Bucket Portfolio article by Christine Benz

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MN-Investor
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Bucket Portfolio article by Christine Benz

Post by MN-Investor » Mon Jul 09, 2018 5:15 pm

For those who are interested in using the bucket approach to retirement investments, Christine Benz has a new article in the AAII Journal. You can read it here:

For Bucket Portfolios, the Devil Is in the Details
The key to success - Save early, save often, invest well.

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Mon Jul 09, 2018 8:24 pm

Simply structure the portfolio by spending horizon, setting aside a cash component for near-term spending needs, and then spend your way through a long and happy retirement.

That seems really straightforward, but implementation can be a bit messy. For one thing, the bucket approach isn’t an insurance policy that you won’t run out of money. Thus, the first job when implementing a bucket strategy is to ensure that your spending rate is sustainable.

In addition, those buckets don’t manage themselves. A cash “bucket” is the lynchpin of the bucket strategy, but how does that cash bucket get refilled, anyway? What about keeping the portfolio’s asset allocation on track? A strategy for “bucket maintenance” is essential for anyone who’s implementing a bucket approach.

Finally, there’s the fact that most retirees will hold their assets in different silos: traditional tax-deferred, Roth and taxable. How can the bucket approach work when you’re drawing upon multiple accounts? A strategy that seems so simple on paper gets pretty messy in a hurry when it collides with actual portfolios.
Ms. Benz's statement above is at the heart of what I've been saying for a while now about a bucket strategy: it is more complex than it seems on the surface, and few employing this method or intending to do so seem prepared to implement it well.

I think that bucket strategies can make a lot of sense. But they likely require more planning than a using a 'traditional' asset allocation, be it a fixed or 'gliding' one.

Below is an example of what I mean from another recent thread.
willthrill81 wrote:
Wed Jun 27, 2018 3:36 pm
TomatoTomahto wrote:
Wed Jun 27, 2018 12:48 pm
Turbo29 wrote:
Wed Jun 27, 2018 12:27 pm
TomatoTomahto wrote:
Wed Jun 27, 2018 12:03 pm
willthrill81 wrote:
Wed Jun 27, 2018 11:43 am


Balanced funds are rebalanced all the time, which is the same thing you would be doing if you owned them separately. Spending down bonds when stocks are down is harder to implement than many realize (the devil is in the details); I've not seen much evidence that doing so provides substantial improvement.
Why is it difficult to spend down bonds (when stocks are down or, for that matter, not down)? That’s one of the reasons I have an n-Fund Portfolio.
If you have a balanced fund (say it's 50/50) and you sell $100 worth you are selling $50 of stocks and $50 of bonds. If you sell $100 of a bond fund, you are selling $100 of bonds.

By having a 2-fund portfolio you can decide which asset class you wish to liquidate when you sell. With a balanced fund you are stuck liquidating the percentages of each that make up the fund.
I get that. My thoughts also. I’m looking for clarification from willthrill81.
As I said, the devil is in the details.

When precisely will you spend from bonds? When stocks are down? Down from their all time high, last year's close, etc.? What if bonds are down as well?

When precisely will you replenish the bonds? When stocks are up? Up from when? Over what period will you replenish the bonds?

These questions can be answered, but I've not heard of a single person who has thoroughly addressed them a priori when implementing this strategy. Those employing this method seem to be winging it, which opens the door for all sorts of behavioral problems. Regardless, it's more complicated than it seems on the surface, as I said to begin with.

Further, how do you know that this process will be more effective than using a traditional AA model, which is what nearly all of the withdrawal rate research has used? How do you determine what this effectiveness is (e.g. higher withdrawal rate, lower failure rate)?
“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 Dandy » Tue Jul 10, 2018 12:47 pm

I think trying to organize and maintain say a 3 bucket (or more )strategy is a task for the designer and especially for a non investment savvy spouse.

I favor 2 "portfolios" (not buckets!). A "safe" portfolio (FDIC products and short term bonds) and a "risk" portfolio of intermediate bonds and equities. Both portfolios may have contents in TIRA, taxable, Roth etc. but they are tagged at least mentally to be part of one of those portfolios.

The "safe" portfolio should have whatever assets you feel are needed to sleep well and get you through a major equity decline. For me I decided to have enough to equal my drawdown needs until age 90. Others may choose 5 years. Each year or so I compare my drawdown needs to my "safe" assets and top them off if necessary. When I actually withdraw I will take from both portfolios unless the "risk" portfolio has had a really bad year.

I don't overly fuss with sub allocations e.g. don't care if I have a bit more FDIC products than short term bonds. Just try to make sure there are adequate "safe" assets and that the overall allocation has a decent equity component. My TIRA is invested very conservatively e.g. about 21% equities and my RMD is sent to VG Fed money market fund (with check writing) so my wife should not be overly stressed/confused about the arrangement upon my demise.

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Re: Bucket Portfolio article by Christine Benz

Post by TheTimeLord » Tue Jul 10, 2018 12:55 pm

I have 3 buckets.
1) Pre-FRA - Extremely Safe Fixed Income
2) Post-FRA - Balanced AA inline with lasting 30 years per the Trinity study
3) Excess Bucket AA 60/40

Doesn't seem all that complicated to me.
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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Tue Jul 10, 2018 2:15 pm

TheTimeLord wrote:
Tue Jul 10, 2018 12:55 pm
I have 3 buckets.
1) Pre-FRA - Extremely Safe Fixed Income
2) Post-FRA - Balanced AA inline with lasting 30 years per the Trinity study
3) Excess Bucket AA 60/40

Doesn't seem all that complicated to me.
How will you deplete/replenish the buckets, specifically?
“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 TheTimeLord » Tue Jul 10, 2018 2:27 pm

willthrill81 wrote:
Tue Jul 10, 2018 2:15 pm
TheTimeLord wrote:
Tue Jul 10, 2018 12:55 pm
I have 3 buckets.
1) Pre-FRA - Extremely Safe Fixed Income
2) Post-FRA - Balanced AA inline with lasting 30 years per the Trinity study
3) Excess Bucket AA 60/40

Doesn't seem all that complicated to me.
How will you deplete/replenish the buckets, specifically?
Pre-FRA bucket is used for expenses until reaching FRA. If anything is left in Pre-FRA it is transferred to Excess bucket once FRA is reached. Post-FRA bucket uses 4% WR as outlined in the Trinity study which historically should cover expenses for at least 30 years. Excess bucket can be used to supplement either Pre-FRA or Post-FRA bucket at any time or for some sort of splurge or large expense item. Still doesn't seem complicated to me.
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Re: Bucket Portfolio article by Christine Benz

Post by MIretired » Tue Jul 10, 2018 2:33 pm

I use a FI piece to get me to soc.sec. Then I have the risk portfolio, but you can think of that as buckets: part is price stability, part is income stability(mostly), and part is growth.

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Re: Bucket Portfolio article by Christine Benz

Post by TheTimeLord » Tue Jul 10, 2018 2:39 pm

MIretired wrote:
Tue Jul 10, 2018 2:33 pm
I use a FI piece to get me to soc.sec. Then I have the risk portfolio, but you can think of that as buckets: part is price stability, part is income stability(mostly), and part is growth.
Those would be my Pre-FRA and Post-FRA buckets.
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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Tue Jul 10, 2018 2:43 pm

TheTimeLord wrote:
Tue Jul 10, 2018 2:27 pm
willthrill81 wrote:
Tue Jul 10, 2018 2:15 pm
TheTimeLord wrote:
Tue Jul 10, 2018 12:55 pm
I have 3 buckets.
1) Pre-FRA - Extremely Safe Fixed Income
2) Post-FRA - Balanced AA inline with lasting 30 years per the Trinity study
3) Excess Bucket AA 60/40

Doesn't seem all that complicated to me.
How will you deplete/replenish the buckets, specifically?
Pre-FRA bucket is used for expenses until reaching FRA. If anything is left in Pre-FRA it is transferred to Excess bucket once FRA is reached. Post-FRA bucket uses 4% WR as outlined in the Trinity study which historically should cover expenses for at least 30 years. Excess bucket can be used to supplement either Pre-FRA or Post-FRA bucket at any time or for some sort of splurge or large expense item. Still doesn't seem complicated to me.
No, it doesn't seem complicated to me either. Many laypersons would be tempted to "abuse" the excess bucket (e.g. frequent 'splurges'), but you know what you're doing.

But your bucket strategy isn't like most I've seen, where the buckets are more defined by what they hold (e.g. CDs, bonds, stocks) rather than the purpose of each bucket as you have done. I think that your strategy is probably 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 TheTimeLord » Tue Jul 10, 2018 2:53 pm

willthrill81 wrote:
Tue Jul 10, 2018 2:43 pm
TheTimeLord wrote:
Tue Jul 10, 2018 2:27 pm
willthrill81 wrote:
Tue Jul 10, 2018 2:15 pm
TheTimeLord wrote:
Tue Jul 10, 2018 12:55 pm
I have 3 buckets.
1) Pre-FRA - Extremely Safe Fixed Income
2) Post-FRA - Balanced AA inline with lasting 30 years per the Trinity study
3) Excess Bucket AA 60/40

Doesn't seem all that complicated to me.
How will you deplete/replenish the buckets, specifically?
Pre-FRA bucket is used for expenses until reaching FRA. If anything is left in Pre-FRA it is transferred to Excess bucket once FRA is reached. Post-FRA bucket uses 4% WR as outlined in the Trinity study which historically should cover expenses for at least 30 years. Excess bucket can be used to supplement either Pre-FRA or Post-FRA bucket at any time or for some sort of splurge or large expense item. Still doesn't seem complicated to me.
No, it doesn't seem complicated to me either. Many laypersons would be tempted to "abuse" the excess bucket (e.g. frequent 'splurges'), but you know what you're doing.

But your bucket strategy isn't like most I've seen, where the buckets are more defined by what they hold (e.g. CDs, bonds, stocks) rather than the purpose of each bucket as you have done. I think that your strategy is probably better.
I can see how those could get hard to manage. Mine is basically derived using this logic. Pre-FRA years are super valuable because I am likely at my youngest and healthiest, so I will use safe fixed income to protect my spending from feeling the squeeze of a downturn. Post-FRA just assumes the Trinity study has been reliable so far, so use it to find a balanced AA that has worked historically to cover 30 years (probably won't live 30 passed FRA but who knows). Excess is invested mildly tilted towards the stock market because historically that is the place to be.

Now if you wanted to retire in you 30s and 40s you would probably have to take a different approach to the Pre-FRA than I did. In fact for those really earlier retirees I can see having just one portfolio or a main bucket and a excess bucket to sort of fence of your buffer.
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Re: Bucket Portfolio article by Christine Benz

Post by Phineas J. Whoopee » Tue Jul 10, 2018 5:32 pm

No matter what one thinks is a bucket or is not a bucket, one owns the totality of what one owns. Thinking about it differently doesn't change that fundamental truth.
PJW

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Re: Bucket Portfolio article by Christine Benz

Post by Dandy » Tue Jul 10, 2018 7:09 pm

No matter what one thinks is a bucket or is not a bucket, one owns the totality of what one owns. Thinking about it differently doesn't change that fundamental truth.
True. But there is sometimes value in segregating assets e.g. an emergency fund, college funding for kids, etc. In retirement, that can apply to assets you want to keep safe vs those you want to grow. In the end you don't change the overall risk -- it is what it is -- but segregation helps keep it more organized.

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Re: Bucket Portfolio article by Christine Benz

Post by Phineas J. Whoopee » Tue Jul 10, 2018 7:22 pm

Dandy wrote:
Tue Jul 10, 2018 7:09 pm
No matter what one thinks is a bucket or is not a bucket, one owns the totality of what one owns. Thinking about it differently doesn't change that fundamental truth.
True. But there is sometimes value in segregating assets e.g. an emergency fund, college funding for kids, etc. In retirement, that can apply to assets you want to keep safe vs those you want to grow. In the end you don't change the overall risk -- it is what it is -- but segregation helps keep it more organized.
The thread is about bucket portfolios, not multiple objectives.

PJW

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Re: Bucket Portfolio article by Christine Benz

Post by averagedude » Tue Jul 10, 2018 7:29 pm

Im not against the bucket strategy but it just seems like its just mental accounting which may ease the minds of people who are risk averse.

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Re: Bucket Portfolio article by Christine Benz

Post by midagelawyer » Tue Jul 10, 2018 7:30 pm

No matter what one thinks is a bucket or is not a bucket, one owns the totality of what one owns. Thinking about it differently doesn't change that fundamental truth.
True. But there is sometimes value in segregating assets e.g. an emergency fund, college funding for kids, etc. In retirement, that can apply to assets you want to keep safe vs those you want to grow. In the end you don't change the overall risk -- it is what it is -- but segregation helps keep it more organized.
To expand on the above, I think what we're saying is that the bucket strategy may be a great way to think about your finances (works that way for me). But, then when it comes time to implement, you realize money is fungible... So, you end up implementing it as tax-efficiently as possible targeting the highest risk-adjusted rate of return for the risk tolerance you can handle across your entire portfolio... And depending on some idiosyncratic factors you:
  • pick the 3-fund portfolio, or you put together a more elaborate AA;
  • stuff your tax-inefficient investments in your IRA;
  • maintain an appropriate level of emergency fund;
  • maintain liquidity to meet your expected large expenses;
  • etc.
The point is, the bucket strategy may be a great way to THINK about your finances. But remember, money is fungible and you're just trying to maximize it given your needs, desires, income-level, etc. and how you do that, well, that's up to you...

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Re: Bucket Portfolio article by Christine Benz

Post by The Wizard » Tue Jul 10, 2018 9:42 pm

Phineas J. Whoopee wrote:
Tue Jul 10, 2018 5:32 pm
No matter what one thinks is a bucket or is not a bucket, one owns the totality of what one owns. Thinking about it differently doesn't change that fundamental truth.
PJW
Correct.
I printed the eight page report from CB and tried to read it but gave up part way through.
*sigh*

I have three different ACCOUNTS in retirement, not buckets.
1) my 403(b) account is largest
2) my Roth IRA is medium sized
3) my taxable account is smallest, but growing

When I retired in 2013 at age 63, I set up a withdrawal plan from my 403(b) for $3000/month in lieu of SS at age 70.
I did NOT put together a cash "bucket" to span those seven years.
I simply withdraw from my 50/50 AA portfolio pro rata each month.
*sigh*

I do target a cash buffer of $10,000 in my checking account to cover lumpy expenses but do not consider that a bucket. I have expenses, mostly travel, of around $8000 this month, so it's good that I have this buffer.

When I have more than $10k in checking some months, with no big expenses pending, I move the excess to my taxable account.
Again, this is not a bucket scheme.

Anyhow, conniving a scheme with more moving parts doesn't make insufficient funding somehow work better.
So avoid bucket schemes and instead, focus on your AA...
Attempted new signature...

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Tue Jul 10, 2018 10:17 pm

averagedude wrote:
Tue Jul 10, 2018 7:29 pm
Im not against the bucket strategy but it just seems like its just mental accounting which may ease the minds of people who are risk averse.
It can be mental accounting but not necessarily. It's true that any bucket approach can be 'converted' to a more traditional AA model. What is more important is how/why the buckets are being used. For instance, someone might only want ten years of spending in cash and bonds with everything else in stocks; this choice would be completely independent of the overall AA. It might result in someone having a 30/70 portfolio or 90/10.

It seems that people usually arrive at a specific AA based on historic analysis of its volatility and their own tolerance for volatility. This is fine, but there's no reason that it's the only way or even the optimal way to design a portfolio.
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Re: Bucket Portfolio article by Christine Benz

Post by Leif » Wed Jul 11, 2018 1:40 am

The Wizard wrote:
Tue Jul 10, 2018 9:42 pm
So avoid bucket schemes and instead, focus on your AA...
In listening to presentations by Christine her point is that the bucket scheme helps to determine an appropriate AA. So it is reversed of what you suggest.

Below is an approximation of what Christine is recommending. To get more details you can read/view her articles/videos on Morningstar.

1-2 years in the "cash" or safe bucket
8-9 years in the middle bucket (bonds primarily)
10+ years stocks primarily

The logic is that 1-2 years of cash from your portfolio allows you to sleep well and hopefully not sell in a panic.

Stocks are volatile, but will typically grow if given enough time. Such as 10 years.

It is a bit simple AA, but I imagine it could work for many.

If we calculate we need 4%/year from our portfolio then:

4-8% in cash for staying power
40% in cash & bonds for stabliity
60% in stocks for growth

I don't use buckets myself. I allocate by style. Except for cash. Cash I plan for 2 year of expenses sourced to the portfolio. I imagine that will be reduced once SS/RMDs kick in.

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Re: Bucket Portfolio article by Christine Benz

Post by Dandy » Wed Jul 11, 2018 5:53 am

The thread is about bucket portfolios, not multiple objectives.
A bucket strategy is about multiple objectives. e.g. This one is for short term needs over the next few years, the next one is for ??..., the last one is for growth. Just like this money is for emergency fund, that one is for Junior's education, etc.

Different ways of organizing and prioritizing a pile of money to make some sense and meet/target some objectives.

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Re: Bucket Portfolio article by Christine Benz

Post by TheTimeLord » Wed Jul 11, 2018 8:02 am

Leif wrote:
Wed Jul 11, 2018 1:40 am
The Wizard wrote:
Tue Jul 10, 2018 9:42 pm
So avoid bucket schemes and instead, focus on your AA...
In listening to presentations by Christine her point is that the bucket scheme helps to determine an appropriate AA. So it is reversed of what you suggest.
Ding, ding, ding. Some are going to get an overall AA that is far more appropriate by breaking things down into objectives and priorities and building bottom up. Others are comfortable with just saying my risk tolerance is X so my AA should be Y/Z. For someone like myself who will retire early and realizes they will have a limited windows to do certain things before Father Time catches up with them it is very important to avoid being discouraged from these activities by negative events in the market. So setting aside a secure bucket for Pre-FRA healthy and active period is worth it. A corporation's budget is just one single amount yet it is built from determining the needs from multiple departments like Marketing, IT, R&D and on and on. Not sure why many BH seem to view bottom up analysis as mental accounting and look down on it and are upset when others utilize it but I am fine with them just have their single bucket with their AA. I will add that I do see the single bucket with a single AA being the easy and more efficient until someone is close to or in retirement.
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Re: Bucket Portfolio article by Christine Benz

Post by magneto » 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."
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: Bucket Portfolio article by Christine Benz

Post by Sandtrap » Wed Jul 11, 2018 9:49 am

Phineas J. Whoopee wrote:
Tue Jul 10, 2018 5:32 pm
No matter what one thinks is a bucket or is not a bucket, one owns the totality of what one owns. Thinking about it differently doesn't change that fundamental truth.
PJW
+1
Weather Buckets, Tiers, or other term, the basic and elegant "Bogle" structure that is normally encouraged here is the same.

This is a very good article and I have forwarded it to folks I know.
Thanks for posting it.
aloha
j :happy

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Wed Jul 11, 2018 10:45 am

Leif wrote:
Wed Jul 11, 2018 1:40 am
The Wizard wrote:
Tue Jul 10, 2018 9:42 pm
So avoid bucket schemes and instead, focus on your AA...
In listening to presentations by Christine her point is that the bucket scheme helps to determine an appropriate AA. So it is reversed of what you suggest.

Below is an approximation of what Christine is recommending. To get more details you can read/view her articles/videos on Morningstar.

1-2 years in the "cash" or safe bucket
8-9 years in the middle bucket (bonds primarily)
10+ years stocks primarily

The logic is that 1-2 years of cash from your portfolio allows you to sleep well and hopefully not sell in a panic.

Stocks are volatile, but will typically grow if given enough time. Such as 10 years.

It is a bit simple AA, but I imagine it could work for many.
Dandy wrote:
Wed Jul 11, 2018 5:53 am
The thread is about bucket portfolios, not multiple objectives.
A bucket strategy is about multiple objectives. e.g. This one is for short term needs over the next few years, the next one is for ??..., the last one is for growth. Just like this money is for emergency fund, that one is for Junior's education, etc.

Different ways of organizing and prioritizing a pile of money to make some sense and meet/target some objectives.
TheTimeLord wrote:
Wed Jul 11, 2018 8:02 am
Some are going to get an overall AA that is far more appropriate by breaking things down into objectives and priorities and building bottom up.
I really like this discussion. What is being correctly reiterated in different ways is that whether one uses a bucket strategy or something else has more to do with how one builds one's portfolio than anything else (i.e. portfolio construction). Some elect to build their entire portfolio around an intent to 'cap' their overall portfolio's volatility at a certain level based on historic performance, resulting in a 'traditional' AA model like 60/40. Others are less concerned with overall portfolio volatility and instead focus on funding specific time periods or events, resulting in a bucketed or liability matching approach (not saying both are equivalent, but they share similarities). Based on what I've seen, neither is inherently superior to the other; it depends on the individual investor's needs and preferences.

I don't recall seeing discussion of this 'fork in the road' with portfolio construction on the Wiki. If it isn't there, it should be.
“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 bobcat2 » Wed Jul 11, 2018 10:56 am

Leif wrote:
Wed Jul 11, 2018 1:40 am
The logic is that 1-2 years of cash from your portfolio allows you to sleep well and hopefully not sell in a panic. Stocks are volatile, but will typically grow if given enough time. Such as 10 years.
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. Here is Moshe Milevsky elaborating on this point.
A bear market early in retirement – i.e. when you start withdrawing money from a portfolio -- can have a devastating impact on the sustainability of your income stream. ...

Some commentators have expressed the view that by placing a few years worth of retirement income needs into safe investments and not touching the remaining funds in the event of a bear market, they can somehow avoid the ruinous impact of a poor sequence of investments returns. A fringe element of this sect believes that if markets decline a retiree should simply be counseled to only take income from their bond allocation and then “wait for the stock allocation to recover” and thus avoid selling at a loss. These strategies are an optical illusion at best and create a potential for grave disappointment at worst. ...

In sum, my only point is as follows. If you decide to adopt the so-called buckets approach to retirement income planning then beware of the fact that your total asset allocation and implicit exposure to equity will fluctuate unpredictably over time. Moreover, if indeed you experience a poor initial sequence of investment returns – so that you have been forced to liquidate all your cash investment -- you might find yourself with a 100% equity exposure well into retirement and possibly deep into a bear market. This is in contrast to the non-bucketer (ok, lousy word) who is maintaining the same exact asset mix and hence the same risk profile over time. Sure, the market may recover by the time you have to tap in to the equity portion – or it may not. Either way, you have neither reduced nor mitigated financial risk but simply taken a bet on scenarios you believe will not happen. Safety is just a mirage.
Example - The 10 year Total Wilshire 5000 real return with dividends reinvested was -23.7% from the end of 1999 thru 2009.

BobK
Last edited by bobcat2 on Wed Jul 11, 2018 11:17 am, edited 2 times in total.
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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Wed Jul 11, 2018 11:08 am

bobcat2 wrote:
Wed Jul 11, 2018 10:56 am
Leif wrote:
Wed Jul 11, 2018 1:40 am
The logic is that 1-2 years of cash from your portfolio allows you to sleep well and hopefully not sell in a panic. Stocks are volatile, but will typically grow if given enough time. Such as 10 years.
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.
Thanks for pointing out that an investor's choice as to how to construct a portfolio, whether by AA or buckets, does not inherently change the underlying risks of the assets held within that portfolio. For instance, stocks going through a 'lost decade' are going to hurt any portfolio with a significant stock weighting.

Those employing a bucket strategy should be fully aware of this reality. Of course, this alone does not mean that a bucket strategy is in any way inferior to an AA strategy.
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Re: Bucket Portfolio article by Christine Benz

Post by bobcat2 » Wed Jul 11, 2018 11:27 am

The point is that if stocks have a bad period of 10 years or more the buckets approach is a terrible strategy. If stocks have a bad period of 5 years or less, then the bucket approach is better. Between 5-10 years doesn't make much difference. But the worst situation is an equity market decline that lasts more than 10 years. In this worst situation the bucket approach is a very poor strategy. A bucketeer thinks his strategy is superior because he is betting that the really bad scenario (10 years or more of bear market) won't happen. He will truly be in a world of hurt if his bet does not pan out. :(

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Re: Bucket Portfolio article by Christine Benz

Post by Dandy » Wed Jul 11, 2018 11:36 am

Safety is just a mirage.
If that means safety is not guaranteed I agree. If having a portion of your nest egg in "safer" assets can be a bit safer than not doing so. But, nasty, long market declines can destroy almost any plan. Too many variables in retirement: the market, inflation, taxes, illness, how long you will live, etc. to feel you have a plan that can't be beat.

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Wed Jul 11, 2018 11:44 am

bobcat2 wrote:
Wed Jul 11, 2018 11:27 am
The point is that if stocks have a bad period of 10 years or more the buckets approach is a terrible strategy. If stocks have a bad period of 5 years or less, then the bucket approach is better. Between 5-10 years doesn't make much difference. But the worst situation is an equity market decline that lasts more than 10 years. In this worst situation the bucket approach is a very poor strategy. A bucketeer thinks his strategy is superior because he is betting that the really bad scenario (10 years or more of bear market) won't happen. He will truly be in a world of hurt if his bet does not pan out. :(

BobK
Whether that is true depends entirely on the specifics of the bucket strategy. The same could be said of a 90/10 AA for a retiree in the withdrawal phase. There is no 'bucket rule' saying that expenses beyond 10 years must be allocated entirely to stocks.
Dandy wrote:
Wed Jul 11, 2018 11:36 am
But, nasty, long market declines can destroy almost any plan. Too many variables in retirement: the market, inflation, taxes, illness, how long you will live, etc. to feel you have a plan that can't be beat.
Bingo. :beer
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Re: Bucket Portfolio article by Christine Benz

Post by TheTimeLord » Wed Jul 11, 2018 11:57 am

bobcat2 wrote:
Wed Jul 11, 2018 10:56 am
Leif wrote:
Wed Jul 11, 2018 1:40 am
The logic is that 1-2 years of cash from your portfolio allows you to sleep well and hopefully not sell in a panic. Stocks are volatile, but will typically grow if given enough time. Such as 10 years.
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. Here is Moshe Milevsky elaborating on this point.
A bear market early in retirement – i.e. when you start withdrawing money from a portfolio -- can have a devastating impact on the sustainability of your income stream. ...

Some commentators have expressed the view that by placing a few years worth of retirement income needs into safe investments and not touching the remaining funds in the event of a bear market, they can somehow avoid the ruinous impact of a poor sequence of investments returns. A fringe element of this sect believes that if markets decline a retiree should simply be counseled to only take income from their bond allocation and then “wait for the stock allocation to recover” and thus avoid selling at a loss. These strategies are an optical illusion at best and create a potential for grave disappointment at worst. ...

In sum, my only point is as follows. If you decide to adopt the so-called buckets approach to retirement income planning then beware of the fact that your total asset allocation and implicit exposure to equity will fluctuate unpredictably over time. Moreover, if indeed you experience a poor initial sequence of investment returns – so that you have been forced to liquidate all your cash investment -- you might find yourself with a 100% equity exposure well into retirement and possibly deep into a bear market. This is in contrast to the non-bucketer (ok, lousy word) who is maintaining the same exact asset mix and hence the same risk profile over time. Sure, the market may recover by the time you have to tap in to the equity portion – or it may not. Either way, you have neither reduced nor mitigated financial risk but simply taken a bet on scenarios you believe will not happen. Safety is just a mirage.
Example - The 10 year Total Wilshire 5000 real return with dividends reinvested was -23.7% from the end of 1999 thru 2009.

BobK
The return of the S&P 500 with dividends reinvested for the time period December 1999 through December 2007 was 17.666% then things dropped off the cliff and as we have experienced rallied spectacularly since March of 2009 . From October 2002 until November 2007 the return of the S&P 500 with dividends reinvested was 87.027% or an annualized 13.107%.
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Re: Bucket Portfolio article by Christine Benz

Post by The Wizard » 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...
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Re: Bucket Portfolio article by Christine Benz

Post by bobcat2 » Wed Jul 11, 2018 1:16 pm

TheTimeLord wrote:
Wed Jul 11, 2018 11:57 am
The return of the S&P 500 with dividends reinvested for the time period December 1999 through December 2007 was 17.666% then things dropped off the cliff ... .
The real return of the Wilshire 5000 with dividends reinvested from December 1999 to December 2007 was -2.3%, a negative return not a positive return. The US stock market not only dropped off a cliff in 2008-09, but also from 2000-2002. At best you have ignored inflation in coming up with 17.7%.

The overriding point is that there have been several times when the US stock market has had negative real returns over extended periods. The decade from 1910-19, during the Great Depression, the period from the late 1960s through the early 1980s, and the period 2000-2009. A strategy such as a bucket strategy premised on the notion that such a period like that won't happen in the future is a risky strategy. 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.

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Re: Bucket Portfolio article by Christine Benz

Post by bobcat2 » Wed Jul 11, 2018 1:23 pm

Two investors have the same asset allocation. The one who has a bucket strategy is mitigating the risk of a ST bear market by amplifying the risk of a LT bear market relative to the other investor using a standard portfolio strategy.

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Re: Bucket Portfolio article by Christine Benz

Post by TheTimeLord » Wed Jul 11, 2018 1:27 pm

bobcat2 wrote:
Wed Jul 11, 2018 1:23 pm
Two investors have the same asset allocation. The one who has a bucket strategy is mitigating the risk of a ST bear market by amplifying the risk of a LT bear market relative to the other investor using a standard portfolio strategy.

BobK
Do you really believe my bucket strategy as outlined does this?
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Re: Bucket Portfolio article by Christine Benz

Post by MnD » Wed Jul 11, 2018 1:48 pm

averagedude wrote:
Tue Jul 10, 2018 7:29 pm
Im not against the bucket strategy but it just seems like its just mental accounting which may ease the minds of people who are risk averse.
It _is_ just mental accounting.

Sell whatever and from wherever it makes most sense and if it happens to be a beatdown risky asset you sold, go buy some of that in another account using safe assets. There - you sold safe assets and didn't really sell any of the beatdown asset except you may have gotten a nice tax-loss sale or whatever.

I've been doing some variation of this for decades and when I explain it people, about 2/3rds first give the blank stare and then explain they still think I am selling stocks at a bad time and they are going to have 3 years of cash sitting in "buckets" down at the credit union when they retire so they never ever have to hold a fire-sale on their precious stock and bond portfolio (which doesn't have enough stocks in it to bother with or make much difference in my opinion).

I've stopped trying to challenge this bucket master-plan and instead wish them good luck with that strategy. I'll pass as I need another layer of complexity on retirement spending like I need a hole in the head.

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Re: Bucket Portfolio article by Christine Benz

Post by MathWizard » Wed Jul 11, 2018 2:01 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...
This is exactly what I plan to do, and makes the most sense to me.

During accumulation, I try to keep my AA near the target by adjusting where new money is invested rather than frequent rebalancing.
I only rebalance on large swings. I liken his to driving down the road making small correction of the steering wheel to stay on track,
and only making big correction when there is an emergency or the road swerves.

I plan to do the same with withdrawals during decumulation. I'll withdraw whatever steers me back towards the target AA, whether than means
100% bonds, 100% stock, or more normally a mix of the two. With huge swings, like in 2008/2009, I would rebalance (as I did then).

If this strategy fails, at least it will be because my calmy considered plan failed, not because of a rash move during a financial crisis.

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Re: Bucket Portfolio article by Christine Benz

Post by Leif » Wed Jul 11, 2018 6:07 pm

bobcat2 wrote:
Wed Jul 11, 2018 11:27 am
A bucketeer thinks his strategy is superior because he is betting that the really bad scenario (10 years or more of bear market) won't happen. He will truly be in a world of hurt if his bet does not pan out. :(

BobK
i don't believe you will get Christine to agree that she "is betting that the really bad scenario (10 years or more of bear market) won't happen."

I think most portfolios would have difficulty with a 10+ year stock bear market. Unless you are very conservative. But her bucket strategy is not the old Ray Lucia method. She recommends rebalancing every year. So at the end of 10 years you are not left with a 100% stock portfolio.

But, I'm not the one to defend the strategy/method. I just use a very conservative WR starting with a 50/50 AA. I believe it will do OK even in a Japan scenario. Of course with a low enough WR any strategy will work.

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Re: Bucket Portfolio article by Christine Benz

Post by AtlasShrugged? » Wed Jul 11, 2018 6:59 pm

The overriding point is that there have been several times when the US stock market has had negative real returns over extended periods.
Bobcat2....Let me start by saying you have greatly aided my learning over time. Your posts on Funding ratio have greatly influenced how I look at my retirement readiness (which is woeful right now). That is the metric I look at every month in my portfolio tracking spreadsheet, and I just call it, "Bobcat2's Number". I notice a number of others (Kitces, Pfau, Estrada, etc) also write about this metric. So thank you for introducing me to it. When you write, I pay attention (along with some others).

I have the impression that you are a real skeptic of the bucket approach, reading your posts in this thread. I read the above, and I said, "Whoa!" (actually, I said something considerably more colorful, and it ended with "**** my life!" but LadyGeek would not like it if I wrote it). :happy

Let me ask you this. In a 30-year retirement, what is the likelihood of a 10 or more year stretch of negative real returns? What does your gut tell you? Behind the question, I am wondering if it really makes sense to try and have (and maintain) a two year 'cash equivalent' expenses in CDs when I get to retirement. If I had to guess, you'd say "Have an emergency fund to handle 1-2 big expenses in any year, but don't go beyond that because you are taking a bigger risk in the long run". Am I right on my guess?

BTW, I really liked the 'retirement bond' thread. Stimulated a lot of thought.
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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Wed Jul 11, 2018 7:32 pm

AtlasShrugged? wrote:
Wed Jul 11, 2018 6:59 pm
In a 30-year retirement, what is the likelihood of a 10 or more year stretch of negative real returns?
The S&P 500 has had negative real returns in a little over 10% of the historic ten year periods.
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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Wed Jul 11, 2018 8:45 pm

bobcat2 wrote:
Wed Jul 11, 2018 1:16 pm
TheTimeLord wrote:
Wed Jul 11, 2018 11:57 am
The return of the S&P 500 with dividends reinvested for the time period December 1999 through December 2007 was 17.666% then things dropped off the cliff ... .
The real return of the Wilshire 5000 with dividends reinvested from December 1999 to December 2007 was -2.3%, a negative return not a positive return. The US stock market not only dropped off a cliff in 2008-09, but also from 2000-2002. At best you have ignored inflation in coming up with 17.7%.

The overriding point is that there have been several times when the US stock market has had negative real returns over extended periods. The decade from 1910-19, during the Great Depression, the period from the late 1960s through the early 1980s, and the period 2000-2009. A strategy such as a bucket strategy premised on the notion that such a period like that won't happen in the future is a risky strategy. 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.

BobK
Yes we have had a lost 20 years, but a 10-year bear market still only has a plunge that lasts a few years. So being heavy in stocks after emptying your bond bucket a few years helps you.

Take an unfortunate soul who retired in 2000 with a $500k portfolio using a 2-bucket strategy ($350k in stocks, $150k bonds). Use the Wilshire 5000 for the stock index return, and since I'm a Fed, I'll use the average of the F Fund (mistakenly wrote G Fund earlier)(last ten years 4.27%) as my bond fund. Withdrawal of 4% with inflation at 3%. Strategy, I wait at least two years after the market bottom to refill the bond bucket. Doing that, I would still have about $350k left. Not bad after two serious contractions in 18 years.
Last edited by Tdubs on Thu Jul 12, 2018 5:10 am, edited 1 time in total.

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Re: Bucket Portfolio article by Christine Benz

Post by bobcat2 » Wed Jul 11, 2018 9:36 pm

Tdubs wrote:
Wed Jul 11, 2018 8:45 pm
Take an unfortunate soul who retired in 2000 with a $500k portfolio using a 2-bucket strategy ($350k in stocks, $150k bonds). Use the Wilshire 5000 for the stock index return, and since I'm a Fed, I'll use the average of the G Fund (last ten years 4.27%) as my bond fund. Withdrawal of 4% with inflation at 3%. Strategy, I wait at least two years after the market bottom to refill the bond bucket. Doing that, I would still have about $350k left. Not bad after two serious contractions in 18 years.
It looks to me like you have conflated nominal and real values. When you put everything in real terms you have a 1.27% real interest rate and you are withdrawing from the G fund $20,000/yr real. After 10 years you would have depleted the G fund and taken over $40,000 out of stocks that would have lost a considerable amout of their value by then compared with their beginning value in 2000 - about 24%. That would leave you with about $220,000 to $230,000 real left by the end of 2009 once we take the 2009 withdrawal of $40,000 into account. In other words, your bucket gave you the boot. :(

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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Wed Jul 11, 2018 10:06 pm

Kitces' analysis of a fairly 'normal' bucket strategy found it to be no better or worse than using a traditional AA approach (what he referred to as total return basis). He noted that rebalancing was the key to making the latter approach work. This coincides with analysis I did of year 2000 retirees using the '4% rule'; failing to rebalance would have left them in a significantly worse state than otherwise.
Yet when such a decision-rules strategy is paired with simple rebalancing, it turns out that the outcome is no better than merely managing the portfolio on a total return basis without the decision rules at all! The key, as it turns out, is that rebalancing alone already has an astonishingly powerful effect to help avoid unfavorable liquidations, as the process systematically ensures that the investments that are up (the most) are sold, and the ones that are down (the most) are actually bought instead! Which means in the end, we may not be giving rebalancing nearly the credit it deserves to accomplish similar – or even better – results than buckets and decision rules alone, and that such approaches are better purposed as explanatory tools for clients than actual systems for generating cash flows in retirement!
https://www.kitces.com/blog/managing-se ... -approach/
As the results reveal, the decision-rules strategy (red line) coincides precisely with the total return rebalancing strategy (blue line), producing a (red plus blue makes) purple line as the colors meld together! In other words, the results are not just similar; the aforementioned decision rules bucket approach is actually having no impact at all over the total return rebalancing approach, as they are precisely identical outcomes at every step along the way!
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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Thu Jul 12, 2018 4:39 am

bobcat2 wrote:
Wed Jul 11, 2018 9:36 pm
Tdubs wrote:
Wed Jul 11, 2018 8:45 pm
Take an unfortunate soul who retired in 2000 with a $500k portfolio using a 2-bucket strategy ($350k in stocks, $150k bonds). Use the Wilshire 5000 for the stock index return, and since I'm a Fed, I'll use the average of the G Fund (last ten years 4.27%) as my bond fund. Withdrawal of 4% with inflation at 3%. Strategy, I wait at least two years after the market bottom to refill the bond bucket. Doing that, I would still have about $350k left. Not bad after two serious contractions in 18 years.
It looks to me like you have conflated nominal and real values. When you put everything in real terms you have a 1.27% real interest rate and you are withdrawing from the G fund $20,000/yr real. After 10 years you would have depleted the G fund and taken over $40,000 out of stocks that would have lost a considerable amout of their value by then compared with their beginning value in 2000 - about 24%. That would leave you with about $220,000 to $230,000 real left by the end of 2009 once we take the 2009 withdrawal of $40,000 into account. In other words, your bucket gave you the boot. :(

BobK
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?

It seems to me that a well constructed bucket plan is more resilient than is given credit. For it to not work, you need four or five years of a plunging market where you wipe out your first bucket and are eating into what's left of the second. That isn't the same as the 10-year bear markets we had postwar. The only thing like that was 1929.

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Re: Bucket Portfolio article by Christine Benz

Post by The Wizard » Thu Jul 12, 2018 6:48 am

One common variation or adaptation of bucket strategies that we see here on the forum at times involves Funding the Gap while delaying SS.

I'm in the midst of that now, with a seven year gap from start of retirement in 2013 to starting age 70 SS in 2020. I withdraw $3000 per month on top of other income in lieu of SS.

Over seven years, $3000/month adds up to $252,000. Some people are prone to set aside this entire amount in cash or similar "safe" assets at the start of retirement.
But this approach creates considerable Cash Drag.

So what I've been doing is withdrawing that $3000/month pro rata from my tax deferred portfolio which was 50% stocks to start with, though I've let stocks drift upward a bit by not rebalancing too much.

There appears to be more risk using a stock-heavy portfolio, but I've been at least 50% stocks for over 40 years, so I'm comfortable with it.
And specifically for SS delay funding, there's an Option B of claiming SS prior to age 70 in the event of a significant stock market crash...
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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » Thu Jul 12, 2018 7:11 am

The Wizard wrote:
Thu Jul 12, 2018 6:48 am
One common variation or adaptation of bucket strategies that we see here on the forum at times involves Funding the Gap while delaying SS.

I'm in the midst of that now, with a seven year gap from start of retirement in 2013 to starting age 70 SS in 2020. I withdraw $3000 per month on top of other income in lieu of SS.

Over seven years, $3000/month adds up to $252,000. Some people are prone to set aside this entire amount in cash or similar "safe" assets at the start of retirement.
But this approach creates considerable Cash Drag.

So what I've been doing is withdrawing that $3000/month pro rata from my tax deferred portfolio which was 50% stocks to start with, though I've let stocks drift upward a bit by not rebalancing too much.

There appears to be more risk using a stock-heavy portfolio, but I've been at least 50% stocks for over 40 years, so I'm comfortable with it.
And specifically for SS delay funding, there's an Option B of claiming SS prior to age 70 in the event of a significant stock market crash...
That sounds like my plan when I get there, though I will only have a three-year gap. There is always the SS ripcord to pull if the market tanks.

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Re: Bucket Portfolio article by Christine Benz

Post by randomguy » Thu Jul 12, 2018 7:47 am

MnD wrote:
Wed Jul 11, 2018 1:48 pm
averagedude wrote:
Tue Jul 10, 2018 7:29 pm
Im not against the bucket strategy but it just seems like its just mental accounting which may ease the minds of people who are risk averse.
It _is_ just mental accounting.

Sell whatever and from wherever it makes most sense and if it happens to be a beatdown risky asset you sold, go buy some of that in another account using safe assets. There - you sold safe assets and didn't really sell any of the beatdown asset except you may have gotten a nice tax-loss sale or whatever.

I've been doing some variation of this for decades and when I explain it people, about 2/3rds first give the blank stare and then explain they still think I am selling stocks at a bad time and they are going to have 3 years of cash sitting in "buckets" down at the credit union when they retire so they never ever have to hold a fire-sale on their precious stock and bond portfolio (which doesn't have enough stocks in it to bother with or make much difference in my opinion).

I've stopped trying to challenge this bucket master-plan and instead wish them good luck with that strategy. I'll pass as I need another layer of complexity on retirement spending like I need a hole in the head.
It is a bit more than mental accounting. It is also a scheme that has a floating AA of some type. If that floating AA helps or hurts is very situational dependent (i.e. not rebalancing after a 50% drop when there is a 100% rebound is different than rebalancing after a 20% drop followed by another 20% which is then followed by another 20% before the rebound).

But yeah the whole idea that you sell stocks in down markets with a fixed AA is just a misunderstanding. When stocks drop, you aren't selling them at depressed most of the time. You are buying them. The exception is if your really stock heavy (say 80%+) with a long downturn.

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Re: Bucket Portfolio article by Christine Benz

Post by randomguy » Thu Jul 12, 2018 8:01 am

Tdubs wrote:
Thu Jul 12, 2018 4:39 am


It seems to me that a well constructed bucket plan is more resilient than is given credit. For it to not work, you need four or five years of a plunging market where you wipe out your first bucket and are eating into what's left of the second. That isn't the same as the 10-year bear markets we had postwar. The only thing like that was 1929.
You need to compare your bucket approach to just holding a fixed AA. People have done this and the bucket approach just doesn't give better results either in terms of letting you spend more money or ending up with more money. And at a certain level the only thing that matters is when you have a bad 10 years (note even the great depression wasn't a 10 year bear market. There were a couple bull markets in the middle). Your strategy needs to handle that in a way you are comfortable with. In restrospect scheme that would have had you 100% stocks at the end of 2008, wouldn't have been too bad. But it sure as heck would have been stressful at the time.

Buckets are far from the worst idea out there. They just have a lot of complexity that gets glossed over. The big one of course is when/if you are refilling. If you aren't refilling (say the you want to cover 10 years to SS), you are basically doing a rising glidepath/bond tent approach. If you are refilling you need to come up with a bunch of rules. It sounds easy to say you refill when stocks are up. But what do you do when stocks aren't up and your bucket is getting low?

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Re: Bucket Portfolio article by Christine Benz

Post by bobcat2 » 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. :(

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willthrill81
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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » Thu Jul 12, 2018 9:29 am

randomguy wrote:
Thu Jul 12, 2018 8:01 am
Buckets are far from the worst idea out there. They just have a lot of complexity that gets glossed over. The big one of course is when/if you are refilling. If you aren't refilling (say the you want to cover 10 years to SS), you are basically doing a rising glidepath/bond tent approach. If you are refilling you need to come up with a bunch of rules. It sounds easy to say you refill when stocks are up. But what do you do when stocks aren't up and your bucket is getting low?
:thumbsup Spot on. The complexity of refilling the buckets in particular is what is commonly glossed over here. That's why I believe that a traditional AA with periodic rebalancing may be better for some, perhaps most. It's comparatively easy to manage the desired AA or buckets.

Part of the reason that some of the bucket strategies look good in some backtests is because they are using a rising equity glidepath, somewhat similar to what Kitces and Pfau have recommended except that they used a traditional AA to do so. The 'free floating AA' aspect of some bucket strategies is where they can diverge from the traditional AA model.
“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

Tdubs
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Re: Bucket Portfolio article by Christine Benz

Post by Tdubs » 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?

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willthrill81
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Re: Bucket Portfolio article by Christine Benz

Post by willthrill81 » 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.
“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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