The Bucket Approach

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firebirdparts
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Re: The Bucket Approach

Post by firebirdparts » Wed Jul 24, 2019 5:23 pm

I thought this was interesting:
http://livingoffyourmoney.com/

The free preview is actually pretty adequate in itself. It's surprising, really, just how little difference reasonable and rational technique makes. In the end you still have a SWR of 4%.

Spoiler: The "three bucket" strategy turned out horribly.
A fool and your money are soon partners

EnjoyIt
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Re: The Bucket Approach

Post by EnjoyIt » Wed Jul 24, 2019 5:31 pm

livesoft wrote:
Tue Jul 23, 2019 4:43 pm
Not for me. If I need to buy a sailboat, I buy a sailboat. If stocks are down, then I'm selling bond fund shares to buy more stock fund shares. If stocks are up, then I'm selling stock fund shares to buy more bond funds shares. If I need sailboat, too, then I sell anything to buy a sailboat and rebalance to get back to my asset allocation.
But, do you have the stones to sell anything to buy a sailboat in the wake of a deep recession?
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bck63
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Re: The Bucket Approach

Post by bck63 » Wed Jul 24, 2019 6:34 pm

jebmke wrote:
Tue Jul 23, 2019 4:49 pm
Bucket strategies seem too complicated for me. Seems like too many moving parts and some chance of wrong-footing and ending up with a risk profile that was unintended. I am looking for more ways to simplify rather than complicate.
+1. It confuses the heck out of me. I'm mathematically challenged and it just seems to make things more complicated. I'll be happy to just have an asset allocation I can live with and take out a sustainable percentage for expenses each year. The simpler the better for this simple-minded investor. :happy

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Re: The Bucket Approach

Post by laidback_and_relaxed » Wed Jul 24, 2019 7:25 pm

firebirdparts wrote:
Wed Jul 24, 2019 5:23 pm
I thought this was interesting:
http://livingoffyourmoney.com/

The free preview is actually pretty adequate in itself. It's surprising, really, just how little difference reasonable and rational technique makes. In the end you still have a SWR of 4%.

Spoiler: The "three bucket" strategy turned out horribly.
I like the Prime Harvesting method described here myself, but it's basically a bucket like strategy with take your pick bands and a hard and fast rule (or modification in the Alternate Prime Harvesting method), where you always sell bonds and only replenish bonds (or safe money) from stocks when your equity allocation has grown by 20% adjusted for inflation on a year over year basis. When this happens the method calls for you to allocate 20% from stock to bonds (or readjust to starting AA for Alternate Prime). Makes sense to me, but I haven't seen the situation where the bond or safe money allocation goes to zero where the method calls for spending from equities on an anual basis for just what is required for that year. That sounds a little scary to me and I wonder if I'll be able to ride that part out very far if I ever experience a really bad run on the market. I'm comfortable with never selling stocks/equities as part of a regular rebalancing routine, anual rebalancing seems like over management of investments for the sake of paying brokers and financial planners. That sounds more like market timing to me than never selling equities (other than when than when growth reaches +20% adjusted for inflation or your out of bonds/safe money for anual spend).

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Re: The Bucket Approach

Post by livesoft » Wed Jul 24, 2019 9:45 pm

EnjoyIt wrote:
Wed Jul 24, 2019 5:31 pm
livesoft wrote:
Tue Jul 23, 2019 4:43 pm
Not for me. If I need to buy a sailboat, I buy a sailboat. If stocks are down, then I'm selling bond fund shares to buy more stock fund shares. If stocks are up, then I'm selling stock fund shares to buy more bond funds shares. If I need sailboat, too, then I sell anything to buy a sailboat and rebalance to get back to my asset allocation.
But, do you have the stones to sell anything to buy a sailboat in the wake of a deep recession?
My neighbor has 4 sailboats. I don't need to buy a sailboat because I can sail for no cost to me.

I have the stones to buy equities all the way down to the bottom as shown by what I did in 2008-2009.
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Re: The Bucket Approach

Post by Steve Reading » Wed Jul 24, 2019 9:52 pm

EnjoyIt wrote:
Wed Jul 24, 2019 5:31 pm
livesoft wrote:
Tue Jul 23, 2019 4:43 pm
Not for me. If I need to buy a sailboat, I buy a sailboat. If stocks are down, then I'm selling bond fund shares to buy more stock fund shares. If stocks are up, then I'm selling stock fund shares to buy more bond funds shares. If I need sailboat, too, then I sell anything to buy a sailboat and rebalance to get back to my asset allocation.
But, do you have the stones to sell anything to buy a sailboat in the wake of a deep recession?
I don't think people who use Buckets want to buy boats with their cash in the wake of deep recessions either.

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Re: The Bucket Approach

Post by Independent George » Wed Jul 24, 2019 10:27 pm

H-Town wrote:
Wed Jul 24, 2019 5:17 pm
How should an average investor determine their appropriate AA? Where do they start? Is it an arbitrary 60/40, 70/30? Is it a tried and true glide path from Targeted Date retirement funds? How does one know the perfect AA and stick to it?
How are those questions any different from what you have while allocating in buckets? The difference with a set AA is that it's a heck of a lot easier to figure out what to sell.

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Re: The Bucket Approach

Post by pascalwager » Wed Jul 24, 2019 10:55 pm

jj45 wrote:
Wed Jul 24, 2019 10:08 am
[quoted post removed by admin LadyGeek]

[Comments removed by admin LadyGeek]

With all of our mathematical gymnastics and Monte Carlo simulations we still need to make a subjective choice: asset allocation. How do you choose your asset allocation? As many have written over many threads over many years, buckets are no different than asset allocation. You can make them both fixed or dynamic, but one can always be translated to another. It seems the only difference is the units used, asset allocation is framed in terms of %, and buckets are framed in terms of years. The mathematically adept can easily convert back and forth. Choosing an asset allocation involves risk tolerance and comfort and fear and describing it in terms of years is, for those with less mathematical understanding [OT comment removed by admin LadyGeek], easier to emotionally understand than %.
Framing buckets in years is the basic error, according to Estrada. Allocating your cash as a small percentage of the overall portfolio would be acceptable* because the cash will be used to buy (re-balance into) stock in down markets.

*Not acceptable to those investors who only need stocks and bonds and a credit card
Retired, pension, no SS | Bond funds: TIPS, TBM | Global stocks: total market, large value, small company, emerging market funds

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Re: The Bucket Approach

Post by pascalwager » Wed Jul 24, 2019 11:01 pm

GerryL wrote:
Tue Jul 23, 2019 5:11 pm
cashboy wrote:
Tue Jul 23, 2019 3:56 pm
to bucket, or not to bucket, that is the question:
whether 'tis nobler in the mind to suffer
the task of filling and emptying one's buckets,
or to go bucket-less against a financial sea of troubles....

in general, me thinks the bucket approach being good or bad, or useful or not (with or without variations for the individual), depends upon where one is on their financial management expertise journey.

BH contains some members that are extremely skilled in areas of financial management.
:happy
for them, they suggest go bucket-less

BH contains some members that are not extremely skilled in areas of financial management, and are learning along the way.
:confused
for them, buckets might provide a structure to start with - something they can understand from where they are in their financial management expertise journey (and then they can modify it and/or go their own way as time passes).
Because what I have read about the Bucket Strategy seems too complicated, I have come up with my own single-bucket strategy.
I have a cash bucket that is continuously fed by SS, RMDs and taxable dividends.
I have a 60/40 portfolio.
Cash goes in the bucket; everything else is in the investment portfolio.
If my cash bucket should get too low (hasn't happened yet), I can choose to sell off something in the portfolio.
If my cash bucket gets too full, I can reinvest the overflow into my taxable account.
One bucket is all I need as long as I understand and stick to my spending target.
This is the original (two) buckets concept used by Harold Evansky for his retired clients. A cash bucket and an investment portfolio bucket.
Retired, pension, no SS | Bond funds: TIPS, TBM | Global stocks: total market, large value, small company, emerging market funds

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Re: The Bucket Approach

Post by WoodSpinner » Wed Jul 24, 2019 11:27 pm

laidback_and_relaxed wrote:
Wed Jul 24, 2019 7:25 pm
firebirdparts wrote:
Wed Jul 24, 2019 5:23 pm
I thought this was interesting:
http://livingoffyourmoney.com/

The free preview is actually pretty adequate in itself. It's surprising, really, just how little difference reasonable and rational technique makes. In the end you still have a SWR of 4%.

Spoiler: The "three bucket" strategy turned out horribly.
I like the Prime Harvesting method described here myself, but it's basically a bucket like strategy with take your pick bands and a hard and fast rule (or modification in the Alternate Prime Harvesting method), where you always sell bonds and only replenish bonds (or safe money) from stocks when your equity allocation has grown by 20% adjusted for inflation on a year over year basis. When this happens the method calls for you to allocate 20% from stock to bonds (or readjust to starting AA for Alternate Prime). Makes sense to me, but I haven't seen the situation where the bond or safe money allocation goes to zero where the method calls for spending from equities on an anual basis for just what is required for that year. That sounds a little scary to me and I wonder if I'll be able to ride that part out very far if I ever experience a really bad run on the market. I'm comfortable with never selling stocks/equities as part of a regular rebalancing routine, anual rebalancing seems like over management of investments for the sake of paying brokers and financial planners. That sounds more like market timing to me than never selling equities (other than when than when growth reaches +20% adjusted for inflation or your out of bonds/safe money for anual spend).
I just finished reading the first 3 chapters and am not sure I could stomach a Prime (or Alternate Prime) approach. My biggest problem is the Dynamic Asset Allocation that drives equities to levels near 80% in backtesting and no guardrails to prevent it from going to 100%. The SWR increases a bit (.5%), but the market risk is more than I could tolerate.

Just my $.02

WoodSpinner

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Re: The Bucket Approach

Post by firebirdparts » Thu Jul 25, 2019 9:51 am

It's a good question, and to me, it's sort of appealing. I have this attitude that after some broad basket of equities declined a lot, then I want to be more invested in those cheaper equities. For most of my life, that ideal was 100%, but I am still working. There's a big difference between the accumulation phase and retirement.

So conversely, it makes sense to know that you are ahead, and have rules to recognize it, and siphon off some money when times are good. This requires you to recognize "good".

It makes sense to me to have some sort of idea that actually addresses sequence-of-return risk as though you cared deeply for that.
Last edited by firebirdparts on Thu Jul 25, 2019 10:02 am, edited 1 time in total.
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Re: The Bucket Approach

Post by Johnnie » Thu Jul 25, 2019 9:56 am

I am not a fan, with the exception of having a separate bucket called the "social security bridge fund." See viewtopic.php?t=102609 for discussion.

The "bridge fund" method can also be stated in non-bucket, programmed-shift in asset allocation terms: Reduce your equity allocation before retirement, and then gradually increase it by spending-down the higher fixed income allocation in the years between retirement and claiming social security at 70, at which time you resume the long term or permanent A/A allocation you have selected.
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Re: The Bucket Approach

Post by firebirdparts » Thu Jul 25, 2019 9:56 am

bck63 wrote:
Wed Jul 24, 2019 6:34 pm
+1. It confuses the heck out of me. I'm mathematically challenged and it just seems to make things more complicated. I'll be happy to just have an asset allocation I can live with and take out a sustainable percentage for expenses each year. The simpler the better for this simple-minded investor. :happy
I say feel good about that. Rebalancing is actually pretty elegant. It doesn't have a huge effect on some things, but it addresses such a broad range of calamities in the right direction.
A fool and your money are soon partners

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Re: The Bucket Approach

Post by H-Town » Thu Jul 25, 2019 9:57 am

Independent George wrote:
Wed Jul 24, 2019 10:27 pm
H-Town wrote:
Wed Jul 24, 2019 5:17 pm
How should an average investor determine their appropriate AA? Where do they start? Is it an arbitrary 60/40, 70/30? Is it a tried and true glide path from Targeted Date retirement funds? How does one know the perfect AA and stick to it?
How are those questions any different from what you have while allocating in buckets? The difference with a set AA is that it's a heck of a lot easier to figure out what to sell.
Of course they are different. Let's ask a soon-to-be retiree how much are they comfortable to keep living expenses in cash or bond. They'd give you a number, i.e. one year, 2 years, 5 years, etc. Now when you ask them what's their appropriate AA given their situations, how many can answer that question?

I know I had no clue when I started investing. I read a lot of books early in my career and they often mention 50/50, 60/40, 70/30. But it would be a disaster to apply an arbitrary number because everyone's finance situation is unique. Now you get to read about trend following (100/0 and 0/100), 100% equity with a pension in the future, etc., it's just get a lot more complicated. And think about normal people out there that not really have much interest in investing, good luck asking them to solve this problem.

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Re: The Bucket Approach

Post by garlandwhizzer » Thu Jul 25, 2019 2:52 pm

I actually use a modified bucket approach myself. Some here argue against it and say it has no benefits relative to a standard asset allocation and that works for them. I'm in the withdrawal phase and still keep a high equity position, more than 60%. I have no pension or other source of income so I periodically sell Prime MMF from my personal account to make ongoing expenses. I sell some amount every month as needed and prefer MMF to short term bond funds because sales of MMF generate no taxes at all. Periodic and frequent sale of a short term bond fund generates a capital gain or capital loss with each sale which gets rather complicated if you're doing it 12 to 20 times each year. In addition MMF have a stable fixed principal value that is reliable whether we're in a rising or falling rate environment. I usually keep sufficient money in PMMF in my personal non-tax deferred account to provide for all living expenses for about 3 years which is longer than most bear market downturns last. The only other financial holding in my personal account is TSM whose dividends are federal tax free as long as you don't exceed the income cutoff for the 12% tax bracket which I don't on purpose. I typically sell sufficient TSM every year to take maximal advantage of the zero federal rate for capital gains, titrating my total income to be just below that cutoff level. I hold all bond funds and all other stock funds, both INTL and US including more TSM in my IRA. Just recently I have had to start taking RMDs. Annually I rebalance my portfolio and do the trades in the IRA account so as not to generate taxes. All rebalancing is done from equity into fixed income. Having less than 40% fixed income I do not sell that to rebalance unless we're in a bear market. If we have a significant bear market with stocks tanking I don't sell equity like this and would simply live off my personal MMF and make RMDs by selling bond funds from my IRA. All my RMDs and the limited sales from TSM (zero rate capital gains) in my personal account go into my PMMF in the personal account which keeps it replenished. This approach is simple, seems to minimize taxes, and avoids selling equity into weakness, all of which appeal to me. Others with different priorities and in different circumstances may rationally chose a different approach but this seems to work for me.

Garland Whizzer

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Re: The Bucket Approach

Post by LadyGeek » Thu Jul 25, 2019 8:10 pm

I removed an off-topic post and several replies. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters.
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Re: The Bucket Approach

Post by Paisley » Thu Jul 25, 2019 8:57 pm

Thank you.
LadyGeek wrote:
Thu Jul 25, 2019 8:10 pm
I removed an off-topic post and several replies. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters.
Last edited by Paisley on Fri Jul 26, 2019 12:37 am, edited 1 time in total.

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Re: The Bucket Approach

Post by Alchemist » Thu Jul 25, 2019 11:27 pm

I do not have any strong opinion regarding any retirement strategy at the moment. I am a few decades from needing to pick one; but the bucket approach is at least emotionally appealing to me. It seems less a really new strategy or alternative to traditional AA approaches, and more just a different framework for thinking about your portfolio makeup.

I really don't understand the high emotional response....its more heated than factor, international, or even whole life topics :confused

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Re: The Bucket Approach

Post by WoodSpinner » Fri Jul 26, 2019 8:32 am

Alchemist wrote:
Thu Jul 25, 2019 11:27 pm
I do not have any strong opinion regarding any retirement strategy at the moment. I am a few decades from needing to pick one; but the bucket approach is at least emotionally appealing to me. It seems less a really new strategy or alternative to traditional AA approaches, and more just a different framework for thinking about your portfolio makeup.

I really don't understand the high emotional response....its more heated than factor, international, or even whole life topics :confused
Agree with you on this assessment! :D

As a relatively new retiree and Boglehead, it’s a bit daunting.

On the other hand, Many of the discussion points brought up in criticism are valid. Rather than abondoning the strategy, I chose to modify and address. Part of the problem is that there is NO ONE BUCKET STRATEGY since many folks have modified the approach they use. Makes back testing and comparison difficult.

Not to mention that investors don’t always have the same goals in mind! For instance I am interested in funding a comfortable retirement for my wife and and I, not so interested in the magnitude of returns. Volatility and reliable withdrawal rates are much more important.

WoodSpinner

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Re: The Bucket Approach

Post by tman9999 » Fri Jul 26, 2019 8:54 am

WoodSpinner wrote:
Tue Jul 23, 2019 3:07 pm
[SNIP]
I have a detailed IPS and Retirement Policy Statement (RPS) as well. Reading, posting and learning from the forum has been invaluable.

WoodSpinner
Does anyone have a sample IPS and RPS I could use to create my own? Or maybe a template?

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Re: The Bucket Approach

Post by anon_investor » Fri Jul 26, 2019 9:58 am

I am no where near retirement (20-30 years away), but I do like the idea of the bucket approach. In part that it is very similar to my current approach: large cash (HYS, MMA, CD) emergency fund (6 months take home = 12 months necessary expenses; and could be stretched even more if needed) + HSA (enough to cover 1 year family HDHP max-out-of pocket cost), pay checks serve as immediate cash flow and portfolio is 100% equities. The large cash emergency fund allows me to completely ignore market down turns and should get me through any normal job loss. The way I see it, the bucket approach uses cash bucket for cash flow (replacing pay check), bonds serve as emergency fund, and the rest sits in equities, which gives the highest chance of returns; cash bucket is refilled by selling equities or from dividends/bond interest. The cash/bonds buckets allow you to live through market volatility, so you are not forced to sell equities in a down market. How big each bucket is, I think really should depend on what your expenses are and the portfolio size. Someone with a ratio of 1:25 annual expenses to portfolio size should have different sized buckets than someone with a 1:50 ratio.

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Re: The Bucket Approach

Post by WoodSpinner » Fri Jul 26, 2019 2:43 pm

tman9999 wrote:
Fri Jul 26, 2019 8:54 am
WoodSpinner wrote:
Tue Jul 23, 2019 3:07 pm
[SNIP]
I have a detailed IPS and Retirement Policy Statement (RPS) as well. Reading, posting and learning from the forum has been invaluable.

WoodSpinner
Does anyone have a sample IPS and RPS I could use to create my own? Or maybe a template?
Take a look at this Post for some of the highlights.

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Re: The Bucket Approach

Post by tman9999 » Fri Jul 26, 2019 7:37 pm

WoodSpinner wrote:
Fri Jul 26, 2019 2:43 pm
tman9999 wrote:
Fri Jul 26, 2019 8:54 am
WoodSpinner wrote:
Tue Jul 23, 2019 3:07 pm
[SNIP]
I have a detailed IPS and Retirement Policy Statement (RPS) as well. Reading, posting and learning from the forum has been invaluable.

WoodSpinner
Does anyone have a sample IPS and RPS I could use to create my own? Or maybe a template?
Take a look at this Post for some of the highlights.
Excellent! Thank you.

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Re: The Bucket Approach

Post by abuss368 » Fri Jul 26, 2019 7:39 pm

Sandtrap wrote:
Tue Jul 23, 2019 1:11 pm
This is a very good archive thread/post on "Christine Benz' 3-Bucket System".
Excellent input from forum members as well.
viewtopic.php?f=10&t=214843&hilit=bucket

The more you understand, then decide if it's for you or not for you.

Search the forum archives for posts by "dratkinson" on "tiers".

j
Did see this a while ago and in my opinion it is very good.
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Re: The Bucket Approach

Post by randomguy » Fri Jul 26, 2019 10:42 pm

anon_investor wrote:
Fri Jul 26, 2019 9:58 am
I am no where near retirement (20-30 years away), but I do like the idea of the bucket approach. In part that it is very similar to my current approach: large cash (HYS, MMA, CD) emergency fund (6 months take home = 12 months necessary expenses; and could be stretched even more if needed) + HSA (enough to cover 1 year family HDHP max-out-of pocket cost), pay checks serve as immediate cash flow and portfolio is 100% equities. The large cash emergency fund allows me to completely ignore market down turns and should get me through any normal job loss. The way I see it, the bucket approach uses cash bucket for cash flow (replacing pay check), bonds serve as emergency fund, and the rest sits in equities, which gives the highest chance of returns; cash bucket is refilled by selling equities or from dividends/bond interest. The cash/bonds buckets allow you to live through market volatility, so you are not forced to sell equities in a down market. How big each bucket is, I think really should depend on what your expenses are and the portfolio size. Someone with a ratio of 1:25 annual expenses to portfolio size should have different sized buckets than someone with a 1:50 ratio.
Sit down with a piece of paper and figure out how your bucket scheme would have worked from 1966-1981. And then see how your same scheme would have worked for say 1929-1945 or 2000-10 and compare them to how holding a fixed AA with roughly the same risk level would have performed. You will notice little difference. With a fixed AA you aren't selling stocks when the market drops. You are selling bonds and buying stocks. The idea that holding say 3-5 years of cash allows you to ignore market volatility is tempting but it is an illusion. You will see a lot of handwaving about it helping. You will not see a lot of math about how much better the results are.

The issue with buckets is the decisions that need to be made. Again think about the 2000 retire. When did they refill their cash bucket? When stocks were down from 2000-6? That brief moment when they broke even in 2007? Were you selling stocks in 2012 to put into cash? During minor blips (say 1987 or even to some extent 2007-9) where the market drops and is back in a couple of years, the bucket scheme seems to work well. But so does just putting the bucket cash into the fixed income of your portfolio. During the big downswings, neither approach works well. You get slightly different results depending on if you end up with a rebalancing bonus or penalty but the differences tend to be pretty minor

It is a bit hard to talk about buckets as there are zillions of schemes out there and they are vary slightly and are often ill defined. In general none of them help or hurt much. Some people like the complexity of giving chunks of money special names and purposes. Others prefer simplicity of 1 portfolio with 1 AA. Either works.

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Re: The Bucket Approach

Post by LadyGeek » Mon Jun 29, 2020 7:37 am

I'm bumping this 2019 thread because it was very helpful giving me a perspective for my withdrawal strategy. I retired a few months ago and wanted to organize my investments for a withdrawal strategy.

I have added this thread to the wiki and included a quote from the Kitces article mentioned in this thread. See: Bucket withdrawal strategy - which is what you type in the wiki's search box.*

I'm using 3 buckets:
  1. Emergency fund as cash
  2. Cash for expenses (my HSA is medical cash stashed in this bucket)
  3. Investments
My Investments bucket only includes stock and bond funds. During my accumulation phase (working at my day job), I had cash as fixed income. Cash now has a different purpose and has been dumped into a separate Expenses bucket.

The intent is to manage my investments as I normally do (rebalance for total return) and withdrawal - liquidate investments - into my cash bucket. I haven't decided on the withdrawal rate yet.

* The content is part of the Buckets of Money article. I moved the "Criticisms" section to the bottom of the page so readers coming in from the above link will see it.
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Re: The Bucket Approach

Post by willthrill81 » Mon Jun 29, 2020 3:38 pm

LadyGeek wrote:
Mon Jun 29, 2020 7:37 am
I'm bumping this 2019 thread because it was very helpful giving me a perspective for my withdrawal strategy. I retired a few months ago and wanted to organize my investments for a withdrawal strategy.

I have added this thread to the wiki and included a quote from the Kitces article mentioned in this thread. See: Bucket withdrawal strategy - which is what you type in the wiki's search box.*

I'm using 3 buckets:
  1. Emergency fund as cash
  2. Cash for expenses (my HSA is medical cash stashed in this bucket)
  3. Investments
My Investments bucket only includes stock and bond funds. During my accumulation phase (working at my day job), I had cash as fixed income. Cash now has a different purpose and has been dumped into a separate Expenses bucket.

The intent is to manage my investments as I normally do (rebalance for total return) and withdrawal - liquidate investments - into my cash bucket. I haven't decided on the withdrawal rate yet.

* The content is part of the Buckets of Money article. I moved the "Criticisms" section to the bottom of the page so readers coming in from the above link will see it.
So are you using a static or dynamic AA? If the latter, which buckets do you to draw from when and how/when do you refill them?
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Re: The Bucket Approach

Post by LadyGeek » Mon Jun 29, 2020 6:13 pm

I'm using static asset allocation. My investing style is to model a Lazy portfolio and rebalance once a year. Creating a cash stream by moving equities and bonds around makes things more complicated, especially in a volatile market.

Not having different investment buckets also allows me to use a single "all-in-one" fund, such as a target date fund (glide path) or LifeStrategy (fixed allocations). They are one bucket by design and are intended to keep things simple.

My current portfolio models the Vanguard 2020 target date fund, but I may change the asset allocation to be more conservative.

(If I misstated anything, let me know.)
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Re: The Bucket Approach

Post by WoodSpinner » Mon Jun 29, 2020 9:06 pm

LadyGeek wrote:
Mon Jun 29, 2020 7:37 am
I'm bumping this 2019 thread because it was very helpful giving me a perspective for my withdrawal strategy. I retired a few months ago and wanted to organize my investments for a withdrawal strategy.

I have added this thread to the wiki and included a quote from the Kitces article mentioned in this thread. See: Bucket withdrawal strategy - which is what you type in the wiki's search box.*

I'm using 3 buckets:
  1. Emergency fund as cash
  2. Cash for expenses (my HSA is medical cash stashed in this bucket)
  3. Investments
My Investments bucket only includes stock and bond funds. During my accumulation phase (working at my day job), I had cash as fixed income. Cash now has a different purpose and has been dumped into a separate Expenses bucket.

The intent is to manage my investments as I normally do (rebalance for total return) and withdrawal - liquidate investments - into my cash bucket. I haven't decided on the withdrawal rate yet.

* The content is part of the Buckets of Money article. I moved the "Criticisms" section to the bottom of the page so readers coming in from the above link will see it.
Can you express the size of bucket 1 & 2 in terms of yearly living expenses?

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Re: The Bucket Approach

Post by willthrill81 » Mon Jun 29, 2020 10:03 pm

LadyGeek wrote:
Mon Jun 29, 2020 6:13 pm
I'm using static asset allocation. My investing style is to model a Lazy portfolio and rebalance once a year. Creating a cash stream by moving equities and bonds around makes things more complicated, especially in a volatile market.

Not having different investment buckets also allows me to use a single "all-in-one" fund, such as a target date fund (glide path) or LifeStrategy (fixed allocations). They are one bucket by design and are intended to keep things simple.

My current portfolio models the Vanguard 2020 target date fund, but I may change the asset allocation to be more conservative.

(If I misstated anything, let me know.)
So you agree that the 'buckets' are just mental accounting (not that that's necessarily 'sub-optimal' in any meaningful way)?
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Re: The Bucket Approach

Post by LadyGeek » Tue Jun 30, 2020 7:40 am

WoodSpinner wrote:
Mon Jun 29, 2020 9:06 pm
Can you express the size of bucket 1 & 2 in terms of yearly living expenses?
That's a good point, as I'm still working on this. Bucket 1 will be about 6 months of living expenses. Bucket 2 should be about 1 year.
willthrill81 wrote:
Mon Jun 29, 2020 10:03 pm
So you agree that the 'buckets' are just mental accounting (not that that's necessarily 'sub-optimal' in any meaningful way)?
Yes. I can easily keep all of my cash in the same account and then draw a virtual line between the different buckets, but that's just me. Some might find it easier to create separate accounts.

Buckets for investments (if I was doing that) would be approached in a similar manner. Adding more funds adds complexity due to the additional tracking for taxes and other documentation.
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Re: The Bucket Approach

Post by ncbill » Tue Jun 30, 2020 9:13 pm

Has there been any discussion here on BH forums previously on the "cash bucket" approach, per this article:

https://earlyretirementnow.com/2018/05/ ... ity-myths/

in order to avoid SORR over a longer (50 years instead of 30 years) retirement, while keeping a fixed AA?

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Re: The Bucket Approach

Post by willthrill81 » Tue Jun 30, 2020 10:34 pm

ncbill wrote:
Tue Jun 30, 2020 9:13 pm
Has there been any discussion here on BH forums previously on the "cash bucket" approach, per this article:

https://earlyretirementnow.com/2018/05/ ... ity-myths/

in order to avoid SORR over a longer (50 years instead of 30 years) retirement, while keeping a fixed AA?
I've mentioned it several times, but I'm not aware of a thread or many posts discussing it.

Karsten's (the author of that site) approach to that and many other of his analyses focuses on 1929 and 1966 retirees, the two years which were the worst in U.S. history for retirees to begin their retirement. Any improvement to one's investment and/or withdrawal strategy that was relevant for those years would, by definition, improve the safe withdrawal rate, which represents the very lowest fixed real dollar withdrawal rate that would have worked over a specified number of years in the historic record.

That's not a bad approach, but how much confidence can we have that what worked to improve the SWR in 1929 and 1966 will work again going forward? That's a sample size of just two. Statistically speaking, that's so close to worthless that it's almost indistinguishable. That alone does not invalidate this approach though. I myself have often reminded those who complain of the lack of data that, like Theodore Roosevelt once said (I think), we have to do the best we can with what we have where we are. But at the same time, I wouldn't put too much confidence in such an approach strictly on the basis of just two starting years.

The specific approach he tested does make some theoretical sense, though it certainly relies heavily on mean reversion (in the broadest understanding of the term and not implying that there is a fixed 'mean' that stocks must 'revert' to in a reliable fashion). It's built on the idea that if you can ride out two years of really bad stock returns without making any portfolio withdrawals at all, including bonds, you can 'ride out the storm'. But what if two years of cash reserves aren't enough? Granted, you'd still be better off than not having the cash reserves, but we must be careful to not fall prey to the 'better than nothing' or 'better off than my peers' fallacy. We need a strategy that is good enough for us.

After reading volumes about such strategies, I personally favor more flexible approaches to withdrawals than even this approach. A potentially huge advantage of percentage of portfolio withdrawal approaches is that they are mathematically guaranteed to never result in total portfolio depletion (unless that is an explicit goal, which it is of the VPW that many here use). That provides a lot of reassurance to retirees, for whom the tendency to want to hoard their assets and don't spend a dime because a poverty mindset can easily set in otherwise (i.e. 'this is all I've got, so I have to make it last and can't spend anything unnecessarily'). The specific approach I like the most for many reasons is the time value of money method, which VPW is based upon. It's extremely flexible in the ways that it can be used.
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Re: The Bucket Approach

Post by LadyGeek » Wed Jul 01, 2020 7:48 am

willthrill81 wrote:
Tue Jun 30, 2020 10:34 pm
...After reading volumes about such strategies, I personally favor more flexible approaches to withdrawals than even this approach. A potentially huge advantage of percentage of portfolio withdrawal approaches is that they are mathematically guaranteed to never result in total portfolio depletion (unless that is an explicit goal, which it is of the VPW that many here use). That provides a lot of reassurance to retirees, for whom the tendency to want to hoard their assets and don't spend a dime because a poverty mindset can easily set in otherwise (i.e. 'this is all I've got, so I have to make it last and can't spend anything unnecessarily'). The specific approach I like the most for many reasons is the time value of money method, which VPW is based upon. It's extremely flexible in the ways that it can be used.
Here's the VPW wiki article: Variable percentage withdrawal

and the on-going support thread: Variable Percentage Withdrawal
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Re: The Bucket Approach

Post by willthrill81 » Wed Jul 01, 2020 10:36 am

LadyGeek wrote:
Wed Jul 01, 2020 7:48 am
willthrill81 wrote:
Tue Jun 30, 2020 10:34 pm
...After reading volumes about such strategies, I personally favor more flexible approaches to withdrawals than even this approach. A potentially huge advantage of percentage of portfolio withdrawal approaches is that they are mathematically guaranteed to never result in total portfolio depletion (unless that is an explicit goal, which it is of the VPW that many here use). That provides a lot of reassurance to retirees, for whom the tendency to want to hoard their assets and don't spend a dime because a poverty mindset can easily set in otherwise (i.e. 'this is all I've got, so I have to make it last and can't spend anything unnecessarily'). The specific approach I like the most for many reasons is the time value of money method, which VPW is based upon. It's extremely flexible in the ways that it can be used.
Here's the VPW wiki article: Variable percentage withdrawal

and the on-going support thread: Variable Percentage Withdrawal
And here's the thread pertaining to the time value of money approach: viewtopic.php?t=274243.
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