"Buckets of Money" and Bogleheads

[jmFightSpam]

Hi,

I have been listening to Ray Lucia's Radio Show lately. I actually find his advice around bucketizing your money making sense to me. It is not a get rich quick scheme in my mind nor a "Mad Money" type of craziness. You won't get super wealthy off of the system, but it seems like your money can grow and be used at a reasonable pace to allow you to retire comfortably.

Do the Bogleheads endorse this strategy? I was just curious.

Thanks.

[moneyman11]

Hi Jm,

Here's a thread I found that had a lot of interesting discussion about the buckets strategy.

http://diehards.org/forum/viewtopic.php ... highlight=

[jmFightSpam]

Hi Jm,

Here's a thread I found that had a lot of interesting discussion about the buckets strategy.

Hey, thanks! I did see that actually. However, I was not able to gauge whether most folks thought the strategy thumbs up or down as a whole. Maybe I didn't read carefully enough though.

[JDeeds]

I can't say whether or not "The Bogleheads" endorse the theory, but I do, with some changes, which I outlined in the other thread.

To me, it's simply another way to set the proper AA, but it does help me visualize it better. It'll do the job - but so will a lot of other strategies.

Sometimes (like when I'm sitting at the computer late at night), I'm tempted to dump it all into Wellington, take the distributions and go fishing.

[mlebuf]

I have listened to Ray Lucia's show for years. I find him very knowledgeable, refreshingly honest and forthright. I also attended two of his live seminars in Phoenix and found them worthwhile too. He bases his recommendations on his own considerable personal experiences and academic research such as modern portfolio theory and empirical studies. I even heard him recommend the Bogleheads' book on his show one day. He is fan of authors such as Larry Swedroe, Bill Bernstein, Burton Malkiel, John Bogle and has mentioned their books many times.

His buckets of money strategy is a way of allocating assets so people won't panic and sell at the wrong time or get greedy and buy at the wrong time. It's basically a buy-and-hold strategy. In short, I think Ray and his brain trust put out sound financial and investment information that helps a lot of people. They are good guys.

Best wishes,
Michael

[bob90245]

Hi Jm,

Here's a thread I found that had a lot of interesting discussion about the buckets strategy.

Hey, thanks! I did see that actually. However, I was not able to gauge whether most folks thought the strategy thumbs up or down as a whole. Maybe I didn't read carefully enough though.

Keep in mind that the Buckets of Money strategy is geared toward the distribution phase (i.e. withdrawing money from a retirement account). From your comments, it didn't appear that you were clear on this.

As a whole, I think Bogleheads do not endorse Lucia's Buckets of Money strategy. It is essentially a "Bonds First" strategy. Under this strategy, your stock allocation will become dominant over time as bonds are spent first. Eventually when bonds are completely spent, a part of the stocks bucket are then sold to replenish the bonds bucket.

However, I'm guessing that retirees here on Bogleheads prefer to keep their stock/bond allocation more or less constant throughout their retirement years.

By the way, I've done a bit of research on the "Bonds First" withdrawal method. You can read more here:

Harvesting Withdrawals in Retirement

[4th&Goal]

His buckets of money strategy is a way of allocating assets so people won't panic and sell at the wrong time or get greedy and buy at the wrong time. It's basically a buy-and-hold strategy. In short, I think Ray and his brain trust put out sound financial and investment information that helps a lot of people. They are good guys.

Best wishes,
Michael

I agree with Michael. The buckets strategy allows me to ignore the stock portion of my portfolio since I won't be touching it for 14 to 20 years. I follow Ray's (and Boglehead) advice to keep my stock holdings in diversified low cost index funds. My allocation has not changed yet I enjoy more peace and sleep well. It helps me be a more disciplined investor and I have learned here that discipline is the key to successful investing.

[Rick Ferri]

The asset allocation between stocks, bonds, and cash explains over 90% of a portfolios risk and return. The trick is to select an appropriate asset allocation and stick with it through think and thin.

If a 'buckets' explanation is an easier way for a person to understand the asset allocation process, then 'buckets of money' it is!

Rick Ferri

[pkcrafter]

I must be missing something about the bucket's strategy. First off, I agree with Rick on the ultimate importance of asset allocation and risk control.

Have I read this wrong? It looks like around year 14 that the investor is holding a near 100% equity portfolio. It appears buckets 1 and 2 are exhausted. If this is true, then the problem is obvious. That's why I must be missing something else. Can someone explain?

Paul

[CyberBob]

Have I read this wrong? It looks like around year 14 that the investor is holding a near 100% equity portfolio. It appears buckets 1 and 2 are exhausted. If this is true, then the problem is obvious. That's why I must be missing something else. Can someone explain?

That would only occur in the worst-case doomsday scenario, where stocks are down and stay down for a full 14 year period. But normally, no, you wouldn't wait until you were down to 0% bonds to replenish them.

Lucia only touches on that in the later chapters of his book, but essentially, like Grangaard, Sengupta, et al, you would, under a normal up-market situation, replenish your bond holdings long before they dwindled down to 0%.

Although, that may confuse people even further because that sounds like you are simply rebalancing between stocks and bonds. What's different with a buckets-type strategy is that the focus isn't on a particular stock/bond allocation, but rather on the bond amount and keeping it as close to X number of 'safe' withdrawals as possible.

Bob

[pkcrafter]

Thanks, Bob. I have not read Lucia's book, but in the link provided by Bob902, http://www.rjlwm.com/content/bomdemo.cfm it shows buckets 1 and 2 empty at one point. OK, if they really do not get to zero, what is the AA when they do get refilled?

Paul

[bob90245]

If anyone wants to see how Lucia describes his Buckets of Money method, you can view the demo on his website:

http://www.rjlwm.com/content/bomdemo.cfm

Edit 1: I didn't see Paul's post when I started writing my post. Sorry for the repeat.

[jmFightSpam]

Good dicussion....

It sounds to me like this strategy is not totally contradictary to the Boglehead strategy. That's good. I was thinking about following it.

Now, Jim Cramer and Mad Money might be contradictary.

[CyberBob]

OK, if they really do not get to zero, what is the AA when they do get refilled?

Well Paul, you have insightfully hit upon the $64,000 question. But nobody can answer that question with 100% certainty simply because you can't predict with 100% certainty what the market will do in the future. You can make some assumptions based on historic numbers. And that's essentially what Lucia does with his 14-year number, which is based on getting you out alive from the 1973-74 era without reducing your withdrawals. (Although, Lucia usually uses a withdrawal rate of 6%, which is a bit high for a 30-year retirement if you look at other sources such as the Trinity-study numbers.)

Ultimately, you have to have some sort of expected return for both stocks and bonds. And, importantly, you have to factor in the time period that you are going to need your portfolio to supply withdrawals. If I've only got a year left, I'm going to put my cash in a money market fund and figure my withdrawal rate at 100%. But obviously, if you've got 40 years left, your withdrawal rate is going to have to be much different.

But essentially, like all withdrawal methods, you have to figure in withdrawal rates and time you need the portfolio to last and have some sort of assumed return for each asset class. Even the 4% rule of thumb from the Trinity Study assumes certain returns and times of portfolio longevity.

All that bucketing does is buy you time for your stocks to approach something resembling a long-term average. Odds are that they will. But, they may not. Ultimately, any withdrawal method -- including the 4% Trinity number -- is something of a crap-shoot and has some assumptions built into it.

But I guess the ultimate answer to your question is that when stocks are exceeding your expected/needed return, then you take that opportunity to buy more safe withdrawals by moving money into bonds. If stocks are not exceeding your expected/needed return, then you take withdrawals from the safer bonds, as the strategy puts them in place for just that reason.

Bob

[pkcrafter]

Bob, I completely agree with your last post regarding unknowns. I have not read the book, so perhaps Lucia does say to replenish #1 and #2 if the market has a good run. I was just looking at Bob902's link that clearly shows 1 and 2 get depleted, and in fact that seems to be the core of the whole strategy.

Looking at it in a different way, and assuming bucket 2 is 50/50, then from the beginning in year one, the equity allocation begins to rise, assuming the market is favorable. By year 7, the portfolio consists of bucket 2 and 3, which might be a 75/25 AA. Does one maintain the 50/50 AA in bucket 2 by rebalancing? If no, then the AA is even higher.

If the market has dropped substantially, the AA will be less than 75/25. In any event, bucket 2 is moved to low risk and #3 remains all stock, which now gets you back to 66/33 or somewhere else depending on what the market did.

From this point on, the AA begins to increase again assuming smooth sailing. The point is that the strategy does not account for a sharp drawdown in that second 7 year phase, which could cost an investor a significant loss in bucket 3 while not having 7 years of income left in #1 for #3 to recover. What I'm getting at is that asset allocation could be all over the map with this strategy. That seems to violate Rule NO.1 regarding AA.

Also, Bob, this strategy was backtested, and I have to say so what. It assumes much and violates another rule—Never confuse the improbable with the impossible. The improbable being a sharp and unexpected decline at the exact wrong time. Just because it did not show up in backtested years does not mean it can't show up.

It all goes back to what Rick said about asset allocation and risk management, which this strategy seems to overlook.

If my assessment is incorrect, please correct me.

Paul

[nisiprius]

I'm not an expert.

I'm skeptical of strategies that call for maintaining a reserve that you can use to "wait out a bear market" because I suspect them of being similar to gambling "martingales." That is, my suspicion is that they do have a high probability of working, but a small probability of failing disastrously in the hopefully rare case where the bear market just happens to last longer than the cash reserve.

It also seems to me that the strategy falls into the category of strategies that assume that "stocks are essentially riskless, in the sense of being able to deliver a known amount of money within a known time frame, as long as you're able to hold them for up to X years." Grangaard's book, which describes a somewhat similar system, seems to be saying that you get stocks to deliver a predictable return by holding them for however long it takes until they do. As soon as they do, you "reset" and start over; until they don't, you keep holding.

If you believe in "riskless stocks," you need to determine for yourself what the "essentially riskless" holding period is, do some reality checks (not forgetting the late 1960s and 1970s, even though it wasn't a Great Depression and people weren't jumping out windows), and see how the "essentially riskless" time period fits the time frame within which you'll have a need for the money.

[JDeeds]

I'm not an expert.

It also seems to me that the strategy falls into the category of strategies that assume that "stocks are essentially riskless, in the sense of being able to deliver a known amount of money within a known time frame, as long as you're able to hold them for up to X years." Grangaard's book, which describes a somewhat similar system, seems to be saying that you get stocks to deliver a predictable return by holding them for however long it takes until they do. As soon as they do, you "reset" and start over; until they don't, you keep holding.

If you believe in "riskless stocks," you need to determine for yourself what the "essentially riskless" holding period is, do some reality checks (not forgetting the late 1960s and 1970s, even though it wasn't a Great Depression and people weren't jumping out windows), and see how the "essentially riskless" time period fits the time frame within which you'll have a need for the money.

Not 'predictable returns', just 'expected returns'. Any withdrawal strategies that include investing in equities have to factor expected returns into to the equation. If you believe there is no ERP, then you will need to save enough to completely fund a 'riskless' withdrawal rate.

AFAIK, the only risk-less asset class is TIPs (and some would argue that). There just is any guarantee. If this strategy isn't working in the expected time frame, it's unlikely than any other one is either.

[jmFightSpam]

The asset allocation between stocks, bonds, and cash explains over 90% of a portfolios risk and return. The trick is to select an appropriate asset allocation and stick with it through think and thin.

If a 'buckets' explanation is an easier way for a person to understand the asset allocation process, then 'buckets of money' it is!

Rick Ferri

Or we can get your book too, Rick to try to help explain it. In fact, I am going to go to the bookstore today and check it out after reading about it in The Boglehead's Guide

[CyberBob]

It all goes back to what Rick said about asset allocation and risk management, which this strategy seems to overlook.

On the contrary, I think a buckets-type strategy has risk-management and the safety of your retirement withdrawals as its primary focus.

Think of a simplified 2-bucket system, where, in one bucket you have 15 years of retirement withdrawals in TIPS. That's about as certain as you can get for having inflation-adjusted retirement withdrawals, and so you can be certain of those withdrawals for 15 years, which is the focus of buckets-type systems.

Never confuse the improbable with the impossible. The improbable being a sharp and unexpected decline at the exact wrong time. Just because it did not show up in backtested years does not mean it can't show up.

I'm skeptical of strategies that call for maintaining a reserve that you can use to "wait out a bear market"...small probability of failing disastrously in the hopefully rare case where the bear market just happens to last longer than the cash reserve.

You guys are both correct that should the doomsday stock scenario show up, that you could be in trouble by not being able to replenish your 'safe' buckets.
But are you just assuming that the doomsday stock scenario would only affect a buckets-type system? Wouldn't the person who had something like a traditional 50/50 portfolio that they rebalanced yearly be hurt just as bad in a doomsday scenario? Or, perhaps even worse, as they would be taking withdrawals from bonds as well as selling bonds to rebalance to stocks, thereby possibly dwindling their bonds even faster.
What's really the alternative for a doomsday stock scenario, other than not owning stocks? But that would probably ultimately harm your returns for all those other scenarios where stocks do well. As JDeeds eloquently states above: "If this strategy isn't working in the expected time frame, it's unlikely than any other one is either."

Now don't get me wrong, I'm not a poster-boy for the buckets-type system.
I think it definitely is a great way to go for those following a constant-dollar withdrawal. But, I also think that the constant-dollar withdrawal is a potential Achilles heel. Would you, psychologically, continue to take inflation-adjusted withdrawals through a long, terrible bear market? Would you need to because your expenses are that fixed and rigid?

Realistically, I think a constant-percentage withdrawal might be more realistic than a constant-dollar withdrawal.

Bob

[pkcrafter]

Bob wrote:

But are you just assuming that the doomsday stock scenario would only affect a buckets-type system? Wouldn't the person who had something like a traditional 50/50 portfolio that they rebalanced yearly be hurt just as bad in a doomsday scenario?

I think the difference would be that an investor who maintains an allocation that was carefully selected, is (hopefully) prepared for drawdown. However, the buckets strategy could have a retiree in various different AAs from time to time. The investor would also not be rebalancing in down market and also lose any possible rebalancing effect.

I don't know, Bob, but you have convinced me that Lucia's book must be my next read.

Thanks for a good discussion,

Paul

[joe8d]

Sometimes (like when I'm sitting at the computer late at night), I'm tempted to dump it all into Wellington, take the distributions and go fishing

.

I've had the same thoughts except I would use the Life Strategy Moderate Fund and a companion MMF funded with 5 years estimated expenses to start with.Then have all the distributions from the LS Fund directed to the MMF and draw from there as needed.The LS Fund,for all practical purposes,has the feature of constantly rebalancing internally.

[leonard]

I will echo others here.

It seems unnecessarily complicated and I don't see a clear value to the complexity.

Ultimately, when you add the 3 buckets back together, you get 1 portfolio with one consolidated asset allocation. Ultimately, the buckets may be counter productive, if they take focus off the overall Debt to Equity ratio of the portfolio and thus the overall risk profile of the portfolio.

I would add the whole idea of "buckets" is to me a clear example of where an analogy goes too far. While moving money from one bucket to another may sound nice, ultimately a money is not water and it's not contained in buckets. Extending the analogy too far by focusing on a particular bucket can make lose site of the whole. It really isn't 3 "buckets", it is one financial portfolio that needs to be managed as such. IMO it should be managed as a single financial portfolio, not managed as an analogy.

This is the primary reason I hesitate to use analogies to explain financial concepts. They start to get in the way.

[nisiprius]

Sometimes (like when I'm sitting at the computer late at night), I'm tempted to dump it all into Wellington, take the distributions and go fishing

.

I will echo others here. It seems unnecessarily complicated and I don't see a clear value to the complexity.

Very seriously, part of a retirement strategy needs to be planning for the decline in reduced mental energy and acuity that will inevitably set in. There's got to be a button you can press that will put it all on autopilot...

However, I'm not at all sure I agree that one should treat one's assets as an undifferentiated bundle.

The other Bob pointed me to an article called Tools and Pools that I like. The idea is that you have truly essential expenses, and one pool of low-risk assets (e.g. income annuities + Social Security + perhaps a low-risk portfolio) dedicated to make sure they are met.

And, on the other hand, discretionary expenses and a second pool of riskier assets (e.g. a traditional stocks-and-bonds portfolio) where you can have good years and bad years and draw more or less accordingly.

This isn't the same as "buckets of money" because one is continually drawing on the low-risk pool to meet essential expenses, and tailoring ones discretionary spending to meet what can be safely drawn from the higher-risk pool.

[4th&Goal]

This topic seems to be generating much interest. Folks are negative about "Buckets of Money" without having read the book. Read the book for a better understanding. Don't fear things because you don't understand them. Read, understand, and then argue to your heart's content.

[CyberBob]

I don't know, Bob, but you have convinced me that Lucia's book must be my next read.

Suggested readings for the bucketeer:
Buckets of Money, Lucia
The Grangaard Strategy, Grangaard
The Only Proven Road to Investment Success, Sengupta (with nifty software)
Asset Dedication, Huxley

Bob
(A 2-bucket bucketeer (ala Sengupta) who is still pondering the constant-dollar versus constant-percentage conundrum).

[JDeeds]

CyberBob -

One twist I have thought about is setting some ground rules that might help me stick with the plan. For instance, I don't ever intend that my Safe Investments should fall below 5 years of funding, nor do I intend that I ever fall below a 70/30 AA.

One other thought is setting an upper dollar limit to my Risky Investments. For example, if it's possible that stocks could fall up to 50% in one year and the most money I would be willing to lose - even temporarily - is $150,000, then the most I should ever have invested in stocks or other Risky Investments at one time would be $300,000. This could cause me to have many more years in Safe Investments than the original plan called for, but it would protect my gains and further, protect me in the 'doomsday' situation you described above. Of course, this would probably only happen after several boom years, but it would control any tendencies to overweight stocks in the portfolio.

[hudson]

I've read Buckets of Money, The Grangaard Strategy, and Asset Dedication. While reading, I skimmed or skipped the authors' investment advice and focused on bucket theory...although they have different names for buckets. I'm starting on Sengupta's book today...the last of CyberBob's recommendations. Out of everything so far, the most valuable section to me is Lucia's Buckets of Money, Chapter 4. In this chapter, you work your way through the buckets, and you get to see how you can take Lucia's $300,000 example and make your own pension fund.

When I worked through Lucia's example, the final allocation was 35% stocks and 65% bonds.

I'm thinking, why couldn't I just set a 35/65 asset allocation using Boglehead theory and just withdraw 3-4% of the balance depending on the market? Isn't this CyberBob's 2-bucketeer method? I would have the advantage of being "out of the market" for up to 20 years. I could also temper high inflation or a bad market by withdrawing a constant percentage of the balance.

Quote, CyberBob:
"Bob (A 2-bucket bucketeer (ala Sengupta) who is still pondering the constant-dollar versus constant-percentage conundrum)."

Now, how to take money out of the buckets? ...Cash and Bonds first...

[Rick Ferri]

IMO, all these plans work IF they are implemented and maintained.

For most investors the Devil is in the details. Deciding on an investment strategy is easy, implementing the plan fully is a higher hurdle, and sticking to the plan for many years is extremely difficult.

Successful investing is one part strategy, two parts implementation, and fifty parts discipline.

Rick Ferri

[CyberBob]

Out of everything so far, the most valuable section to me is Lucia's Buckets of Money, Chapter 4.

Check out Sengupta's chapter 7. It's even better.

When I worked through Lucia's example, the final allocation was 35% stocks and 65% bonds.

I don't know your personal situation, but do those seem reasonable to you? I've always thought Lucia's assumptions about return and consequently withdrawal rates was too high.

I'm thinking, why couldn't I just set a 35/65 asset allocation using Boglehead theory and just withdraw 3-4% of the balance depending on the market?

Sounds good to me, assuming that stock/bond allocation is okay for your particular age/financial situation.
Although, that wouldn't really be bucketing. Bucketing is based on taking a fixed-dollar amount, not a fixed percentage.
And even more importantly, it wouldn't really be bucketing because you would be holding a fixed allocation. Not that that is bad, but that's one big thing that seems to be hard to grasp about a bucket-type system -- that it does not have a rigorous stock/bond allocation as it's primary focus. The focus is the safety of a certain amount of retirement withdrawals. (Sengupta's chapter 7 explains this more in-depth than Lucia, I think).

Isn't this CyberBob's 2-bucketeer method?

My buckets are essentially Sengupta's view:

• Risky stuff -- Stocks in all their differing gradations. Higher long-term return potential, but lots of volatility in the shorter-term.
• Safe stuff -- Various types of bonds and money market instruments. Lower long-term return potential, but much more stability in the shorter-term.

And as for the allocation, which most people like to focus on, I assume the following in my calculations:

• 3% inflation
• 4% nominal bond return (over 10+ year periods)
• 6% nominal stock return (over 10+ year periods)
• Minimum of 10 years of withdrawals in 'safe' assets (I'm at about 15 years now, due to higher than expected market returns over the last several years - although not the last several months )
• Drop dead at 90-ish

Which gives me a rough allocation framework of:
Age 45 70/30
Age 50 66/34
Age 55 64/36
Age 60 60/40
Age 65 55/45
Age 70 48/52
Age 75 35/65
Age 80 90/10
Age 85 100/0
Age 90 100/0

Now, how to take money out of the buckets? ...Cash and Bonds first...

If you are going to be a true bucketeer, that's the case only in a down market year. Otherwise, take it primarily from stocks, in order to keep your safe bucket cushion at full strength.

Bob

[bob90245]

Now, how to take money out of the buckets? ...Cash and Bonds first...

If you are going to be a true bucketeer, that's the case only in a down market year. Otherwise, take it primarily from stocks, in order to keep your safe bucket cushion at full strength.

I haven't read Sengupta's book. But in both Lucia's book and his website demo along with Grangaard's book, there is no distinction about "only in a down market year". They show cash and bonds are spent first in all cases.

[CyberBob]

Now, how to take money out of the buckets? ...Cash and Bonds first...

If you are going to be a true bucketeer, that's the case only in a down market year. Otherwise, take it primarily from stocks, in order to keep your safe bucket cushion at full strength.

I haven't read Sengupta's book. But in both Lucia's book and his website demo along with Grangaard's book, there is no distinction about "only in a down market year". They show cash and bonds are spent first in all cases.

I probably worded that poorly, as Lucia doesn't really emphasize shorter one year periods. Sengupta is definitely more straightforward about it, saying that you should spend mostly stock profits during up-market periods in order to keep your safe cushion fully funded and available for the next bear market.

Lucia actually suggests a similar method. It's a later chapter in his book, and seemingly absent on his website demo, but he does emphasize taking advantage of a raging bull market.

Bob is quite correct in that the basic Lucia strategy is one of spending the short-term bucket first and then worrying about the intermediate and long buckets and refilling later. However, Lucia does emphasize that you shouldn't just empty the buckets totally before you worry about refilling them. If market returns are favorable and you can refill a shorter-term bucket earlier, he definitely suggests doing so.

Lucia's 'taking advantage of a raging bull market', and Sengupta's 'opportunistic selling' always seem to really muddy the waters. What they both suggest is to simply keep your safe bucket/cushion fully funded as much as possible. Unfortunately, since that involves starting out with an assumed return percentage for each asset class, that advice is often seen as either market timing or simply basic rebalancing. It actually isn't either.

In my above comment, I was thinking of Sengupta's method, and there is a difference in focus between he and Lucia. Sengupta has more of a focus on keeping the safe 'bucket' intact as much as possible for use during stock market downturns, whereas Lucia uses the safe bucket first to allow the stock bucket more time to grow.
Thanks to Bob for pointing that out. I suppose that to avoid confusing myself, I shouldn't use the actual word 'bucket' when thinking about anyone's method other than Lucia's.

Bob

[Auld Fella]

Interesting topic. Very thoughtful contributions. I'd like to add a slightly different perspective, if I may.

First, it seems we are often our own worst enemy when it comes to investing successfully. Our brain tells us one thing, but our emotions scream another. Too often, the emotions eventually win out. That is why average market returns so often dwarf average "investor" returns.

It is THAT factor, I think, that makes this approach intriguing, because ANYTHING that can help calm our natural emotions at time like these and helps us stick to a prudent long term plan can be helpful.

And IF using 'buckets' or 'asset dedication' or 'matching assets and liabilities' or other variations on the theme helps some relax enough to keep an appropriate portion of their assets in equities rather than panicing and bailing out at the worst possible time, then there is value in it to some.

We have seen the enemy, and it is us.

This is really more about investor behavior than MPT, and it is behavior that is usually the weak link in the chain, not the theory - problems with the implementation, not the plan.

[4th&Goal]

It is THAT factor, I think, that makes this approach intriguing, because ANYTHING that can help calm our natural emotions at time like these and helps us stick to a prudent long term plan can be helpful.

And IF using 'buckets' or 'asset dedication' or 'matching assets and liabilities' or other variations on the theme helps some relax enough to keep an appropriate portion of their assets in equities rather than panicing and bailing out at the worst possible time, then there is value in it to some.

We have seen the enemy, and it is us.

Amen. Precisely why I find comfort in a buckets type AA. It is still a Boglehead portfolio and, in my case ,still a 50/50 stock/bond portfolio. Lucia, Senguptha, Grangaard, et.al., give me a different way of looking at things that keep me disciplined and comfortable.

[mlebuf]

Sometime before I started listening to Ray Lucia, I read articles by Frank Armstrong and Peter di Teresa that tell how to structure a portfolio and make withdrawals during retirement. The purpose of the plan is to reduce the odds of running out of money before we run out of time. The plan made sense to me and I've been following it for a number of years. It isn't as sophisticated as the buckets of money strategy but I like its simplicity.

Here's a link to the di Teresa article. I hope someone finds it as useful as I have:
http://news.morningstar.com/articlenet/ ... x?id=80583

Best wishes,
Michael

[4th&Goal]

Michael, thanks for the link. Another variation of buckets for retired, or soon to retire, investors.

[leonard]

With the buckets or the di Teresa article, I still see the same problem if you have several down years of the stock market. In such a scenario, you would be spending your cash and short term bonds (or your bucket 1 or 2). Under such a scenario, you could be "using up" your bonds and thus gradually increasing your equity to debt ratio. So, under such a situation it appears you could be gradually making your portfolio more risky. Given that rebalancing debt/equity is the primary means we have to control risk of a portfolio, it doesn't make sense to me that someone would stop rebalancing debt/equity and spend down bonds simply to follow these strategies matter what. Seems you lose control of your primary tool for managing risk, the debt/equity ratio.

[bob90245]

With the buckets or the di Teresa article, I still see the same problem if you have several down years of the stock market. In such a scenario, you would be spending your cash and short term bonds (or your bucket 1 or 2). Under such a scenario, you could be "using up" your bonds and thus gradually increasing your equity to debt ratio. So, under such a situation it appears you could be gradually making your portfolio more risky. Given that rebalancing debt/equity is the primary means we have to control risk of a portfolio, it doesn't make sense to me that someone would stop rebalancing debt/equity and spend down bonds simply to follow these strategies matter what. Seems you lose control of your primary tool for managing risk, the debt/equity ratio.

Well if we assume that during a bear market the "stocks bucket" falls faster than the "bonds bucket" and you want to rebalance to bring the stock allocation back up to your target, you would also be "using up" your bonds bucket from which you transfer from bonds to stocks.

Also understand that Bucketeers fully realize that their debt/equity ratio will not be their primary tool for managing risk. Rather it will be to have enough money in safe assets (cash and bonds) to ride out prolonged bear markets.

(Don't take my comments as promoting the bucket strategy. Only to try to explain the Bucket approach.)

[CyberBob]

I still see the same problem if you have several down years of the stock market. In such a scenario, you would be spending your cash and short term bonds (or your bucket 1 or 2). Under such a scenario, you could be "using up" your bonds and thus gradually increasing your equity to debt ratio. So, under such a situation it appears you could be gradually making your portfolio more risky.

Don't forget that the reason you are "using up" your bonds during a down market is that your stocks are likely dropping as fast or even faster than you are selling from the bond side of the house.

An example might be the three really bad market years of 2000-2002. If you started out with a 60/40 portfolio*, didn't rebalance and took your withdrawal every year by only selling bonds, you actually wound up at the end with a portfolio that was less risky than when you started; 51/49.

Bob

* 40% Total Stock, 20% Total International Stock, 40% Total Bond

[jmFightSpam]

OK. I am doing an experiment with respect to Buckets of Money

I read this thread: http://diehards.org/forum/viewtopic.php?t=12880 and some of the other threads on early-retirement.org.

I even have the book.

But I am still stymied.

How do you apply the buckets of money formula to someone that is let's say 15 years from planned retirement and won't collect social security benefits for 25 years?

What is the magic formula to figure out your current buckets no matter what age you are now, how to change the buckets when you retire and change them again once you start collecting social security?

Or is the Buckets of Money strategy best for someone who is right on the cusp of retirement and those that are 10-15-20 years away should stay away from this strategy?

[mikenz]

The point of bucket or asset dedication strategies is to maintain enough short-term funds to live off for a "safe" period while your stocks grow. So if you are still accumulating you don't need buckets, although you probably want still want some bonds in your AA. I mean the whole point of Bucket #1 is for your spending, so you just wouldn't need that now.

According to the book Asset Dedication, you should be 100% stocks until very near retirement, and during retirement should only hold the exact amount of bonds you need to live off of for a given period.

[jmFightSpam]

The point of bucket or asset dedication strategies is to maintain enough short-term funds to live off for a "safe" period while your stocks grow. So if you are still accumulating you don't need buckets, although you probably want still want some bonds in your AA. I mean the whole point of Bucket #1 is for your spending, so you just wouldn't need that now.

According to the book Asset Dedication, you should be 100% stocks until very near retirement, and during retirement should only hold the exact amount of bonds you need to live off of for a given period.

That makes sense for sure. The thing is, Ray Lucia in the book actually goes through a real-world example of bucketizing himself and he is 9 years away from retirement. So he just has things in buckets 2 and 3 -- and in fact, I never see in the example anything being put in bucket 1. I am just trying to figure out how he came up with his numbers.

[nisiprius]

That makes sense for sure. The thing is, Ray Lucia in the book actually goes through a real-world example of bucketizing himself and he is 9 years away from retirement. So he just has things in buckets 2 and 3 -- and in fact, I never see in the example anything being put in bucket 1. I am just trying to figure out how he came up with his numbers.

One of the things that bothers me a lot about investment books is that I'm never quite sure what real-world actual experience they are based on.

In Jack London's novel The Sea-Wolf, one of the protagonists says

"Do you know Dr. Jordan's final test of truth?" Maud asked.

I shook my head and paused in the act of dislodging the shavings which had drifted down my neck.

"`Can we make it work? Can we trust our lives to it?' is the test."

(a reference to professor David Starr Jordan, president of Stanford University and a notable of the day).

What sort of data does Lucia present on actual retirees, twenty years or more into retirement who have actually been using his method? Or is this just backtested theory, a plan that ought to work?

How many people have been trusting their lives to it?

[CyberBob]

What is the magic formula to figure out your current buckets no matter what age you are now, how to change the buckets when you retire and change them again once you start collecting social security?

As a simple explanation, consider that you have just 2 buckets:

• Long-term bucket (10+ years until you need to tap it)
• Short-term bucket (Liquidity; all money you'll need in less than 10 years)

If you are a young 20-something and are earmarking all of your money for retirement you may have:

• Short-term bucket: 6 months of emergency money
• Long-term bucket: Everything else

Whereas a more middle-aged person may have:

• Short-term bucket: emergency money, money your saving to buy a car in a few years, money for a down payment on the house you are buying
• Long-term bucket: Retirement money, money for possible vacation home purchase in 20 years.

Or, someone 90 years old who isn't planning on leaving anything to anyone

• Short-term bucket: Everything
• Long-term bucket: Nothing

As for someone approaching retirement and utilizing this method, they should start 10 years prior to their retirement and gradually start moving money toward their Short-term bucket so that by the day they retire they have the full 10 years of needed money in their safe bucket.

As Mikenz mentions above, the point of buckets is to have safe money available for when you need it. So, if you have no need to spend the money for some time, your safe bucket may be small. On the other hand, if you have a need for the money soon, your safe bucket should be bigger.

Bob

[Rick Ferri]

CyberBob

That sounds an awful lot like classical age-based asset allocation to me.

A rose by any other name is still a rose.

Rick Ferri

[leary]

It seems to me that asset allocation and rebalancing will do about the same thing. I have a 50-50 stock-bonds index asset allocation and rebalance annually. The only thing different it seems to me is that bucketts of money only rebalances if the stock portion of a poerfolio is up. If the stock portion is down then take drawdown from bonds until the stocks recover and get all their losses back, then only rebalance with stock profits. Maybe that would be all right, I have just never done it. I rebalance annually whatever the market does.

Charles

[joe8d]

I concur with CyberBob's explanation.Simply have at retirement half your life expectancies estimated expenses going forward in conservative investments (MMF, Bond funds, etc.) and the balance in broad stock market index funds (US/ International).