrap » Sat Dec 09, 2017 9:48 pm

itstoomuch wrote:
Sat Dec 09, 2017 9:24 pm
^ sandtrap
The one rental came about in an inheritance which we used to buy a rental property for Income and not so much for Investment. We we're heavy in equities and the rental worked as a diversifier
The second rental is short-term to be used as a permanent retirement home. Our current house may or may not be used as a rental. Undecided.
A property that has been idle is under contract. How we proceed is unclear. It is the "#5" bucket.
The RE functions as a Income stream to us and as a business for son who is the unpaid PM/advisor. It's is experience for him as it is somewhat related to his job. He will never get a complaint from the CEO for doing RE.
Thanks. I get it.
A bit different with 100's of rentals so I fired myself and took a reluctant retirement. Too much whining and complaining from myself to myself, said DW. :shock:
j :D

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