Bucket Portfolio article by Christine Benz

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Johnnie
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Re: Bucket Portfolio article by Christine Benz

Post by Johnnie » Thu Jul 12, 2018 10:34 am

Bucket approaches make me uncomfortable because they feel like a way to play games and avoid hard thinking about asset allocation. That said, I'm planning to use one in the years between retirement and collecting SS at age 70.

Specifically, "Cut-Throat's famous 'Delay Social Security to age 70 and Spend more money at 62'" scheme.
viewtopic.php?t=102609

I view this mainly as a "metering device" for approximating how much more I must take in distributions before age 70 to equalize total pre- and post-SS retirement income. It has you placing a portion of the portfolio in a CD ladder "bucket" to withdraw during those in-between years alongside the regular distributions prescribed by your distribution plan. The latter are (permanently) adjusted downward by the amount subtracted from the whole portfolio and placed in this "bucket."

But my head I state it both ways: As a bucket approach and as a programmed and gradual AA shift during those in-between years, from a more conservative AA at the start of retirement (it works out to close to 50/50 in my case) to 60/40 when the SS checks start rolling in at age 70.

This has the additional benefit of modestly mitigating SOR risk during those early retirement years.
"I know nothing."

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Re: Bucket Portfolio article by Christine Benz

Post by House Blend » Thu Jul 12, 2018 10:36 am

Here's what my 85yo mother's withdrawal "strategy" looks like:

Her gross income in 2017 from all sources (pension, RMDs, dividends from taxable) was X.

Her 2017 spending (including income tax) was about 70% of X.

It's been like that for several years.

Buckets aren't even in the conversation. The only decision making involved is settling on an appropriate AA for (re)investing the excess income.

Many Bogleheads are over-savers/under-spenders, and I suspect that they will have similar experiences once they reach the age of RMDs. (Unless they Roth-convert aggressively prior to that.)

Whether the withdrawal strategy is simple or complex, the odds that a Boglehead will not have a sustainable rate of spending in retirement are approximately 0.

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Re: Bucket Portfolio article by Christine Benz

Post by bobcat2 » Thu Jul 12, 2018 10:52 am

AtlasShrugged? wrote:
Wed Jul 11, 2018 6:59 pm
Bobcat2....
I have the impression that you are a real skeptic of the bucket approach...
Got that right :!: :D

Links to articles about the bucket approach.
Can Buckets Bail-Out a Poor Sequence of Investment Returns?
https://web.archive.org/web/20150320005 ... uckets.pdf

Bucket Baloney
https://seekingalpha.com/article/4119677-bucket-baloney

The bucket approach is more complicated than the conventional approach of retirement planning - rebalancing blah blah blah, but it is not less risky. It simply shifts the risk profile. If the bear market recovers in 5 years or less you are better off using buckets, but in the really bad case of a bear market lasting 9 years or more, the bucket approach makes a very bad situation worse. If you want less risk, you have to do some form of liability matching at least for a portion of your retirement income.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Bucket Portfolio article by Christine Benz

Post by munemaker » Thu Jul 12, 2018 10:54 am

House Blend wrote:
Thu Jul 12, 2018 10:36 am
Here's what my 85yo mother's withdrawal "strategy" looks like:

Her gross income in 2017 from all sources (pension, RMDs, dividends from taxable) was X.

Her 2017 spending (including income tax) was about 70% of X.
Yes, if you have a big pension that, together with SS more than covers your expenses, you don't need a strategy to withdraw from your portfolio, bucket approach or otherwise.

For many of us in the private sector, pensions no longer exist and we depend on withdrawals from our portfolio to cover our expenses.

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Thu Jul 12, 2018 11:08 am

bobcat2 wrote:
Thu Jul 12, 2018 10:52 am
AtlasShrugged? wrote:
Wed Jul 11, 2018 6:59 pm
Bobcat2....
I have the impression that you are a real skeptic of the bucket approach...
Got that right :!: :D

Links to articles about the bucket approach.
Can Buckets Bail-Out a Poor Sequence of Investment Returns?
https://web.archive.org/web/20150320005 ... uckets.pdf

Bucket Baloney
https://seekingalpha.com/article/4119677-bucket-baloney

The bucket approach is more complicated than the conventional approach of retirement planning - rebalancing blah blah blah, but it is not less risky. It simply shifts the risk profile. If the bear market recovers in 5 years or less you are better off using buckets, but in the really bad case of a bear market lasting 9 years or more, the bucket approach makes a very bad situation worse. If you want less risk, you have to do some form of liability matching at least for a portion of your retirement income.

BobK
I refer you to Kitces' analysis where he demonstrated that, in actual operation, at least one common bucket strategy was literally identical to a traditional AA approach.
“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

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Re: Bucket Portfolio article by Christine Benz

Post by House Blend » Thu Jul 12, 2018 11:39 am

munemaker wrote:
Thu Jul 12, 2018 10:54 am
House Blend wrote:
Thu Jul 12, 2018 10:36 am
Here's what my 85yo mother's withdrawal "strategy" looks like:

Her gross income in 2017 from all sources (pension, RMDs, dividends from taxable) was X.

Her 2017 spending (including income tax) was about 70% of X.
Yes, if you have a big pension that, together with SS more than covers your expenses, you don't need a strategy to withdraw from your portfolio, bucket approach or otherwise.

For many of us in the private sector, pensions no longer exist and we depend on withdrawals from our portfolio to cover our expenses.
Mom has a pension only, no SS. (State pension in lieu of SS.)
And no, the pension alone doesn't cover her expenses.

Her pension is a bit more generous than SS would have been, but doesn't materially change things. Replace the pension with an SS benefit commensurate with her earnings and she'd still be in
a situation where SS + RMDs + dividends significantly exceed her expenses.

Of course RMDs + dividends count as portfolio withdrawals if they are spent.

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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Thu Jul 12, 2018 12:13 pm

willthrill81 wrote:
Thu Jul 12, 2018 10:02 am
Tdubs wrote:
Thu Jul 12, 2018 9:50 am
bobcat2 wrote:
Thu Jul 12, 2018 8:29 am
Tdubs wrote:
Thu Jul 12, 2018 4:39 am
In 2010 I had $181K in stocks and $119k in bonds left in the scenario. So $300k after ten years. Had increased my withdrawals by 3% every year. So with at least 50 percent in stocks, what would do better than that?
In real terms you are left with about $223k, not $300k. In other words in ten years the purchasing power of your portfolio is down about 55%. Now a real $20,000 withdrawal is 9% of your portfolio. That will not be sustainable withdrawal rate for very many years. :(

BobK
I am also 18 years older (mid-late 80s) and just need ten more years. I am withdrawing now at +30k in 2017 money. Even if I just toss it all in some ladder of bonds/treasuries, I could eke out around 3%, heck 4% from my TIAA traditional. So even in real terms, I'm going to make it. And this is for someone who retired right on the edge of the abyss in 2000.

What would have been a better course for someone in 2000?
Without a priori knowledge of what was going to happen, probably not much. A decade with net losses in stocks would stress any portfolio (buckets, 'AA model', or anything else) with significant stock holdings.

If the Fed is able to maintain their long-term target inflation of 2%, then you could amortize your entire portfolio with TIAA Traditional at 4% and make constant sum withdrawals adjusted for inflation for well over 30 years.
Just to be clear, the above is just my hypothetical retiree who had started in 2000 and used a bucket strategy to survive being whipsawed in that nasty decade. It works.

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Re: Bucket Portfolio article by Christine Benz

Post by GAAP » Thu Jul 12, 2018 12:48 pm

magneto wrote:
Wed Jul 11, 2018 9:41 am
Some thoughts from Frank Armstrong :-
https://investorsolutions.com/knowledge ... portfolio/

Investors who prefer a permanent Constant Ratio, may find some dificulty with :-
"A far superior alternative strategy would treat the equity and bond portfolios separately, then impose a rule for withdrawals that protects equity capital during down markets by liquidating only bonds during “bad” years. During “good” years withdrawals are funded by sales of equity shares and any excess accumulation is used to re-balance the portfolio back to the desired asset allocation. Using spreadsheet models with Monte Carlo simulation we find substantial incremental improvement by imposing this simple rule."
This is what happens automatically if you use rebalancing bands. Bands effectively provide the "buckets", without changing your target AA.

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Re: Bucket Portfolio article by Christine Benz

Post by The Wizard » Thu Jul 12, 2018 12:54 pm

GAAP wrote:
Thu Jul 12, 2018 12:48 pm

This is what happens automatically if you use rebalancing bands. Bands effectively provide the "buckets", without changing your target AA.
Umm, no.
No they don't...
Attempted new signature...

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Re: Bucket Portfolio article by Christine Benz

Post by GAAP » Thu Jul 12, 2018 1:15 pm

The Wizard wrote:
Thu Jul 12, 2018 12:54 pm
GAAP wrote:
Thu Jul 12, 2018 12:48 pm

This is what happens automatically if you use rebalancing bands. Bands effectively provide the "buckets", without changing your target AA.
Umm, no.
No they don't...
The degree depends on what bands you use, and what your AA is, certainly.

Example:
  • 50/50 portfolio
  • Rebalance band +/- 20%
  • Tolerance band +/- 10%
  • Withdrawal rate 4% Real
  • Starting value $100k (50K each stocks/bonds)
  • For simplicity, assume zero inflation for the year
If there is a 25% stock drop, stocks are now worth $37.5K and the portfolio goes to $87.5. The AA goes to ~43/57, which would trigger a rebalance need, but I need to make a 4K withdrawal, which I would take from the 57%, resulting in a portfolio value of 83.5 and an AA of 45/55. I'm now within my tolerance range and don't need to rebalance anything.

I could do the same thing with a cash allocation, if I actually was willing to earn -CPI returns. In that case, since the allocation would be much smaller, it would also be the first to get hit on any portfolio drop. The same rebalance/tolerance bands around a 10% cash allocation would get triggered every time I needed to make a 4% withdrawal.

And, yes this is a simplistic example to illustrate the concept -- and no, that's not my AA (or withdrawal method).

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Re: Bucket Portfolio article by Christine Benz

Post by munemaker » Thu Jul 12, 2018 3:14 pm

House Blend wrote:
Thu Jul 12, 2018 11:39 am
munemaker wrote:
Thu Jul 12, 2018 10:54 am
House Blend wrote:
Thu Jul 12, 2018 10:36 am
Here's what my 85yo mother's withdrawal "strategy" looks like:

Her gross income in 2017 from all sources (pension, RMDs, dividends from taxable) was X.

Her 2017 spending (including income tax) was about 70% of X.
Yes, if you have a big pension that, together with SS more than covers your expenses, you don't need a strategy to withdraw from your portfolio, bucket approach or otherwise.

For many of us in the private sector, pensions no longer exist and we depend on withdrawals from our portfolio to cover our expenses.
Mom has a pension only, no SS. (State pension in lieu of SS.)
And no, the pension alone doesn't cover her expenses.

Her pension is a bit more generous than SS would have been, but doesn't materially change things. Replace the pension with an SS benefit commensurate with her earnings and she'd still be in
a situation where SS + RMDs + dividends significantly exceed her expenses.

Of course RMDs + dividends count as portfolio withdrawals if they are spent.
Thanks for the clarification. I misread the original post.

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Thu Jul 12, 2018 3:45 pm

The Wizard wrote:
Thu Jul 12, 2018 12:54 pm
GAAP wrote:
Thu Jul 12, 2018 12:48 pm

This is what happens automatically if you use rebalancing bands. Bands effectively provide the "buckets", without changing your target AA.
Umm, no.
No they don't...
I suggest that you take a look at the link to Kitces' analysis of bucket strategies that I linked to earlier. A bucket strategy can be literally identical to an 'AA' strategy (but not always).
“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

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Re: Bucket Portfolio article by Christine Benz

Post by GAAP » Thu Jul 12, 2018 4:23 pm

willthrill81 wrote:
Thu Jul 12, 2018 3:45 pm
The Wizard wrote:
Thu Jul 12, 2018 12:54 pm
GAAP wrote:
Thu Jul 12, 2018 12:48 pm

This is what happens automatically if you use rebalancing bands. Bands effectively provide the "buckets", without changing your target AA.
Umm, no.
No they don't...
I suggest that you take a look at the link to Kitces' analysis of bucket strategies that I linked to earlier. A bucket strategy can be literally identical to an 'AA' strategy (but not always).
TLDR from that article:
To understand why the decision-rules-based buckets liquidation strategy and the total return rebalancing strategy were the same, it’s necessary to go back to the assumptions used for the decision-rules framework, which were:

1) If equities are up, take the retirement spending from equities

2) If equities are down but bonds are up, take the spending from bonds instead

3) If both equities and bonds are down in the same year, take the distribution from Treasury bills

Using this decision-rules approach, the chart below shows the retiree’s results if retirement begins in 1966, assuming a 4% initial withdrawal rate, distributions adjusted each subsequent year for inflation, with liquidations occurring at the end of each year, and the portfolio rebalanced back to 60/30/10 at the start of each year.

The key, here, is the final sentence: once a portfolio is going to be rebalanced every year, the impact of decision rules is made null and void and the buckets are essentially just an asset allocation mirage, because the total amount of withdrawals is always the same (regardless of which asset classes it’s taken from) and the final allocation is always the same (due to the rebalancing).

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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Thu Jul 12, 2018 10:50 pm

GAAP wrote:
Thu Jul 12, 2018 4:23 pm
willthrill81 wrote:
Thu Jul 12, 2018 3:45 pm
The Wizard wrote:
Thu Jul 12, 2018 12:54 pm
GAAP wrote:
Thu Jul 12, 2018 12:48 pm

This is what happens automatically if you use rebalancing bands. Bands effectively provide the "buckets", without changing your target AA.
Umm, no.
No they don't...
I suggest that you take a look at the link to Kitces' analysis of bucket strategies that I linked to earlier. A bucket strategy can be literally identical to an 'AA' strategy (but not always).
TLDR from that article:
To understand why the decision-rules-based buckets liquidation strategy and the total return rebalancing strategy were the same, it’s necessary to go back to the assumptions used for the decision-rules framework, which were:

1) If equities are up, take the retirement spending from equities

2) If equities are down but bonds are up, take the spending from bonds instead

3) If both equities and bonds are down in the same year, take the distribution from Treasury bills

Using this decision-rules approach, the chart below shows the retiree’s results if retirement begins in 1966, assuming a 4% initial withdrawal rate, distributions adjusted each subsequent year for inflation, with liquidations occurring at the end of each year, and the portfolio rebalanced back to 60/30/10 at the start of each year.

The key, here, is the final sentence: once a portfolio is going to be rebalanced every year, the impact of decision rules is made null and void and the buckets are essentially just an asset allocation mirage, because the total amount of withdrawals is always the same (regardless of which asset classes it’s taken from) and the final allocation is always the same (due to the rebalancing).
Till you do multiple runs with different withdrawal rates, you wont' see the value of the Bucket Plan. When your account is stressed is when you should consider it.

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Thu Jul 12, 2018 10:53 pm

Tdubs wrote:
Thu Jul 12, 2018 10:50 pm
GAAP wrote:
Thu Jul 12, 2018 4:23 pm
willthrill81 wrote:
Thu Jul 12, 2018 3:45 pm
The Wizard wrote:
Thu Jul 12, 2018 12:54 pm
GAAP wrote:
Thu Jul 12, 2018 12:48 pm

This is what happens automatically if you use rebalancing bands. Bands effectively provide the "buckets", without changing your target AA.
Umm, no.
No they don't...
I suggest that you take a look at the link to Kitces' analysis of bucket strategies that I linked to earlier. A bucket strategy can be literally identical to an 'AA' strategy (but not always).
TLDR from that article:
To understand why the decision-rules-based buckets liquidation strategy and the total return rebalancing strategy were the same, it’s necessary to go back to the assumptions used for the decision-rules framework, which were:

1) If equities are up, take the retirement spending from equities

2) If equities are down but bonds are up, take the spending from bonds instead

3) If both equities and bonds are down in the same year, take the distribution from Treasury bills

Using this decision-rules approach, the chart below shows the retiree’s results if retirement begins in 1966, assuming a 4% initial withdrawal rate, distributions adjusted each subsequent year for inflation, with liquidations occurring at the end of each year, and the portfolio rebalanced back to 60/30/10 at the start of each year.

The key, here, is the final sentence: once a portfolio is going to be rebalanced every year, the impact of decision rules is made null and void and the buckets are essentially just an asset allocation mirage, because the total amount of withdrawals is always the same (regardless of which asset classes it’s taken from) and the final allocation is always the same (due to the rebalancing).
Till you do multiple runs with different withdrawal rates, you wont' see the value of the Bucket Plan. When your account is stressed is when you should consider it.
Kitces' analysis is true regardless of the withdrawal rate used. Only when you use something like a free-floating AA bucket model can the bucket strategy yield different results than a more conventional fixed or glidepath AA.
“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

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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Fri Jul 13, 2018 8:21 am

willthrill81 wrote:
Thu Jul 12, 2018 10:53 pm
Tdubs wrote:
Thu Jul 12, 2018 10:50 pm
GAAP wrote:
Thu Jul 12, 2018 4:23 pm
willthrill81 wrote:
Thu Jul 12, 2018 3:45 pm
The Wizard wrote:
Thu Jul 12, 2018 12:54 pm


Umm, no.
No they don't...
I suggest that you take a look at the link to Kitces' analysis of bucket strategies that I linked to earlier. A bucket strategy can be literally identical to an 'AA' strategy (but not always).
TLDR from that article:
To understand why the decision-rules-based buckets liquidation strategy and the total return rebalancing strategy were the same, it’s necessary to go back to the assumptions used for the decision-rules framework, which were:

1) If equities are up, take the retirement spending from equities

2) If equities are down but bonds are up, take the spending from bonds instead

3) If both equities and bonds are down in the same year, take the distribution from Treasury bills

Using this decision-rules approach, the chart below shows the retiree’s results if retirement begins in 1966, assuming a 4% initial withdrawal rate, distributions adjusted each subsequent year for inflation, with liquidations occurring at the end of each year, and the portfolio rebalanced back to 60/30/10 at the start of each year.

The key, here, is the final sentence: once a portfolio is going to be rebalanced every year, the impact of decision rules is made null and void and the buckets are essentially just an asset allocation mirage, because the total amount of withdrawals is always the same (regardless of which asset classes it’s taken from) and the final allocation is always the same (due to the rebalancing).
Till you do multiple runs with different withdrawal rates, you wont' see the value of the Bucket Plan. When your account is stressed is when you should consider it.
Kitces' analysis is true regardless of the withdrawal rate used. Only when you use something like a free-floating AA bucket model can the bucket strategy yield different results than a more conventional fixed or glidepath AA.
I ran the Wilshire 5000 (2000-17 period) through a 2-bucket and a rebalance scenario (70-30 balance on $500k portfolio) with a high withdrawal rate (6%). Bucket won by a smidgen ($25k at the end), though both portfolios were wiped out after 17 years.

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Re: Bucket Portfolio article by Christine Benz

Post by Chaconne » Fri Jul 13, 2018 7:14 pm

The Wizard wrote:
Wed Jul 11, 2018 12:53 pm
One difference between a bucket scheme and a non bucket scheme is the withdrawal mechanism.
Lets assume monthly withdrawals to replenish your checking account in retirement. Thats what I do.

So if my target AA was 50% stocks, 45% bonds, and 5% cash, then each monthly withdrawal of $X000 would be done in such a way as to maintain that AA, to the extent possible.
In my personal case, my 403(b) provider doesn't offer a monthly rebalancing withdrawal plan, so I do automatic pro rata withdrawals. And then every few months or more, if my AA gets too far unbalanced, I manually rebalance toward my target.

The above is my non bucket scheme.
My impression is that bucket schemes do withdrawals much differently...
Apologies for being this thread’s official dummy. I’m struggling to get all this through my thick head, so please humor me and tell me what’s wrong with my thinking.

The Wizard, can’t you do the same thing you do using a bucket strategy? Say you have one bucket each for cash, bonds and stocks. When replenishing your cash fund each month, year or whatever, you’d just take funds from your bonds and/or stocks in amounts that maintain your target allocation?

In short, I’m not sure I understand the difference between a bucket strategy and a non-bucket strategy like the one that you explained. Can anyone straighten me out? THANKS.
-Bob

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Fri Jul 13, 2018 9:13 pm

hesson11 wrote:
Fri Jul 13, 2018 7:14 pm
The Wizard wrote:
Wed Jul 11, 2018 12:53 pm
One difference between a bucket scheme and a non bucket scheme is the withdrawal mechanism.
Lets assume monthly withdrawals to replenish your checking account in retirement. Thats what I do.

So if my target AA was 50% stocks, 45% bonds, and 5% cash, then each monthly withdrawal of $X000 would be done in such a way as to maintain that AA, to the extent possible.
In my personal case, my 403(b) provider doesn't offer a monthly rebalancing withdrawal plan, so I do automatic pro rata withdrawals. And then every few months or more, if my AA gets too far unbalanced, I manually rebalance toward my target.

The above is my non bucket scheme.
My impression is that bucket schemes do withdrawals much differently...
Apologies for being this thread’s official dummy. I’m struggling to get all this through my thick head, so please humor me and tell me what’s wrong with my thinking.

The Wizard, can’t you do the same thing you do using a bucket strategy? Say you have one bucket each for cash, bonds and stocks. When replenishing your cash fund each month, year or whatever, you’d just take funds from your bonds and/or stocks in amounts that maintain your target allocation?

In short, I’m not sure I understand the difference between a bucket strategy and a non-bucket strategy like the one that you explained. Can anyone straighten me out? THANKS.
-Bob
I'd really suggest that you read the Kitces' article linked to above. It gives a very clear description (with graphics) as to how both a bucket and an 'AA' strategy can function identically.
“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

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Re: Bucket Portfolio article by Christine Benz

Post by sandramjet » Fri Jul 13, 2018 9:23 pm

bobcat2 wrote:
Thu Jul 12, 2018 10:52 am
It simply shifts the risk profile. If the bear market recovers in 5 years or less you are better off using buckets, but in the really bad case of a bear market lasting 9 years or more, the bucket approach makes a very bad situation worse. If you want less risk, you have to do some form of liability matching at least for a portion of your retirement income.
While I would agree that it is risk shifting, I also believe that LMP involves a risk shifting exercise but no one ever talks about it. You are shifting the risk to knowing both what the liabilities are and when your liabilities will come due. So far, my ability to predict the timing of my liabilities and their size has not been much better than predicting the market, or anything else in the future. Everyone seems to dismiss this as easy to do, however, that has not been my experience.

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Re: Bucket Portfolio article by Christine Benz

Post by bobcat2 » Fri Jul 13, 2018 9:43 pm

sandramjet wrote:
Fri Jul 13, 2018 9:23 pm
bobcat2 wrote:
Thu Jul 12, 2018 10:52 am
It simply shifts the risk profile. If the bear market recovers in 5 years or less you are better off using buckets, but in the really bad case of a bear market lasting 9 years or more, the bucket approach makes a very bad situation worse. If you want less risk, you have to do some form of liability matching at least for a portion of your retirement income.
While I would agree that it is risk shifting, I also believe that LMP involves a risk shifting exercise but no one ever talks about it. You are shifting the risk to knowing both what the liabilities are and when your liabilities will come due. So far, my ability to predict the timing of my liabilities and their size has not been much better than predicting the market, or anything else in the future. Everyone seems to dismiss this as easy to do, however, that has not been my experience.
Retirement liability matching typically means your goal in retirement is to have enough income to keep the same standard of living that you enjoyed in the latter years of your working career. Typically the amount of income needed in retirement to keep that same standard of living is 55% to 70% of your income while working. This lower level of income to keep the same living standard results from several lower expenses in retirement including not having to save for retirement, no SS & Medicare payroll taxes, an empty nest, and a mortgage that has been paid off. The liability that is being matched is the income to keep your living standard the same as before retirement. We are not trying to match every conceivable liability that may occur in retirement. Think of the liability as your retirement salary replacement check.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Bucket Portfolio article by Christine Benz

Post by AlohaJoe » Fri Jul 13, 2018 9:55 pm

willthrill81 wrote:
Thu Jul 12, 2018 10:53 pm
Only when you use something like a free-floating AA bucket model can the bucket strategy yield different results than a more conventional fixed or glidepath AA.
I mean....yes? All bucket strategies assume free floating asset allocation, don't they? They don't call it out and they don't ever bother explaining that it means a retiree will have high equity allocations in the depths of the Great Depression....but I think all bucket strategies assume free floating asset allocations.

Are there actually bucket advocates who say the asset allocation should be fixed and the buckets refilled every year regardless of market conditions?

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Fri Jul 13, 2018 10:29 pm

AlohaJoe wrote:
Fri Jul 13, 2018 9:55 pm
willthrill81 wrote:
Thu Jul 12, 2018 10:53 pm
Only when you use something like a free-floating AA bucket model can the bucket strategy yield different results than a more conventional fixed or glidepath AA.
I mean....yes? All bucket strategies assume free floating asset allocation, don't they?
Not necessarily. I'll refer you to the excellent article by Kitces linked to in this post. This was how he laid out one particular type of bucket strategy that employed a fixed AA. The 'bucket part' of the strategy was which asset class the withdrawals were drawn from before the rebalancing back to the target AA took place.
For instance, a retiree separates their portfolio into three buckets: #1 holds equities (e.g., S&P 500) for 60% of the portfolio; #2 is invested in (intermediate government) bonds for 30% of the portfolio; and bucket # holds the last 10% of the portfolio in cash (Treasury bills).

Once these three buckets are established, the retiree then might use the following decision-rule framework for liquidations:

1) If equities are up, take the retirement spending from equities

2) If equities are down but bonds are up, take the spending from bonds instead

3) If both equities and bonds are down in the same year, take the distribution from Treasury bills

Using this decision-rules approach, the chart below shows the retiree’s results if retirement begins in 1966, assuming a 4% initial withdrawal rate, distributions adjusted each subsequent year for inflation, with liquidations occurring at the end of each year, where the portfolio is rebalanced back to its original 60/30/10 allocation at the start of each year.
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Re: Bucket Portfolio article by Christine Benz

Post by AlohaJoe » Fri Jul 13, 2018 10:41 pm

willthrill81 wrote:
Fri Jul 13, 2018 10:29 pm
AlohaJoe wrote:
Fri Jul 13, 2018 9:55 pm
Are there actually bucket advocates who say the asset allocation should be fixed and the buckets refilled every year regardless of market conditions?
I'll refer you to the excellent article by Kitces linked to in this post.
Sure but in that post Kitces is creating a bit of a strawman, in that he's creating his own definition of buckets and then disproving it, as opposed to using someone else's definition of buckets. What I mean is: can someone point me to a book or web page from an actual buckets advocate who explicitly says "and then rebalance every year". It is entirely possible someone says that, I just can't say I've seen it. Instead there's usually some ill defined hocus pocus about drawing from the stock bucket when stocks are "up" and drawing from the cash bucket when stocks are "down" and using the middle bucket when stocks are "flat" or some such.

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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Fri Jul 13, 2018 11:28 pm

AlohaJoe wrote:
Fri Jul 13, 2018 10:41 pm
willthrill81 wrote:
Fri Jul 13, 2018 10:29 pm
AlohaJoe wrote:
Fri Jul 13, 2018 9:55 pm
Are there actually bucket advocates who say the asset allocation should be fixed and the buckets refilled every year regardless of market conditions?
I'll refer you to the excellent article by Kitces linked to in this post.
Sure but in that post Kitces is creating a bit of a strawman, in that he's creating his own definition of buckets and then disproving it, as opposed to using someone else's definition of buckets. What I mean is: can someone point me to a book or web page from an actual buckets advocate who explicitly says "and then rebalance every year". It is entirely possible someone says that, I just can't say I've seen it. Instead there's usually some ill defined hocus pocus about drawing from the stock bucket when stocks are "up" and drawing from the cash bucket when stocks are "down" and using the middle bucket when stocks are "flat" or some such.
If you rebalance every year, you are NOT using a bucket strategy, at least not as it was envisioned. Deferring rebalancing for a few years during bear markets is the whole point of a BS. As I noted above, when I ran BS vs rebalancing model for the 2000-17 period, the BS provided a little more benefit, but only when rebalancing did not happen for five years in the 2000-05 stretch at the beginning. During good years, you rebalance every year and the BS is no different than someone who rebalances regularly. Even then I suspect the use of a BS is a good idea considering investor psychology--it probably helps discipline your decisions and follow a plan.

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Re: Bucket Portfolio article by Christine Benz

Post by Call_Me_Op » Sat Jul 14, 2018 6:47 am

If one thinks about it, what Christine is describing is essentially the same as the balanced bogleheads portfolios we discuss regularly here. I see no fundamental differences. This is not a criticism in any way. But the one potentially misleading aspect is that she describes the buckets with a time frame (e.g., 3-10 years). This may lead the casual observer to interpret it literally to mean that this is the bucket from which to spend during years 3 to 10 of retirement. What she really means is that one is to allow 3-10 years before one needs to tap this bucket. But one cap tap it before then if it provides an adequate return to justify it.
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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Sat Jul 14, 2018 7:22 am

The BS is really a disaster plan. You don't need think about it in good times, just rebalance as you go. Just based on the calculations I have run, it is useful when the market contracts several years in a row and you have a high withdrawal rate. The difference between a 6% and 4% withdrawal rate was (surprise!) the difference between success and financial failure.

So a different solution to a market plunge is to withdraw less from your account. Maybe you can't do that, so a bucket plan might be another tool to use.

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Re: Bucket Portfolio article by Christine Benz

Post by Hyperborea » Sat Jul 14, 2018 8:45 am

Tdubs wrote:
Fri Jul 13, 2018 11:28 pm
If you rebalance every year, you are NOT using a bucket strategy, at least not as it was envisioned. Deferring rebalancing for a few years during bear markets is the whole point of a BS. As I noted above, when I ran BS vs rebalancing model for the 2000-17 period, the BS provided a little more benefit, but only when rebalancing did not happen for five years in the 2000-05 stretch at the beginning. During good years, you rebalance every year and the BS is no different than someone who rebalances regularly. Even then I suspect the use of a BS is a good idea considering investor psychology--it probably helps discipline your decisions and follow a plan.
Tdubs wrote:
Sat Jul 14, 2018 7:22 am
The BS is really a disaster plan. You don't need think about it in good times, just rebalance as you go. Just based on the calculations I have run, it is useful when the market contracts several years in a row and you have a high withdrawal rate. The difference between a 6% and 4% withdrawal rate was (surprise!) the difference between success and financial failure.

So a different solution to a market plunge is to withdraw less from your account. Maybe you can't do that, so a bucket plan might be another tool to use.
From your description, it sounds like you have used buckets to build a sort of rising equity glidepath. By spending down the bonds/cash and and leaving the equity alone your AA will swing. These two are also similar to the LMP where one sets aside enough bonds/cash to cover oneself until some event (e.g. pension or SS eligibility). The differences between these three are how much you have in the "bucket" of bonds/cash and the policies on replenishment. The main goal of these all is to avoid drawing down the equity portion during a downturn. Once you've avoided any possible downturn at the beginning of retirement then with a conservative WR the equity portion should have grown large enough to not care about following ones.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Sat Jul 14, 2018 9:03 am

Hyperborea wrote:
Sat Jul 14, 2018 8:45 am

From your description, it sounds like you have used buckets to build a sort of rising equity glidepath. By spending down the bonds/cash and and leaving the equity alone your AA will swing. These two are also similar to the LMP where one sets aside enough bonds/cash to cover oneself until some event (e.g. pension or SS eligibility). The differences between these three are how much you have in the "bucket" of bonds/cash and the policies on replenishment. The main goal of these all is to avoid drawing down the equity portion during a downturn. Once you've avoided any possible downturn at the beginning of retirement then with a conservative WR the equity portion should have grown large enough to not care about following ones.
That does seem to be the case. I've done these calcs for two bad periods (late 1960s-early 1980s and 2000-17). The bucket strategy does help a little, but it is better to keep WR low at the outset.

I've wanted to sit down and play with scenarios where you increase your equities as you get older, for the very reason you cite. Having avoided portfolio failure, perhaps a larger commitment to equities makes sense by your late 70s.

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Re: Bucket Portfolio article by Christine Benz

Post by GAAP » Sat Jul 14, 2018 9:33 am

bobcat2 wrote:
Fri Jul 13, 2018 9:43 pm
Typically the amount of income needed in retirement to keep that same standard of living is 55% to 70% of your income while working. This lower level of income to keep the same living standard results from several lower expenses in retirement including not having to save for retirement, no SS & Medicare payroll taxes, an empty nest, and a mortgage that has been paid off. The liability that is being matched is the income to keep your living standard the same as before retirement.
I'm not disagreeing with the concept, but I haven't thought about gross income in decades -- couldn't tell you what that amount is without looking. I've been doing payroll savings for so long that gross income is essentially only of interest for things like Roth contributions. I work from that net income amount, not the gross, adjusting for the things that would be additional. Net income is what drives my cash flow. For me, the liability you're talking about is actually greater than 100% of current.
bobcat2 wrote:
Wed Jul 11, 2018 1:16 pm
But what makes it worse, is that bucket strategies are promoted as particularly safe strategies. That is simply not true. What is true is that you are mitigating the risk of a ST bear market by amplifying the risk of a LT bear market when using a bucket strategy.
I wonder how many of those advocating a true (non-rebalanced) bucket strategy will feel about their AA after a five-year downturn where they've withdrawn all five years from cash and bonds? Using the 4% "standard" could take a 30/70 portfolio to 50/50. If bonds were down also, that could go much higher -- how well would they sleep at night?

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Re: Bucket Portfolio article by Christine Benz

Post by TheTimeLord » Sat Jul 14, 2018 9:45 am

This thread would be far more useful with terms associated. To me a bucket is an individually defined portfolio with it's own unique AA set created to serve a timeframe or purpose. Obviously this is not the definition being used by the majority here, especially ardent anti-Bucketeers.
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Re: Bucket Portfolio article by Christine Benz

Post by The Wizard » Sat Jul 14, 2018 10:16 am

TheTimeLord wrote:
Sat Jul 14, 2018 9:45 am
This thread would be far more useful with terms associated. To me a bucket is an individually defined portfolio with it's own unique AA set created to serve a timeframe or purpose. Obviously this is not the definition being used by the majority here, especially ardent anti-Bucketeers.
Right.
Furthermore, the Bucket Concept is complicated by different types of accounts, in my case:
1) 403(b) tax deferred
2) Roth IRA
3) taxable account

If one was a Bucketeer, I'm not sure how they would play this hand.
Probably strive to keep the taxable account all cash, the Cash Bucket.

But I don't.
I take income + Roth conversion from my 403(b) (presently 59% stocks) each month.

Both my Roth IRA and my taxable account tend to grow each month and I treat these funds as a combination of after-tax reserves and a New Car fund.
When I get to age 70 in 2020, I will cease Roth conversions and all excess income will go to my taxable account, currently 100% VTSAX...
Attempted new signature...

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Re: Bucket Portfolio article by Christine Benz

Post by GAAP » Sat Jul 14, 2018 10:25 am

TheTimeLord wrote:
Sat Jul 14, 2018 9:45 am
This thread would be far more useful with terms associated. To me a bucket is an individually defined portfolio with it's own unique AA set created to serve a timeframe or purpose. Obviously this is not the definition being used by the majority here, especially ardent anti-Bucketeers.
I think you're probably right. I see buckets as a way to manage a particular portfolio. If you are actually setting aside money for separate purposes, I see that as three sub-portfolios. It gets even better if you're also trying to manage the combination of sub-portfolios to meet an overall AA goal.

I treat my overall portfolio as one large item, but I do allocate a fixed portion for bridging the gap between retirement and various defined benefits. I don't "liability match" in the classic sense of the term, and I don't use buckets that relate to timing of cash flow needs.

The LMP believers may now hate on me... :happy

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Sat Jul 14, 2018 10:44 am

bobcat2 wrote:
Wed Jul 11, 2018 10:56 am
You are simply trading off one set of risks for another. If stocks don't recover within 10 years you are stuck with an all equity portfolio that has shrunk, which is a worse situation than the situation the buckets have avoided.
Are you opposed to the notion of a rising equity glidepath, as suggested by Kitces and Pfau?
Yet the reality is that strict implementation of a bucket strategy is more than just an exercise in mental accounting; it can actually distort the portfolio’s asset allocation, leading to an increasing amount of equity exposure over time as fixed income assets are spent down while equities continue to grow. Yet recent research shows that despite the contrary nature of the strategy – allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age – it turns out that a “rising equity glidepath” actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good… well, clients won’t have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life).
https://www.kitces.com/blog/should-equi ... ly-better/
“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

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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Sat Jul 14, 2018 12:14 pm

willthrill81 wrote:
Sat Jul 14, 2018 10:44 am
bobcat2 wrote:
Wed Jul 11, 2018 10:56 am
You are simply trading off one set of risks for another. If stocks don't recover within 10 years you are stuck with an all equity portfolio that has shrunk, which is a worse situation than the situation the buckets have avoided.
Are you opposed to the notion of a rising equity glidepath, as suggested by Kitces and Pfau?
Yet the reality is that strict implementation of a bucket strategy is more than just an exercise in mental accounting; it can actually distort the portfolio’s asset allocation, leading to an increasing amount of equity exposure over time as fixed income assets are spent down while equities continue to grow. Yet recent research shows that despite the contrary nature of the strategy – allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age – it turns out that a “rising equity glidepath” actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good… well, clients won’t have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life).
https://www.kitces.com/blog/should-equi ... ly-better/
Kitces article doesn't make it clear that there is a tipping point where regular rebalancing and a BS have the advantage. If rebalancing takes money out of your equities at the same time the market is dropping, you will lose money compared to the BS. When would that happen? A down year where you also needed a lot of money to live.

So to go back to the example I used earlier. Take a 500k portfolio in 2000. The equities (70 percent) are in a Wilshire 5000 index, and it is about to contract three years in a row. This particular retiree also decides to take money out at a 6 percent rate. As a result, the Wilshire index is contracting and, with rebalancing, feeding money into the bonds side of the portfolio. (If you withdrew at 4% the proportional flow would reverse into equities in this scenario.).

After three years contraction, the rebalanced Wilshire index fund has a smaller balance than the bucket strategy version. As recovery of the market begins, there is less money in it to take advantage of the growth years. As a result the bucket strategy portfolio has, after six years, about $4k more in it than the rebalance-every-year approach. Change the numbers a little bit, and the advantage shifts to rebalancing.

So, given a set of circumstances unique to each portfolio, the needs of the retiree, and market performance, one strategy or the other may be best.

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Re: Bucket Portfolio article by Christine Benz

Post by Hyperborea » Sat Jul 14, 2018 3:43 pm

Tdubs wrote:
Sat Jul 14, 2018 12:14 pm
willthrill81 wrote:
Sat Jul 14, 2018 10:44 am
bobcat2 wrote:
Wed Jul 11, 2018 10:56 am
You are simply trading off one set of risks for another. If stocks don't recover within 10 years you are stuck with an all equity portfolio that has shrunk, which is a worse situation than the situation the buckets have avoided.
Are you opposed to the notion of a rising equity glidepath, as suggested by Kitces and Pfau?
Yet the reality is that strict implementation of a bucket strategy is more than just an exercise in mental accounting; it can actually distort the portfolio’s asset allocation, leading to an increasing amount of equity exposure over time as fixed income assets are spent down while equities continue to grow. Yet recent research shows that despite the contrary nature of the strategy – allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age – it turns out that a “rising equity glidepath” actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good… well, clients won’t have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life).
https://www.kitces.com/blog/should-equi ... ly-better/
Kitces article doesn't make it clear that there is a tipping point where regular rebalancing and a BS have the advantage. If rebalancing takes money out of your equities at the same time the market is dropping, you will lose money compared to the BS. When would that happen? A down year where you also needed a lot of money to live.

So to go back to the example I used earlier. Take a 500k portfolio in 2000. The equities (70 percent) are in a Wilshire 5000 index, and it is about to contract three years in a row. This particular retiree also decides to take money out at a 6 percent rate. As a result, the Wilshire index is contracting and, with rebalancing, feeding money into the bonds side of the portfolio. (If you withdrew at 4% the proportional flow would reverse into equities in this scenario.).

After three years contraction, the rebalanced Wilshire index fund has a smaller balance than the bucket strategy version. As recovery of the market begins, there is less money in it to take advantage of the growth years. As a result the bucket strategy portfolio has, after six years, about $4k more in it than the rebalance-every-year approach. Change the numbers a little bit, and the advantage shifts to rebalancing.

So, given a set of circumstances unique to each portfolio, the needs of the retiree, and market performance, one strategy or the other may be best.
So, for avoidance of a bad sequence at the start of retirement I fail to see how casting this as a bucket solution makes it easier. A rising equity glide path does the same and is easier to understand. Start with some allocation, say 40/60 to 60/40, and spend down the bonds/cash portion for the first n years until you get to your final allocation. If the duration of n happens to be the same as your time until your pension or SS then you can claim that your rising equity glidepath is an LMP.

I'm following such a strategy now. I've got a roughly 60/40 portfolio and I'm spending only from the bonds/cash until I get about 2 years of such left. For me that will take about 10 years until I'm about 61. I'm about 2 years into that plan already.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Sat Jul 14, 2018 4:54 pm

Hyperborea wrote:
Sat Jul 14, 2018 3:43 pm
Tdubs wrote:
Sat Jul 14, 2018 12:14 pm
willthrill81 wrote:
Sat Jul 14, 2018 10:44 am
bobcat2 wrote:
Wed Jul 11, 2018 10:56 am
You are simply trading off one set of risks for another. If stocks don't recover within 10 years you are stuck with an all equity portfolio that has shrunk, which is a worse situation than the situation the buckets have avoided.
Are you opposed to the notion of a rising equity glidepath, as suggested by Kitces and Pfau?
Yet the reality is that strict implementation of a bucket strategy is more than just an exercise in mental accounting; it can actually distort the portfolio’s asset allocation, leading to an increasing amount of equity exposure over time as fixed income assets are spent down while equities continue to grow. Yet recent research shows that despite the contrary nature of the strategy – allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age – it turns out that a “rising equity glidepath” actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good… well, clients won’t have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life).
https://www.kitces.com/blog/should-equi ... ly-better/
Kitces article doesn't make it clear that there is a tipping point where regular rebalancing and a BS have the advantage. If rebalancing takes money out of your equities at the same time the market is dropping, you will lose money compared to the BS. When would that happen? A down year where you also needed a lot of money to live.

So to go back to the example I used earlier. Take a 500k portfolio in 2000. The equities (70 percent) are in a Wilshire 5000 index, and it is about to contract three years in a row. This particular retiree also decides to take money out at a 6 percent rate. As a result, the Wilshire index is contracting and, with rebalancing, feeding money into the bonds side of the portfolio. (If you withdrew at 4% the proportional flow would reverse into equities in this scenario.).

After three years contraction, the rebalanced Wilshire index fund has a smaller balance than the bucket strategy version. As recovery of the market begins, there is less money in it to take advantage of the growth years. As a result the bucket strategy portfolio has, after six years, about $4k more in it than the rebalance-every-year approach. Change the numbers a little bit, and the advantage shifts to rebalancing.

So, given a set of circumstances unique to each portfolio, the needs of the retiree, and market performance, one strategy or the other may be best.
So, for avoidance of a bad sequence at the start of retirement I fail to see how casting this as a bucket solution makes it easier. A rising equity glide path does the same and is easier to understand. Start with some allocation, say 40/60 to 60/40, and spend down the bonds/cash portion for the first n years until you get to your final allocation. If the duration of n happens to be the same as your time until your pension or SS then you can claim that your rising equity glidepath is an LMP.

I'm following such a strategy now. I've got a roughly 60/40 portfolio and I'm spending only from the bonds/cash until I get about 2 years of such left. For me that will take about 10 years until I'm about 61. I'm about 2 years into that plan already.
I never said it was easier. But in certain situations, it may give you the best return.

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