The “Bucket Strategy” is ineffective (ERN)

[TinyHouse]

Well, Karsten and Fritz have been at it again. From where I sit, Karsten/ERN is correct, and the bucket strategy is pretty much useless and overly complex and doesn’t live up to its promises of shielding from SORR. I recommend actually reading the arguments before responding, it’s pretty well laid out. What do you think?

https://earlyretirementnow.com/2023/01/ ... s-part-55/

[billthecat]

I'm just once again thankful for Safari's reader view to present the article as it should be without all the ads and page clutter.

[sailaway]

I thought we already knew this? Seems a handful of posters here have been pointing this out for awhile. The bucket strategy is more about coming up with an illusion of safety in a way that makes intuitive sense to some people.

And I am 100% onboard with it being a bizarrely complex method, but illusions often work that way.

[mtwhmemn]

I'm just once again thankful for Safari's reader view to present the article as it should be without all the ads and page clutter.

Thanks for the reminder I can use Safari's reader view. (I use Chrome on my Mac for better and worse, ha!)

[retiringwhen]

I am kind of lost in the post as I don't understand just what he is calling a Strategic Asset Allocation (SAA) approach. Is that basically a fixed AA or is he employing one of the glidepaths or dynamic allocation schemes he has discussed? Lingo is getting in the way.

[TinyHouse]

I am kind of lost in the post as I don't understand just what he is calling a Strategic Asset Allocation (SAA) approach. Is that basically a fixed AA or is he employing one of the glidepaths or dynamic allocation schemes he has discussed? Lingo is getting in the way.

Read his previous article on the subject that he links to pretty early in this post

[nisiprius]

I'll just make a mental note that what I've thought for years has been confirmed.

The basic problem with bucket strategies, I think, is the idea of "a cash reserve big enough to ride through a bear market without needing to sell stocks." The problem is that there is no limit on the length of a bear market, and the statistics have the kind of "long tail" that makes near-guarantees impossible.

A second problem is that any statistics you see on the "average length of a bear market" are suspect because of two very important historic periods--1929-1944 and 2000-2013. Either of them can be scored either as one long bear market or two shorter bear markets back-to-back, and in both cases there was a moment in the middle that is either "just barely a recovery" or "not quite a recovery." But for most purposes, e.g. draining a cash bucket, two 7-year bear markets back-to-back are not much better than a 14-year bear market. The point is that within the last century we've had two periods, of 16 and 14 years, which would have been challenging to a cash bucket. The experience of Japan shows that 16 years isn't any limit, either.

So the problem is how big to make the cash bucket. And by the time it gets big enough to actually ride through a long bear market, it is big enough to create a really serious cash drag on the portfolio as a whole.

The next problem, which few discussions of bucket strategies address, is what, exactly, you are supposed to do if the cash bucket becomes empty. It has been sized so that the presenter argues that it is big enough, period. It's assumed and that the bear market will end before the bucket is empty, and you can top it up again it from a stock bucket that is back to normal. In reality, if you run out of cash and the stock market is still down, out of cash in a down market is not a good place to be.

So the use of a cash bucket is better if the bear market is short enough, and worse if it is too long, and it is just yet another risk-balancing exercise. Worse yet, it is probably a "negative skew" situation, frequently better, but much worse at the rare times when the bucket does get emptied.

The problem is the idea of a free lunch, that the bucket strategy magically transformed a simple strategy into one that is Just Plain Better. All withdrawal strategies are trying to create a low-risk income stream silk purse from a high-risk stock portfolio sow's ear, and there isn't any way to just make the risk go away.

I have also been influenced by the analyses of (I fear, the late?) Bob90245, who once posted often in this forum, and once maintained a website on withdrawal strategies, and concluded that bucket strategies were just a complicated way of implementing a "bonds first" strategy.

And I have also been influenced by the fact that the most prominent exponent of bucket strategies, Ray Lucia, author of Buckets of Money, turned out to have been a fraud who, in 2013, was unable to show the SEC documentation of his supposed backtesting, and was stripped of his advisor's registration and barred from any association with advisory firms.

[nisiprius]

I am kind of lost in the post as I don't understand just what he is calling a Strategic Asset Allocation (SAA) approach. Is that basically a fixed AA or is he employing one of the glidepaths or dynamic allocation schemes he has discussed? Lingo is getting in the way.

I feel sure that he has a strategy which (he says) is Just Plain Better than either a bucket strategy or just drawing down the whole portfolio evenly.

[dcabler]

Yeah, this one has been discussed many times on the forum, to pretty much the same conclusion. It's been a while though..

I always that that its appeal had more to do with helping people who are afraid that they may make behavioral errors more than anything that could in any way be considered "optimal" (whatever that means)....

Cheers

[cheezit]

Here's some food for thought - how do we square this particular circle:

A) Bucket Strategies are Bad
B) Emergency Funds are Good

but

C) Emergency Funds are obviously a Bucket Strategy




We can fix this by falsifying A or falsifying B, or by engaging in some sophistry to falsify C. Eg. "emergency funds don't count as a bucket strategy because they are meant to ride out a different type of problem (eg. unemployment during the intended-to-be-accumulation stage) without drawing down stocks in a bear market, whereas cash buckets are meant to ride out the bear market itself without drawing down stocks".

[dbr]

The problem is the idea of a free lunch, that the bucket strategy magically transformed a simple strategy into one that is Just Plain Better. All withdrawal strategies are trying to create a low-risk income stream silk purse from a high-risk stock portfolio sow's ear, and there isn't any way to just make the risk go away.

An obvious alternative is to liquidate high risk stocks to purchase one or more SPIAs or a long ladder of TIPS. A person could discuss what the risks are in those approaches and also the relative benefits. Those options are also more or less beneficial depending on whether interest rates are high or low at the time. The payout of a 30 year TIPS ladder ranges from 2.4% when real yields are -2% to 4.4% at real yield of +2%. The neutral point at 0% real yield is 3.3%. The point is that if security of income (pending inflation) is an issue it is not clear that a buckets plan is the first place to look. SPIA and TIPS ladder have the huge behavioral advantage of being certain in advance on their own terms and needing no management in and of themselves. These are intended to be a use for part the wealth and not all of it. You could say SPIA and/or TIPS ladder are the ultimate "bucket."

[canadianbacon]

A bucket strategy can save you from having to sell with the market 15% down in a year only to end up having to sell with the market down another 40% 2-3 years later (all numbers arbitrary for arguments sake).

That said I do personally favour spending more from fixed income in a down market, which normal market action will encourage anyway because usually (not so much last year) your FI drops less than your equities.

[Marseille07]

Well, Karsten and Fritz have been at it again. From where I sit, Karsten/ERN is correct, and the bucket strategy is pretty much useless and overly complex and doesn’t live up to its promises of shielding from SORR. I recommend actually reading the arguments before responding, it’s pretty well laid out. What do you think?

https://earlyretirementnow.com/2023/01/ ... s-part-55/

We all use buckets.

I think it's stupid to say "60/40" is not a bucket but "equities & 10 years expenses in safe assets" is.

[sailaway]

Here's some food for thought - how do we square this particular circle:

A) Bucket Strategies are Bad
B) Emergency Funds are Good

but

C) Emergency Funds are obviously a Bucket Strategy




We can fix this by falsifying A or falsifying B, or by engaging in some sophistry to falsify C. Eg. "emergency funds don't count as a bucket strategy because they are meant to ride out a different type of problem (eg. unemployment during the intended-to-be-accumulation stage) without drawing down stocks in a bear market, whereas cash buckets are meant to ride out the bear market itself without drawing down stocks".

What makes you think the "bucket strategies are bad" and the "my portfolio is my emergency fund" aren't the same people?

Many of us believe an emergency fund is important in order to start building a portfolio, so that you aren't constantly selling or using credit poorly before your portfolio has a chance to build momentum. But once you have built up your portfolio and it has seasoned for awhile (ie, once you are considering withdrawals) an emergency fund is less useful. So much so, that I include cash in accounts as part of my bond allocation when running my numbers, as the cash itself is just there to make cash flow simpler. Only cold hard cash and the value on my laundry card are left out and neither are enough to even register as a rounding error in my spreadsheet.

[frugalor]

I am not retired yet, but I feel the bucket strategy makes sense in retirement.

But I wonder if they treat treasuries as cash or as bonds? For me, they are cash because I can build a somewhat liquid flow with treasury ladder, and they won't lose nominal value like bond funds do.

If the safe buckets get depleted because of the 10+ year bear market, the other strategies would fare worse.

[drumboy256]

Here's some food for thought - how do we square this particular circle:

A) Bucket Strategies are Bad
B) Emergency Funds are Good

but

C) Emergency Funds are obviously a Bucket Strategy




We can fix this by falsifying A or falsifying B, or by engaging in some sophistry to falsify C. Eg. "emergency funds don't count as a bucket strategy because they are meant to ride out a different type of problem (eg. unemployment during the intended-to-be-accumulation stage) without drawing down stocks in a bear market, whereas cash buckets are meant to ride out the bear market itself without drawing down stocks".

I think it depends on the mental accounting of are you going up the hill (accumulation) or are you going down the hill (retirement)? I think the questions posed in the article are decent ones in terms of a strategy is needed for both, while at times, the same strategy that got you up the hill isn't as advantageous on getting you down the hill.

Either way, I think the point of the article is to ensure you do have a "strategy" regardless if you have one for now and one for later. The sticking point is that you understand what is at risk to you, hence, personal finance being "personal".

[Ben Mathew]

The problem is the idea of a free lunch, that the bucket strategy magically transformed a simple strategy into one that is Just Plain Better. All withdrawal strategies are trying to create a low-risk income stream silk purse from a high-risk stock portfolio sow's ear, and there isn't any way to just make the risk go away.

Well said.

In the end, it's the risk of the entire portfolio that matters, not the risk of various subportfolios. The risk of the portfolio is determined by the asset allocation of the entire portfolio. That's where the focus should be.

Bucket strategies increase risk during bad times. When there's an emergency, the idea is to start consuming from a 100% bond bucket and leave the risky portfolio alone. But that increases risk because you're consuming your bonds and leaving stocks alone. Is a personal emergency a good time to start taking on more risk? It would seem, no! But somehow when it's framed as a bucket strategy, people think it makes sense.

[the_wiki]

Really this just comes down to arguing about how much cash should be in your portfolio and when or if cash is better than bonds.

Where you hold or how you mentally or physically separate your portfolio is irrelevant when considering your total wealth and returns.

"Buckets" are just a personal finance organization tool.

[Marseille07]

Bucket strategies increase risk during bad times. When there's an emergency, the idea is to start consuming from a 100% bond bucket and leave the risky portfolio alone. But that increases risk because you're consuming your bonds and leaving stocks alone. Is a personal emergency a good time to start taking on more risk? It would seem, no! But somehow when it's framed as a bucket strategy, people think it makes sense.

No, it doesn't increase risk. Risk has already manifested as you start consuming bonds.

If spending down fixed income during a downturn increases risk, you can't stop selling equities at all.

[KlangFool]

I am not retired yet, but I feel the bucket strategy makes sense in retirement.

But I wonder if they treat treasuries as cash or as bonds? For me, they are cash because I can build a somewhat liquid flow with treasury ladder, and they won't lose nominal value like bond funds do.

If the safe buckets get depleted because of the 10+ year bear market, the other strategies would fare worse.

It is very simple.

If you can lose the nominal principal value of that investment, it is not cash.

KlangFool

[Kenkat]

I think they are talking about only one type of bucket strategy. For example, a liability matching portfolio approach might be considered a “bucket” strategy, but the money never flows out of one bucket and into the other. I am doing something similar with my retirement portfolio. I have what I think of as bucket 1, which will fund from now to age 70, invested mostly in TIPS and stable value, and then bucket 2, which I don’t need now or much at all, even at 70, so that is more equity heavy. I don’t plan for money to ever need to move between buckets for the most part. The plan is to burn down bucket 1 to zero by 70, but if there’s a little left or I fall short a bit, I can deal with that as well.

So to say “the bucket strategy” is ineffective is really saying a particular flavor of it is. Or strategies use terms such as “bucket”, but aren’t really “bucket strategies”.

[Edited to add]

In general, I think too many retirement strategies assume that a relatively fixed withdrawal amount, adjusted for inflation, will be needed throughout retirement, while the existence of social security makes that untrue. The planning assumption is invalid.

[KlangFool]

Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool

[Lawrence of Suburbia]

As additional fuel for palaver, here's Rob Berger's take on things (more understandable to simpletons like me). ERN articles give me a headache.

https://youtu.be/fNP62fSLg1U

[Marseille07]

Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool

The thing is, having 2 years outside of 60/40 means you actually have 50/50 (or whatever the resulting number might be). It's not a bad strategy but no silver bullet either.

[dbr]

For me a "buckets" plan is not just that one tabulates a division of assets into different categories but that one also has rules for how much is allocated to each category at any time and for how the allocation is managed, specifically where to take withdrawals and when to shift assets across buckets. The usual "portfolio theory" asset allocation is about equities and fixed income and has a rule to rebalance the allocation to a fixed target in time. The usual buckets plan involves a variable asset allocation across the buckets that depends on events in the market. Also "buckets" applies when one is withdrawing from the portfolio. I have never heard of a buckets scheme during accumulation. One does not say that one adds to cash to avoid buying stocks when they are high, I guess. The key question is whether or not varying the asset allocation by some rule is helpful compared to simply maintaining a fixed allocation within limits. Otherwise it is a fair comment that stocks and bonds are "buckets" as are stocks, bonds, and cash, as are small stocks, large stocks, value stocks, growth stocks, short bonds, TIPS, etc. etc. Also, I think something like a bond tent or a glide path is an "asset allocation" rule and not "buckets."

[AlwaysLearningMore]

As far as I know, perfection is for the next world.

I’m not aware of any financial schema, which can successfully address all financial catastrophes such as a 30 year bear market. Perhaps a 30 year TIPS ladder covering all essential expenses comes close.

However, a stable value fund (or TSP G fund) or a money market fund containing 2-5 years (perhaps 7-10 for a conservative investor?) of expenses not covered by guaranteed income will help the average investor weather many financial storms.

[nisiprius]

Here's some food for thought - how do we square this particular circle:

A) Bucket Strategies are Bad
B) Emergency Funds are Good

but

C) Emergency Funds are obviously a Bucket Strategy

We can fix this by falsifying A or falsifying B, or by engaging in some sophistry to falsify C. Eg. "emergency funds don't count as a bucket strategy because they are meant to ride out a different type of problem (eg. unemployment during the intended-to-be-accumulation stage) without drawing down stocks in a bear market, whereas cash buckets are meant to ride out the bear market itself without drawing down stocks".

I don't think that's sophistry at all. I think that's a good answer to the question.

The reason why I think the distinction is not "sophistry" that people discussing "bucket strategies" are generally discussing market history and statistics, not job loss or medical surprises or hurricanes, while discussions of "emergency funds" are not generally discussing market downturns.

We can "square the circle" another way, by being more careful to define what we mean by "good" and "bad."

"Bad" can mean

1) "lighting your money on fire," or "risking meaningful financial problems."

2) "kidding yourself," "adding complexity while for no real benefit," "letting a third party leech tolerable amounts of money from you, for no real benefit."

In the Bogleheads' forum we often use the word "bad" in the second sense. Using a bucket strategy, buying a fixed indexed annuity, buying actively managed mutual funds with expense ratios over 0.50% would be examples. They are not lighting your money on fire, and they are not risking serious financial problems.

[Ben Mathew]

Bucket strategies increase risk during bad times. When there's an emergency, the idea is to start consuming from a 100% bond bucket and leave the risky portfolio alone. But that increases risk because you're consuming your bonds and leaving stocks alone. Is a personal emergency a good time to start taking on more risk? It would seem, no! But somehow when it's framed as a bucket strategy, people think it makes sense.

No, it doesn't increase risk. Risk has already manifested as you start consuming bonds.

Risk that has manifested is not over and done with. It's not like there are ten bad things, and if one of them happens, there's only nine bad things left. If anything, the forward looking risk is higher because it just manifested.

Example:

Person A becomes unemployed in Jan 2022.
Person B is employed in Jan 2022.

Who is more likely to be unemployed in Feb 2022?
Obviously person A.

And yet the bucket strategy has person A enter Feb 2022 with a riskier asset allocation than person B.

The implicit assumption behind bucketing seems to be that there is a quota for risks and that once a risk manifests, future risk reduces. I don't think that's a good model of the risks that people typically face in real life. Getting unemployed does not reduce your risk of future unemployment. Getting into a car accident does not reduce your risk of future car accidents. Experiencing a stock market drawdown not reduce the risk of future stock market drawdowns. So asset allocation should not become riskier when bad things happen.

[Mike Scott]

How big is your bucket? Many potential problems disappear if you have a BIG bucket.

[Ben Mathew]

Here's some food for thought - how do we square this particular circle:

A) Bucket Strategies are Bad
B) Emergency Funds are Good

but

C) Emergency Funds are obviously a Bucket Strategy




We can fix this by falsifying A or falsifying B, or by engaging in some sophistry to falsify C. Eg. "emergency funds don't count as a bucket strategy because they are meant to ride out a different type of problem (eg. unemployment during the intended-to-be-accumulation stage) without drawing down stocks in a bear market, whereas cash buckets are meant to ride out the bear market itself without drawing down stocks".

I square it by rejecting (B). Emergency funds don't help. Savings are what matters. The asset allocation on total savings determines risk, not that fact that there's a special bucket labeled "emergency funds" holding bonds. Liquidity/accessibility of funds do matter, so for that purpose some funds may need to be held outside of a 401K. Roth IRA contributions can be accessed in case of emergency, so that can serve the purpose.

[retireIn2020]

I'm not sure why everyone thinks there has to be a "CASH" bucket in the bucket strategy, when one can get CD's MYGA's, and many have stable value funds that do not lose nominal value, all returning in the neighborhood of 3 to over 5% which is very equivalent to the long-term return of total bond funds.

[nisiprius]

...The implicit assumption behind bucketing seems to be that there is a quota for risks and that once a risk manifests, future risk reduces. I don't think that's a good model of the risks that people typically face in real life. Getting unemployed does not reduce your risk of future unemployment. Getting into a car accident does not reduce your risk of future car accidents. Experiencing a stock market drawdown not reduce the risk of future stock market drawdowns. So asset allocation should not become riskier when bad things happen...

The examples of 1929-1944 and 2000-2013 are relevant, because they show that two stock market crashes can occur back-to-back, with almost no pause for recuperation in between.

1937-1944 is particularly interesting because almost nobody knows about it. But it was a seven-or-eight-year decline with about a -50% drawdown, and about as serious for US stocks as 2008-2009. The likely reason people ignore it is that 1929-1936 happened first and was so much worse.

There's also a psychological component. My own experience is that going through 2000-2003 does not increase your risk tolerance; if anything, it decreases it. In particular, it is easy to believe your risk tolerance is higher than it is, and a stock market crash may result in a change in self-knowledge. So not only does a bucket strategy become riskier after bad things happen, it may also leave you with a higher-risk portfolio at a time when your risk tolerance has decreased.

[TinyHouse]

Well, Karsten and Fritz have been at it again. From where I sit, Karsten/ERN is correct, and the bucket strategy is pretty much useless and overly complex and doesn’t live up to its promises of shielding from SORR. I recommend actually reading the arguments before responding, it’s pretty well laid out. What do you think?

https://earlyretirementnow.com/2023/01/ ... s-part-55/

We all use buckets.

I think it's stupid to say "60/40" is not a bucket but "equities & 10 years expenses in safe assets" is.

Right, my whole portfolio is my emergency fund, my spending account, slush fund, etc.

It’s all one bucket, we all just have different allocations and types of accounts (roth, etc).

[KlangFool]

Folks,

Cash is very useful for

A) Tax management.

B) ACA subsidy

C) "Sleep Well At Night"

D) If the portfolio is big enough, the inefficiency does not matter.

Whoever is wring the article would not be paying my bills when the time comes.

KlangFool

The thing is, having 2 years outside of 60/40 means you actually have 50/50 (or whatever the resulting number might be). It's not a bad strategy but no silver bullet either.

I am not an obsessive optimizer. Money is just a tool to live my life. It is not an end goal by itself.

You only need one word to be happy: "enough".

KlangFool

[nisiprius]

...In general, I think too many retirement strategies assume that a relatively fixed withdrawal amount, adjusted for inflation, will be needed throughout retirement, while the existence of social security makes that untrue. The planning assumption is invalid...

Too many retirement strategies assume that expenses in retirement will be more predictable than they are. It's all averages. Averages are great for insurance companies and public policy, not very useful for individuals.

Ever since Blanchett published the article--I think it's just an article, not a peer-reviewed paper?--on the "Retirement Spending Smile," the whole world seems to have pounced on it to justify higher spending rates on the grounds that on the average retirement spending declines with age. (They ignore the fact that even on the face of the studies, it then increases again).

But even if it is valid, the "retirement spending smile" is an average of rare and unpredictable events. And "slowing down" doesn't mean reducing expenses. Maybe you aren't going to cross the Atlantic in a sailboat, as my daughter-in-law's dad plans to do--solo, no, sailboat, yes--but you need to buy stuff, like... new houses where everything important is all on one floor.

[Marseille07]

Right, my whole portfolio is my emergency fund, my spending account, slush fund, etc.

It’s all one bucket, we all just have different allocations and types of accounts (roth, etc).

It doesn't make a huge difference whether you keep 3-years expenses in EF or 10% of AA in EF. Just different ways of accounting.

[TinyHouse]

Right, my whole portfolio is my emergency fund, my spending account, slush fund, etc.

It’s all one bucket, we all just have different allocations and types of accounts (roth, etc).

It doesn't make a huge difference whether you keep 3-years expenses in EF or 10% of AA in EF. Just different ways of accounting.

Right, but it’s the bucket strategy people who think it’s something novel to have their asset allocation on display and think of their portfolio in chunks. It doesn’t necessarily protected from anything, it’s all psychological and perspective.

My emergency fund is in VTSAX and is nearly all of my portfolio. Same with my spending account.

[Marseille07]

Right, but it’s the bucket strategy people who think it’s something novel to have their asset allocation on display and think of their portfolio in chunks. It doesn’t necessarily protected from anything, it’s all psychological and perspective.

My emergency fund is in VTSAX and is nearly all of my portfolio. Same with my spending account.

Well ERN is distasteful because they're bashing the bucket strategy. If it doesn't make a huge difference, there isn't anything to bash either.

[secondopinion]

But even if it is valid, the "retirement spending smile" is an average of rare and unpredictable events. And "slowing down" doesn't mean reducing expenses. Maybe you aren't going to cross the Atlantic in a sailboat, as my daughter-in-law's dad plans to do--solo, no, sailboat, yes--but you need to buy stairlifts.

The chances are my retirement will be more expensive than my current spending; sadly, I think many of the very frugal individuals here (I being one) are likely to face that reality.

This means that the only true way to hedge this is to save more. That is easy for me; I just hope I can hold out for 20-30 years of working.

[Zanmar]

Fritz has many articles on many different things.
https://www.theretirementmanifesto.com/ ... -strategy/

Isn't his allocation a bucket strategy too?

Balanced Fund, Wellington, Wellesley, Target Dates, Slice and Dice, and so on... are all bucket strategies imo.

[KlangFool]

Right, my whole portfolio is my emergency fund, my spending account, slush fund, etc.

It’s all one bucket, we all just have different allocations and types of accounts (roth, etc).

It doesn't make a huge difference whether you keep 3-years expenses in EF or 10% of AA in EF. Just different ways of accounting.

Right, but it’s the bucket strategy people who think it’s something novel to have their asset allocation on display and think of their portfolio in chunks. It doesn’t necessarily protected from anything, it’s all psychological and perspective.

My emergency fund is in VTSAX and is nearly all of my portfolio. Same with my spending account.

Yes and no. Do you plan to rebalance away that "bucket" when the stock market drops 50% or 80%? If not, why do you keep it in your AA?

It is not psychological if you do not plan to rebalance. The "bucket" is real.

A question to you,

Are you going to rebalance away that 3 years of expense when the stock market drop 50%? How about 80%?

If the answer is no, you have a bucket. Pretending that it is in your AA does not change that.

There is a significant difference!

KlangFool

[nisiprius]

...Balanced Fund, Wellington, Wellesley... are all bucket strategies imo.

How are those three "bucket strategies" in any sense of the word? If you are drawing from any of these funds, you are always drawing on stocks and bonds in the same proportion as they are within the fund. If you are withdrawing from the Balanced Index Fund every $1,000 you withdraw is $600 in stocks, $400 in bonds, no matter if the stock market is up or down, and no matter what your age is.

[cbox]

I'll just make a mental note that what I've thought for years has been confirmed.

The basic problem with bucket strategies, I think, is the idea of "a cash reserve big enough to ride through a bear market without needing to sell stocks." The problem is that there is no limit on the length of a bear market, and the statistics have the kind of "long tail" that makes near-guarantees impossible.

Arguments such as this are specious because they suggest that if a defensive solution does not cover all possible scenarios, then it is not worth implementing.

That's incorrect. Put simply: something is better than nothing. If I have 2 years of cash reserves that allow me not to withdraw retirement funds during a bear market that lasts 5 years, well, then, that's better than having no cash reserves at all, isn't it?

[HenryG]

Well, Karsten and Fritz have been at it again. From where I sit, Karsten/ERN is correct, and the bucket strategy is pretty much useless and overly complex and doesn’t live up to its promises of shielding from SORR. I recommend actually reading the arguments before responding, it’s pretty well laid out. What do you think?

https://earlyretirementnow.com/2023/01/ ... s-part-55/

We all use buckets.

I think it's stupid to say "60/40" is not a bucket but "equities & 10 years expenses in safe assets" is.

Right, my whole portfolio is my emergency fund, my spending account, slush fund, etc.

It’s all one bucket, we all just have different allocations and types of accounts (roth, etc).

So you have different account/allocation buckets within one bucket. Got it.

[Zanmar]

...Balanced Fund, Wellington, Wellesley... are all bucket strategies imo.

How are those three "bucket strategies" in any sense of the word? If you are drawing from any of these funds, you are always drawing on stocks and bonds in the same proportion as they are within the fund. If you are withdrawing from the Balanced Index Fund every $1,000 you withdraw is $600 in stocks, $400 in bonds, no matter if the stock market is up or down, and no matter what your age is.

Funds are automatic rebalancing.
Buckets are manual rebalancing. Market Timing here?

[dbr]

Again, a "buckets strategy" is not about what categories assets are listed into but about how one manages across the assets. A standard rebalanced fixed allocation is not what most people have in mind for "buckets" nor is a preplanned glide path across assets.

It might be better to speak of a "pipeline" by which assets eventually spew out money to spend than to think of a set of containers. Buckets is organized around how manipulate holdings to get the money to spend. Asset allocation is organized around the risk and return of the portfolio, withdrawals being incidental.

At least that is the only feature that seems to distinguish a buckets plan specifically from what is otherwise thought of as an asset allocation. Note any variety of buckets containers or asset allocations can be reported from your assets as fast as you can create columns in a spreadsheet. Actually transacting over time various withdrawals from a portfolio and various exchanges among assets is real.

[dbr]

...Balanced Fund, Wellington, Wellesley... are all bucket strategies imo.

How are those three "bucket strategies" in any sense of the word? If you are drawing from any of these funds, you are always drawing on stocks and bonds in the same proportion as they are within the fund. If you are withdrawing from the Balanced Index Fund every $1,000 you withdraw is $600 in stocks, $400 in bonds, no matter if the stock market is up or down, and no matter what your age is.

Funds are automatic rebalancing.
Buckets are manual rebalancing. Market Timing here?

Buckets do not usually rebalance to a fixed and pre-targeted allocation. This appears to incorporate some form of tactical asset allocation or timing. If it were not so there would be nothing to talk about.

It isn't manual or automatic. Both rebalanced asset allocations and buckets plans are automatic in the sense that they follow an algorithm but both are manual in that most people probably rebalance assets or manage buckets manually. What algorithm any particular person with a buckets plan is following needs to be made explicit. The essence of the plan is not what the buckets are but how flow between and among them is managed, resulting in the end with money withdrawn to spend.

[secondopinion]

I'll just make a mental note that what I've thought for years has been confirmed.

The basic problem with bucket strategies, I think, is the idea of "a cash reserve big enough to ride through a bear market without needing to sell stocks." The problem is that there is no limit on the length of a bear market, and the statistics have the kind of "long tail" that makes near-guarantees impossible.

Arguments such as this are specious because they suggest that if a defensive solution does not cover all possible scenarios, then it is not worth implementing.

That's incorrect. Put simply: something is better than nothing. If I have 2 years of cash reserves that allow me not to withdraw retirement funds during a bear market that lasts 5 years, well, then, that's better than having no cash reserves at all, isn't it?

I think this is more about the distribution phase than the accumulation phase.

In the accumulation phase, breaking into retirement savings often costs taxes and penalties. 10% loss to penalties is considerable regardless (20% if HSA for uncovered reasons).

There is limited effective cost during retirement usually to break into it.

It is a different picture when considering the phase of life.

[cbox]

I think this is more about the distribution phase than the accumulation phase.

Correct. I was talking about the distribution phase.

[Zanmar]

Thanks for your thoughts nisiprius and dbr.
This dialog has led me to this: What is the “Boglehead Approach” for Decumulation Phase?
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