Buckets in Retirement

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bpkasl
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Buckets in Retirement

Post by bpkasl »

Curious how many active retirees on this site use the three bucket approach during retirement for short term cash needs, medium term and longer term growth? Would be interested in the Vanguard funds used in each of the three buckets
dbr
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Re: Buckets in Retirement

Post by dbr »

No. I see no point in it.

A different question is how you would view pensions, annuities, and Social Security as "spigots" of income rather than as "buckets" of assets. I think that discussion does have a point.
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celia
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Re: Buckets in Retirement

Post by celia »

I’m a very active retiree that is busier than when working. I don’t use ‘buckets’ because our monthly income more than meets our needs.
flyingaway
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Re: Buckets in Retirement

Post by flyingaway »

celia wrote: Thu Sep 24, 2020 9:27 am I’m a very active retiree that is busier than when working. I don’t use ‘buckets’ because our monthly income more than meets our needs.
Are you worried about "our monthly income more than meets our needs"? I mean there might be missed opportunities if you don't spend the money.
pkcrafter
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Re: Buckets in Retirement

Post by pkcrafter »

bpkasl wrote: Thu Sep 24, 2020 9:15 am Curious how many active retirees on this site use the three bucket approach during retirement for short term cash needs, medium term and longer term growth? Would be interested in the Vanguard funds used in each of the three buckets
I think the "3 bucket" idea is simply a mental accounting trick. The reality is you have just so much money to last the rest of your life, and the chances of not running out of money are dependent on a "safe" withdrawal rate and a risk rate which is dependent on how much you allocate to equity.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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celia
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Re: Buckets in Retirement

Post by celia »

flyingaway wrote: Thu Sep 24, 2020 9:36 am
celia wrote: Thu Sep 24, 2020 9:27 am I’m a very active retiree that is busier than when working. I don’t use ‘buckets’ because our monthly income more than meets our needs.
Are you worried about "our monthly income more than meets our needs"? I mean there might be missed opportunities if you don't spend the money.
No financial problems here. Done with Roth conversions and the small remaining Inherited IRA is being used for QCDs. Have some house remodeling on the radar and travel after covid is done. Estate planning done. Well insured.

Anything else I’m forgetting?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Mullins
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Re: Buckets in Retirement

Post by Mullins »

You can search for threads for thoughts on what constitutes "short term cash," such as TIPS, CDs and so on, what's good for "medium term" needs such as some bond funds, and for long term growth, which is typically a stock market index fund.

But using the word, "buckets" here will more often than not get you the "that's mental accounting, we rebalance!" affirmations.

You can read more about using buckets from Michael Kitces: https://www.theretirementmanifesto.com/ ... -strategy/

Also, Christine Benz of Morningstar: https://www.morningstar.com/articles/84 ... allocation
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AllieTB1323
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Re: Buckets in Retirement

Post by AllieTB1323 »

Nope, we worry more about our AA, asset location and maintaining a tax efficient withdrawal strategy.
helloeveryone
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Re: Buckets in Retirement

Post by helloeveryone »

celia wrote: Thu Sep 24, 2020 9:54 am
flyingaway wrote: Thu Sep 24, 2020 9:36 am
celia wrote: Thu Sep 24, 2020 9:27 am I’m a very active retiree that is busier than when working. I don’t use ‘buckets’ because our monthly income more than meets our needs.
Are you worried about "our monthly income more than meets our needs"? I mean there might be missed opportunities if you don't spend the money.
No financial problems here. Done with Roth conversions and the small remaining Inherited IRA is being used for QCDs. Have some house remodeling on the radar and travel after covid is done. Estate planning done. Well insured.

Anything else I’m forgetting?
Congrats! A lot of us aspire to be you and try to stay on track through this forum!
Dottie57
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Re: Buckets in Retirement

Post by Dottie57 »

Have buckets/lmp portfolio. Money I am spending within 18 mo is in very short term accounts. I have enough bonds to get me to SS AT 70 ( but will spend from whatever Is doing well when withdrawn.) I pay myself $xxxx every month as my paycheck.
Last edited by Dottie57 on Thu Sep 24, 2020 10:22 am, edited 1 time in total.
Robdac
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Re: Buckets in Retirement

Post by Robdac »

This may be semantics.

I'm not retired. I suppose I have three "buckets." Stocks (VTSAX/VTIAX), bonds (VTBLX), and a cash emergency fund (VMMXX). I refer to them as asset allocation.
dbr
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Re: Buckets in Retirement

Post by dbr »

Robdac wrote: Thu Sep 24, 2020 10:21 am This may be semantics.

I'm not retired. I suppose I have three "buckets." Stocks (VTSAX/VTIAX), bonds (VTBLX), and a cash emergency fund (VMMXX). I refer to them as asset allocation.
So true. The actual difference between buckets and an "asset allocation" is a system that varies the asset allocation according to some procedure or another rather than one that maintains a constant asset allocation within some random bounds. To the extent that the actual allocations end up being similar to each other, there is not going to be a difference in outcome. It takes some imagination of specific examples to find a difference. Probably one that comes to mind is someone consuming a meaningful fraction of their assets (perhaps a third or more) to postpone Social Security and then using the remnant with Social Security later on. Another one that comes to mind would be using perhaps two thirds of one's assets to set up a TIPS ladder that is slowly exhausted as time goes on. How the remainder is invested is an open question. Another extreme that should not count as asset allocation would be to take perhaps half the assets and buy annuities at different times. Thinking of the spigot rather than the bucket is probably more helpful. Note the TIPS ladder is in actual behavior an income stream and not a bucket.
wanderer
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Re: Buckets in Retirement

Post by wanderer »

Started detailed retirement planning more than 10 years ago using the "bucket" approach (retired in 2013). This seemed to be a sensible way to balance near-term spending security with an opportunity for some assets to grow for longer-term spending. However, I never figured out a logical way to "re-fill" these "buckets" (short-medium-long term) withdrawals or the market ups/downs of the growth portion. On one extreme this effort evolved into a detailed liability matching/spending plan (essentially a "bucket" for each year), and, to the other extreme, a simple portfolio re-balancing plan suggested by many Bogleheads.

In the end, this mental planning exercise was beneficial. It helped me better understand our acceptable risk and AA needs through the years, especially as we were withdrawing at higher rates pre-SS. It also helped me understand that simple portfolio re-balancing, as suggested by many Bogleheads, was essentially the same thing, only simpler and kept a better view of the "big picture". I still mentally "view" certain assets in my overall portfolio as assigned to "buckets", especially pre/post SS, but in reality simple re-balancing using withdrawals has worked well. I also use basic re-balancing bands rather than a tight AA to account for the year-year variations. To me, it's the same thing, only much, much simpler. While generally a detail person, I realize that market forces and life events have a much bigger effect on the outcome than any detail planning I try to do. Now, I am just trying to keep it comfortably between the ditches learned by the exercise in details, not obsess over the balances year-year or month-month. YMMV
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Leif
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Re: Buckets in Retirement

Post by Leif »

I'm retired and don't use buckets. However, I can see a few points in their use. You can find more info from Christine Benz at https://www.morningstar.com. She is the director of personal finance. She advocates the use of buckets. She even has some sample portfolios. She does have a version using Vanguard funds. Also savers and retirees.

1. A way on determining a possible asset allocation. She suggestions 2 years of cash withdrawals in retirement , 8 years of bonds, and the rest in stocks. So if you need a 4% withdrawal rate then that gives you 8% cash, 32% bonds, and 60% stocks. That needs to be adjusted for your need, willingness, and ability to take risk.

2. The 2 years cash buffer is to allow you to sleep when the market is doing it's volatility thing. The 2+8=10 years is based on the length of time you might find the market down relative to fixed income. The method also describes how transactions can be used to rebalance when stocks or bonds are preforming better.

To find out more see the link below. May require a free registration to get to this.

Model Portfolios for Savers and Retirees
Last edited by Leif on Thu Sep 24, 2020 2:12 pm, edited 2 times in total.
dbr
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Re: Buckets in Retirement

Post by dbr »

Leif wrote: Thu Sep 24, 2020 10:48 am

2. The 2 years cash buffer is to allow you to sleep when the market is doing it's volatility thing. The 2+8=10 years is based on the length of time you might find the market down relative to fixed income. The method also describes how transactions can be used to rebalance when stocks or bonds are preforming better.

Right. The point being that it differs from a rebalanced constant asset allocation by incorporating a scheme to vary the asset allocation. Proving that this has benefit is a tall order.
Leesbro63
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Re: Buckets in Retirement

Post by Leesbro63 »

I just posted this on my “Never Ever Rebalance Into Stocks” thread:

What you're talking about is basically "buckets". This has been discussed here many times. The bottom line is that it's just mental accounting for a lower overall equity allocation.

Say your overall nest egg has portfolio #1 that's 30% I-Bonds, TIPS, CDs and other safe income that covers for up to 20 years. Portfolio 2 is 60/40. You're just fooling yourself because what you really have is one portfolio that's 42% stock and 58% Equity. Call it 40/60. It's just a head game. Why play a game like that? Just be honest with yourself and use the less aggressive 40/60 portfolio.
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Leif
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Re: Buckets in Retirement

Post by Leif »

dbr wrote: Thu Sep 24, 2020 10:54 am Right. The point being that it differs from a rebalanced constant asset allocation by incorporating a scheme to vary the asset allocation. Proving that this has benefit is a tall order.
I see it as a framework for your investments. Giving it categories that you can fill with investments that meets your needs. A methodology for a beginner and not necessarily so important for someone with 1000+ posts here (i.e., investment nerds).
radiowave
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Re: Buckets in Retirement

Post by radiowave »

Leif wrote: Thu Sep 24, 2020 10:48 am I'm retired and don't use buckets. However, I can see a few points in their use. You can find more info from Christine Benz at www.morningsar.com. She is the director of personal finance. She advocates the use of buckets. She even has some sample portfolios. She does have a version using Vanguard funds. Also savers and retirees.

1. A way on determining a possible asset allocation. She suggestions 2 years of cash withdrawals in retirement , 8 years of bonds, and the rest in stocks. So if you need a 4% withdrawal rate then that gives you 8% cash, 32% bonds, and 60% stocks. That needs to be adjusted for your need, willingness, and ability to take risk.

2. The 2 years cash buffer is to allow you to sleep when the market is doing it's volatility thing. The 2+8=10 years is based on the length of time you might find the market down relative to fixed income. The method also describes how transactions can be used to rebalance when stocks or bonds are preforming better.

To find out more see the link below.

Model Portfolios for Savers and Retirees

First link is behind a paywall, the second wants me to register for something . . .
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page
Broken Man 1999
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Re: Buckets in Retirement

Post by Broken Man 1999 »

Our retirement portfolio consists of bonds/index bond funds and equity index ETFs/individual equities.

I suppose in the broadest sense our portfolio could be said to have two buckets. I don't think of our portfolio in terms of buckets, since I only have two things (buckets) to draw from, and to rebalance into/out of.

Honestly, I am way too lazy to have to do any more required bucketing if I add another bucket. So, I don't.

To have to consider another bucket being emptied/refilled seems more complex than necessary.

Now, if folks find the bucket strategy works, good for them. We do call this subject personal finance, so the tent is large enough for all, no matter the number of buckets used.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
rich126
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Re: Buckets in Retirement

Post by rich126 »

I'm not retired yet and while all your money is one big bucket regardless how you think about it, I think the bucket concept does make it easier for some people. In some cases people are more likely to leave money alone and not mess with asset allocations. For example my TSP account I haven't touched in several years. I can't say that about my brokerage account or even my Vanguard account.

Whether I do this or not I don't know but I've been thinking along the lines of:

(just making up round numbers as an example)
1. Core account, $1M, 4% SWR
2. Emergency medical account, $150K, only use in extreme medical event
3. Shortfall account, $150K, only use if the core account takes a huge hit
4. Bridge account, $200K to cover from retirement date to whenever we decide to collect social security, for this exercise assume retired at 62 collect social security at 67 so this provides $40K a year.

Total: $1.5M

Obviously there is no need to actually do this, but at a minimum it gives me something to think about. The core account would have some kind of standard allocation while the other accounts would be mostly/all CDs/MYGAs or a small equity allocation in them.

I do think for many people it is easier for them to withdraw from a fixed income account than from a core account in a down market year. As mentioned above I'm not retired but unless you have a good pension and more savings than you really need, withdrawing 4% from an account when it has dropped 10% or more in a year can be mentally tough (especially if the drop happens shortly after you retired).
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GerryL
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Re: Buckets in Retirement

Post by GerryL »

I looked at the bucket approach as a way to simplify money management in retirement. But then I realized that after setting up the buckets I would still have to manage moving funds to keep the buckets at the appropriate level. Found it more confusing than clarifying.

If I have ended up with any "buckets," it's cash and everything else. I probably keep more in cash than many, but as my cash stash grows (from dividends and RMDs), I move excess into a balanced mutual fund in my taxable account, thereby increasing the next round of dividends.

I have simplified money management in retirement by 1) knowing how much I am "allowed" to spend in a year and then 2) keeping track of expenditures.
dbr
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Re: Buckets in Retirement

Post by dbr »

GerryL wrote: Thu Sep 24, 2020 12:26 pm I looked at the bucket approach as a way to simplify money management in retirement. But then I realized that after setting up the buckets I would still have to manage moving funds to keep the buckets at the appropriate level. Found it more confusing than clarifying.

It does seem hard to imagine how buckets simplify money management. It might be buckets simplify the organization of fear for some investors.

If I have ended up with any "buckets," it's cash and everything else. I probably keep more in cash than many, but as my cash stash grows (from dividends and RMDs), I move excess into a balanced mutual fund in my taxable account, thereby increasing the next round of dividends.


Be careful about that one. You already reduced your next round of dividends by taking dividends or RMDs in cash. You are just restoring what you had with some delay in time while you held too much cash. Not that the difference is all that big.


I have simplified money management in retirement by 1) knowing how much I am "allowed" to spend in a year and then 2) keeping track of expenditures.

Right. It really is not that hard. Also one is allowed large excursions in either direction as long as it averages out.
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Leif
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Re: Buckets in Retirement

Post by Leif »

radiowave wrote: Thu Sep 24, 2020 11:08 am
Leif wrote: Thu Sep 24, 2020 10:48 am I'm retired and don't use buckets. However, I can see a few points in their use. You can find more info from Christine Benz at www.morningsar.com. She is the director of personal finance. She advocates the use of buckets. She even has some sample portfolios. She does have a version using Vanguard funds. Also savers and retirees.

1. A way on determining a possible asset allocation. She suggestions 2 years of cash withdrawals in retirement , 8 years of bonds, and the rest in stocks. So if you need a 4% withdrawal rate then that gives you 8% cash, 32% bonds, and 60% stocks. That needs to be adjusted for your need, willingness, and ability to take risk.

2. The 2 years cash buffer is to allow you to sleep when the market is doing it's volatility thing. The 2+8=10 years is based on the length of time you might find the market down relative to fixed income. The method also describes how transactions can be used to rebalance when stocks or bonds are preforming better.

To find out more see the link below.

Model Portfolios for Savers and Retirees

First link is behind a paywall, the second wants me to register for something . . .
Try https://www.morningstar.com. Must be the "https://" oddly enough. In fact, in the post, I just typed the www address and the forum software automatically changed it to a link.

Some stuff on morningstar requires a free registration. Could be the case with the Model Portfolios.
nguy44
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Re: Buckets in Retirement

Post by nguy44 »

GerryL wrote: Thu Sep 24, 2020 12:26 pm If I have ended up with any "buckets," it's cash and everything else. I probably keep more in cash than many, but as my cash stash grows (from dividends and RMDs), I move excess into a balanced mutual fund in my taxable account, thereby increasing the next round of dividends.

I have simplified money management in retirement by 1) knowing how much I am "allowed" to spend in a year and then 2) keeping track of expenditures.
I agree with this and take the same approach. Our cash position is to cover the difference between our retirement income(my pension, wife SS) for 5-7 years. We track our monthly cash flow against that. All else is just stock/bond investments what so far we only touch when rebalancing is needed or if we choose to reward ourselves for whatever reason.
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GerryL
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Re: Buckets in Retirement

Post by GerryL »

dbr wrote: Thu Sep 24, 2020 12:34 pm
GerryL wrote: Thu Sep 24, 2020 12:26 pm I looked at the bucket approach as a way to simplify money management in retirement. But then I realized that after setting up the buckets I would still have to manage moving funds to keep the buckets at the appropriate level. Found it more confusing than clarifying.

It does seem hard to imagine how buckets simplify money management. It might be buckets simplify the organization of fear for some investors.

If I have ended up with any "buckets," it's cash and everything else. I probably keep more in cash than many, but as my cash stash grows (from dividends and RMDs), I move excess into a balanced mutual fund in my taxable account, thereby increasing the next round of dividends.


Be careful about that one. You already reduced your next round of dividends by taking dividends or RMDs in cash. You are just restoring what you had with some delay in time while you held too much cash. Not that the difference is all that big.

This is opposed to spending it or leaving it in a low-interest cash account. Just trying to leverage the higher earnings available.

I have simplified money management in retirement by 1) knowing how much I am "allowed" to spend in a year and then 2) keeping track of expenditures.

Right. It really is not that hard. Also one is allowed large excursions in either direction as long as it averages out.
I keep a running tab on my under spend so I will be ready for a "large excursion" down the line somewhere. This year the underspend will be significant given lack of travel.
Leesbro63
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Re: Buckets in Retirement

Post by Leesbro63 »

GerryL wrote: Thu Sep 24, 2020 2:31 pm
If I have ended up with any "buckets," it's cash and everything else. I probably keep more in cash than many, but as my cash stash grows (from dividends and RMDs), I move excess into a balanced mutual fund in my taxable account, thereby increasing the next round of dividends.
Isn't a balanced mutual fund generally 60/40? So all you're doing is changing your asset allocation by converting that excess cash to 60% equity? Again, the "bucket" thing is just a mental game. It's more self-honest if you just have a lower stock/bond allocation to begin with and not fool yourself into the bucket façade.
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9mm
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Re: Buckets in Retirement

Post by 9mm »

bpkasl wrote: Thu Sep 24, 2020 9:15 am Curious how many active retirees on this site use the three bucket approach during retirement for short term cash needs, medium term and longer term growth? Would be interested in the Vanguard funds used in each of the three buckets
I recommend this thoughtful debunking of the bucket strategy and its supposed value: https://earlyretirementnow.com/2019/10/ ... more-41937
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Re: Buckets in Retirement

Post by texasdiver »

The "bucket" thing seems to me to simply be a metal exercise to justify to yourself why you will be holding equities in a portfolio that you will be withdrawing from.

My retired parents essentially have three buckets.

They have their retirement portfolio which is invested roughly 50/50 and from which their minimum required distributions are paid into their checking.

They have their interest-bearing checking account from which they spend money and into which their social security and pension checks are deposited.

They have some sort of interest-bearing savings account where they save the surplus since their minimum IRA distributions and social security are about double what they actually need.

Basically they live like they always have and have a growing savings balance that they tap into for travel and family vacations and such. If it gets too large they will likely need to figure out some way to invest it. But they always seem to figure out some way to use enough of it to keep it from getting too enormous.
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celia
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Re: Buckets in Retirement

Post by celia »

helloeveryone wrote: Thu Sep 24, 2020 10:10 am Congrats! A lot of us aspire to be you and try to stay on track through this forum!
No, you don’t really want to be me, if you’ve read a lot of my posts :) . I’m trustee for family trusts and looking out on behalf of several relatives. I’m retired but busier with several things I can’t control than when I was working and raising kids! I have about 25 accounts at various places I need to track.

Bogleheads is my entertainment escape.
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jjunk
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Re: Buckets in Retirement

Post by jjunk »

I'm not retired yet but am planning to in the next 2-5yrs. We're in the process of building a cash "bucket" mostly because we plan to use the ACA for insurance and it is gated on MAGI. Having a few years of expenses in cash allows us to better control MAGI, staves off a portion of sequence risk and also will help us sleep at night as we enter the next phase of life.

I understand why others call this mental accounting but for myself, its actually a tactical thing to control my MAGI first and foremost. It just happens to have a few other benefits as well.
RetiredCSProf
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Re: Buckets in Retirement

Post by RetiredCSProf »

I have been retired for eight years and have five buckets:
1) monthly income from SS and pension, which covers my basic needs ("bucketed" by my budget)
2) taxable savings for "big purchases"
3) a narrow ladder of EE savings bonds, which are maturing over the next 20 years
4) investments in rollover IRAs -- I withdraw at most the RMD plus Roth conversions
5) Roth IRAs -- for legacy

I have considered setting up buckets within the rollover IRAs to plan for future RMDs; however, I have not yet formulated a plan that makes sense for the long term.
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celia
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Re: Buckets in Retirement

Post by celia »

bpkasl wrote: Thu Sep 24, 2020 9:15 am Curious how many active retirees on this site use the three bucket approach during retirement for short term cash needs, medium term and longer term growth? Would be interested in the Vanguard funds used in each of the three buckets
I have no idea how you would balance buckets for short, medium, long term needs with owning taxable, tax-deferred, and Roth accounts. Seems the tax implications of the various accounts is more important than the mental accounting of using ‘buckets’, unless it is just the taxable that is thought of as being in buckets.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Wrench
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Re: Buckets in Retirement

Post by Wrench »

bpkasl wrote: Thu Sep 24, 2020 9:15 am Curious how many active retirees on this site use the three bucket approach during retirement for short term cash needs, medium term and longer term growth? Would be interested in the Vanguard funds used in each of the three buckets
I'm not retired, but will be within a year or two. I view my investments in a couple ways. One is more globally - the "10,000 foot view" where I want to know and fix my asset allocation appropriately once or twice a year. The other is an "on the ground" view which tells me where my money is coming from month to month. To me "buckets" fall in this latter category. They are an easy way to categorize where my money is, and where I expect my primary income to come from. I have an "income bucket" that has two annuities in it, one pays 4% guaranteed interest, the other is an SPIA that will pay 5% inflation adjusted. These, together with Social Security, will provide income for my DW and I to live comfortably day to day. I will "draw" on them, but not otherwise adjust them. I count these annuities as part of my bond allocation since they act like bonds, producing income every month. The rest of my portfolio provides potential growth and I can live with higher risk because I don't need the money day to day. We may use that money for "special projects" like house renovations, or new cars, or a fancy one-time vacation, but otherwise will leave it alone. With this approach I feel more comfortable making higher risk/higher reward investments, for example higher stock allocation, in this non-income "bucket" than I might otherwise. Is it mental gymnastics? Maybe. Who cares? It works for me and gives me the opportunity to grow my wealth AND allows me to sleep well at night knowing that I will have an inflation adjusted income that meets our needs for the rest of our lives, independent of market ups and downs. It's also very easy to explain to my loved ones, and/or financial advisors I talk with from time to time. Everybody gets it right away. No need to explain, "oh, I'm using a withdrawal rate of 4%" (or whatever other approach) and trying to explain what that is and how it works, especially when they may be less financially inclined than your average BH.
suemarkp
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Re: Buckets in Retirement

Post by suemarkp »

My bucketing ideas have more to do with where things are and liquidity (similar to what Wrench just posted). Money that is available instantly (via cash machine or a trip to a bank teller) is one bucket. The next are the 3 to 5 day liquidity buckets (401Ks, IRAs, Brokerage account). I have sub buckets because of multiple 401Ks, multiple IRAs, and they have different investment choices so I'd like to keep them where they are and not roll them all up to a common place, or I may want to draw from the Roth last so it is logically separated. I have physical precious metals which is yet another bucket and hopefully won't be touched.

Asset allocation transcends all of these and it does make it harder to calculate. The income streams that turn on at different times complicate this as well (2 pensions, 2 social securities).

What I haven't determined is whether I really need an emergency fund in retirement. Prior to retirement, that was to cover job loss or some unanticipated large expense. Job loss is moot with retirement, but what if my pension check didn't come or I can't access my 401K site? How much money do I need to overcome an income stream delay and what are the odds of that happening? I also don't want to pull from retirement accounts every month, maybe quarterly. So I'm sizing my most liquid cash bucket to be 6 months of spending. That will allow many months between 401K distributions, and provide a decent cushion if an income stream item mysteriously stops.
Mark | Kent, WA
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GerryL
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Re: Buckets in Retirement

Post by GerryL »

Leesbro63 wrote: Thu Sep 24, 2020 2:41 pm
GerryL wrote: Thu Sep 24, 2020 2:31 pm
If I have ended up with any "buckets," it's cash and everything else. I probably keep more in cash than many, but as my cash stash grows (from dividends and RMDs), I move excess into a balanced mutual fund in my taxable account, thereby increasing the next round of dividends.
Isn't a balanced mutual fund generally 60/40? So all you're doing is changing your asset allocation by converting that excess cash to 60% equity? Again, the "bucket" thing is just a mental game. It's more self-honest if you just have a lower stock/bond allocation to begin with and not fool yourself into the bucket façade.
I don't count my cash "bucket" as part of my portfolio. In the big picture, it is usually only a little more than a rounding error, anyway. Not even enough to prompt rebalancing.
Dollars that are in the credit union or online bank, are no longer in my AA calculation. So, when I invest some of those $$ in my balanced fund, I am adding to my portfolio in a 60/40 proportion, which matches the AA in my retirement accounts.

Some people will call this "mental accounting" just as they call the Bucket Method mental accounting. Isn't it all mental accounting? We look for ways to manage cash flow that works for our circumstances and temperament.
roth evangelist
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Re: Buckets in Retirement

Post by roth evangelist »

Doesn't everyone use a bucket approach? Most people have multiple buckets: pret-tax, Roth, taxable, cash. And most people keep their more aggressive investments in a Roth, their bonds in pre-tax accounts, and the most tax efficient assets (TSM/S&P500, munis) in a taxable account. Unless the bucket approach refers to something more specific than just having buckets and using each of them accordingly.

I'm far off from retirement (more than 30 years before tapping into traditional retirement accounts), but here's how I plan to use my buckets in retirement:

401(k)/tIRA: Primary source of income to cover joint living expenses. (60/40, then 30/70 eventually)
Roth IRAs: My wife and I's personal allowance funds. (80/20)
HSA: All medical expenses. (Probably 60/40)
Taxable account: Whatever is left here in 100% municipal bonds.
Cash: Probably 1 to 2 years of living expenses to be used and refilled from time to time.
radiowave
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Re: Buckets in Retirement

Post by radiowave »

Leif wrote: Thu Sep 24, 2020 2:10 pm
radiowave wrote: Thu Sep 24, 2020 11:08 am
Leif wrote: Thu Sep 24, 2020 10:48 am I'm retired and don't use buckets. However, I can see a few points in their use. You can find more info from Christine Benz at www.morningsar.com. She is the director of personal finance. She advocates the use of buckets. She even has some sample portfolios. She does have a version using Vanguard funds. Also savers and retirees.

1. A way on determining a possible asset allocation. She suggestions 2 years of cash withdrawals in retirement , 8 years of bonds, and the rest in stocks. So if you need a 4% withdrawal rate then that gives you 8% cash, 32% bonds, and 60% stocks. That needs to be adjusted for your need, willingness, and ability to take risk.

2. The 2 years cash buffer is to allow you to sleep when the market is doing it's volatility thing. The 2+8=10 years is based on the length of time you might find the market down relative to fixed income. The method also describes how transactions can be used to rebalance when stocks or bonds are preforming better.

To find out more see the link below.

Model Portfolios for Savers and Retirees

First link is behind a paywall, the second wants me to register for something . . .
Try https://www.morningstar.com. Must be the "https://" oddly enough. In fact, in the post, I just typed the www address and the forum software automatically changed it to a link.

Some stuff on morningstar requires a free registration. Could be the case with the Model Portfolios.
All I get is a JP Morgan advertisement? Gotta get an ad blocker one of these days. . .
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WoodSpinner
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Re: Buckets in Retirement

Post by WoodSpinner »

OP,

I am using a LMP/buckets approach and find it pretty easy to manage. The key from my experience is to have a model of your Cashflow needs through retirement. Another plus is to have sufficient assets and income streams to support retirement with plenty of leeway. In my case, the LMP is about 1/3 of the entire portfolio.

Here is a quick overview of how I manage things. In my case, I need to fund the Cashflow for the period from now till SS begins. After that, I should be able to manage the Cashflow from SS and Pensions.

I overlay an overall target AA (60/40) in my case over the entire portfolio. The LMP portion is always fully funded. Rebalancing from Equities to Bonds only occurs within the Growth Portfolio. In a very bad downturn, this will morph the Growth Portfolio to being solely equities since the Intermediate Treasuries in that portion will be sold for rebalancing.

This assures me that I will always have 10 years of expenses in Safe Assets which should be plenty of stability. It also means my AA may dip below 60% equities since there are no other bond funds available for rebalancing.

I like this approach since it gives me some confidence that I will have funds for my Retirement while still owning equities for long term growth, unexpected expenses and as an inflation hedge. It’s a structure that I can understand and explain. The LMP is emptied (or increased) on a yearly cycle (Along with any Rebalancing) based on my expected expenses and income projections.


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ginstwin
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Re: Buckets in Retirement

Post by ginstwin »

WoodSpinner- Thanks for the excellent explanation. To keep the buckets fully funded 0-10 years do you transfer funds annually from your long term growth bucket?
helloeveryone
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Re: Buckets in Retirement

Post by helloeveryone »

celia wrote: Thu Sep 24, 2020 3:23 pm
helloeveryone wrote: Thu Sep 24, 2020 10:10 am Congrats! A lot of us aspire to be you and try to stay on track through this forum!
No, you don’t really want to be me, if you’ve read a lot of my posts :) . I’m trustee for family trusts and looking out on behalf of several relatives. I’m retired but busier with several things I can’t control than when I was working and raising kids! I have about 25 accounts at various places I need to track.

Bogleheads is my entertainment escape.

Oopsies, sounds you like have a few full time jobs in retirement. Okay I take it back....
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Re: Buckets in Retirement

Post by Dandy »

I roughly follow Dr. Wm Bernstein's idea of having X years worth of drawdown dollars in "safe" products. For me I decided to have enough "safe" assets to fund retirement to age 90 -- I'm 72. "Safe" to me is FDIC products, money markets and short term bond funds.

I withdraw from a combination of "safe" and "risk" assets unless equities have a bad year. This tends to result in my "safe" assets being more than needed. When that happens I spend, gift or rebalance. My overall allocation is 45/55. I've done this for about 4 years and it has worked well and I sleep well.

I found retirement changed my outlook on investing and risk. I realized that the reason I could tolerate risk had a lot to do with my salary and bonus income and less to do with being comfortable with investment theory. It was sobering to realize that I might have to fund 30 years or more in retirement without really any earnings prospects. Eventually, pension and SS at age 70 has provided enough income for us to take a lot more risk -- but I don't have the need to do it--thankfully.
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WoodSpinner
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Re: Buckets in Retirement

Post by WoodSpinner »

ginstwin wrote: Thu Sep 24, 2020 9:55 pm WoodSpinner- Thanks for the excellent explanation. To keep the buckets fully funded 0-10 years do you transfer funds annually from your long term growth bucket?
Only if needed due to a revision in my cash flow model.
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ruralavalon
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Re: Buckets in Retirement

Post by ruralavalon »

bpkasl wrote: Thu Sep 24, 2020 9:15 am Curious how many active retirees on this site use the three bucket approach during retirement for short term cash needs, medium term and longer term growth? Would be interested in the Vanguard funds used in each of the three buckets
Just one big "bucket" for us, with no cash allocation. I think buckets are an unnecessary complication.

Our spending needs are covered by a combination of Social Security and Required Minimum Distributions (RMDs) taken automatically every month proportionally from each fund in my rollover IRA, with direct deposit to our joint checking account.
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Re: Buckets in Retirement

Post by suemarkp »

I guess age is going to be a factor too. I plan to retire next year at 59. That's 35+ years of spending I need to plan for, I have a lot of buckets, and only one income stream. Once I reach 70 and have all the income streams flowing, I won't need the money to last as long and I should have enough that I could just put it under the mattress and spend the principal as needed until I die. If I can do that, then I'd probably just put it all in one big bucket.
Mark | Kent, WA
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Re: Buckets in Retirement

Post by dbr »

suemarkp wrote: Fri Sep 25, 2020 12:05 pm I guess age is going to be a factor too. I plan to retire next year at 59. That's 35+ years of spending I need to plan for, I have a lot of buckets, and only one income stream. Once I reach 70 and have all the income streams flowing, I won't need the money to last as long and I should have enough that I could just put it under the mattress and spend the principal as needed until I die. If I can do that, then I'd probably just put it all in one big bucket.
If the amount of money you need to spend between 60 and 70 is a significant fraction of your assets then it makes sense to set aside a less risky bucket of money to fund that time span. That is also mathematically equivalent to adopting a less risky asset allocation that drifts to a more risky asset allocation as the period in question is traversed. The result would be managing the severe consequences of a large downturn in risk investments at a cost in less harmfully reducing the benefit should there be an upturn in the market during this time. It is not necessarily simple to lay out a picture of the entire range of possibilities in order to assess how harmful hypothetical extremes in different directions might actually turn out to be. Modelling retirement spending under scenarios of variable asset allocation is complicated. It is also an enterprise in which significant differences are hard to observe because asset allocation does not have a large effect on portfolio performance under withdrawals. The two factors that offset to produce a kind of homeostasis are that more risky portfolios are more subject to wide effects from sequence of return variation but less risky portfolios are more subject to bad outcomes from inadequate return.
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Leif
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Re: Buckets in Retirement

Post by Leif »

radiowave wrote: Thu Sep 24, 2020 8:12 pm
Leif wrote: Thu Sep 24, 2020 2:10 pm Try https://www.morningstar.com. Must be the "https://" oddly enough. In fact, in the post, I just typed the www address and the forum software automatically changed it to a link.

Some stuff on morningstar requires a free registration. Could be the case with the Model Portfolios.
All I get is a JP Morgan advertisement? Gotta get an ad blocker one of these days. . .
Just click on "continue to site" link in the upper right corner. Yes, it is annoying. But the site is worth it, IMO.
soccerbogle
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Re: Buckets in Retirement

Post by soccerbogle »

I will use buckets to determine my starting asset allocation. Start with [example #s] 2x expenses in cash and 8x expenses in bonds = 10x expenses in FI. Then if the rest of my money is another 10x, I am at 50/50. Then I take out money as per the asset allocation. So if stocks are up, I take from stocks. If stocks are down, I take from FI.

One issue is that if I want 10x expenses in FI, and stock crashes by 50% the first year, then I spend 1x FI, I now only have 9x FI left in my portfolio. To get back to 10x, I would have to sell stocks, which I would be selling at the bottom, which is bad. So I think the way I would have to account for this, would be to start with a higher percentage of FI, if keeping an FI floor was more important than potential growth. Basically I accept that my years of FI money COULD end up lower than I started with and choose a starting allocation accordingly.

Adjust asset allocation as need / risk / desires change (eg when I start to collect social security I will need less each year from my portfolio, at which point I could either make it more conservative b/c I need less, or more aggressive, b/c I need less... heh)
suemarkp
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Re: Buckets in Retirement

Post by suemarkp »

You could allow a "sliding window" in your 10 years of fixed income allowing it to go down to say 5X during downturns. This gives you 5 years to hope for recovery and start building it back up.
Mark | Kent, WA
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Sandi_k
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Re: Buckets in Retirement

Post by Sandi_k »

I have two buckets: the "spend" bucket for the first 5 years, and the "investment" bucket for the longer term.

I have set aside cash/TIPS for 5 years (age 60-65) in a spend bucket of $40k per year. In year 6, the mortgage is paid off, so that becomes our "spend" cash flow, with no need for a bucket any longer.

Spend bucket - $200k
Investment bucket - $1.1M (estimated), at 80/20 now.

Once that $200k is drawn down, we plan to rest at 65/35% pretty much permanently.
Leesbro63
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Re: Buckets in Retirement

Post by Leesbro63 »

Dandy wrote: Fri Sep 25, 2020 7:13 am I roughly follow Dr. Wm Bernstein's idea of having X years worth of drawdown dollars in "safe" products. For me I decided to have enough "safe" assets to fund retirement to age 90 -- I'm 72. "Safe" to me is FDIC products, money markets and short term bond funds.

I withdraw from a combination of "safe" and "risk" assets unless equities have a bad year. This tends to result in my "safe" assets being more than needed. When that happens I spend, gift or rebalance. My overall allocation is 45/55. I've done this for about 4 years and it has worked well and I sleep well.

I found retirement changed my outlook on investing and risk. I realized that the reason I could tolerate risk had a lot to do with my salary and bonus income and less to do with being comfortable with investment theory. It was sobering to realize that I might have to fund 30 years or more in retirement without really any earnings prospects. Eventually, pension and SS at age 70 has provided enough income for us to take a lot more risk -- but I don't have the need to do it--thankfully.
What if we have the not-so-uncommon-after-big-debt-runup scenario like we had after WW1, after WW2 and after Vietnam: Where you get something like 50% total inflation in 5 years and fixed income stays near zero? (or, during and after Vietnam, not zero but way below inflation)? How do those "safe" products hold up then? Even TIPS will have the big problem of "taxflation" as their ability to keep up with inflation loses some to taxes on those phantom gains?
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