The Bucket Strategy is Flawed--Do this Instead
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- Опубліковано 12 чер 2024
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The bucket strategy of retirement investing is flawed. In theory, it helps retirees avoid selling stocks in a down market. Yet the bucket strategy suffers from several problems. First, in a down market, one should be buying stocks, not just avoiding selling. Second, it's very difficult to know when to move money from one bucket to the next. Finally, it can lead to asset allocations contrary to the 4% rule.
Just pick an asset allocation (e.g., 60/40) and rebalance every year. Rebalancing causes us to sell high and buy low. And you can keep some of the bond allocation in cash to sleep better at night. Much easier to implement.
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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
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My father passed away at the age of 95 with 1.2 million in CD. No stocks and tiny pension. He said that " if I don't have the cash I don't buy it"
Rob, I started with the bucket approach - 60% stocks/40% bonds. It lasted about six months - after watching both bonds and stocks drop I ended up with a 95/5 approach. I set aside 3 years cash for living and invested the rest in stocks. Two years later Im glad I did. Now I take money as I need it from the stock fund to replenish the cash fund. The growth of the stocks and dividends has worked well.
This is my plan as well. And the "cash" part can be active;GICs (Canada) or CDs with a 5%+ return. I much prefer them to bonds.
Ditto...I did 10% in cash knowing that I could live on SS alone and still have some discretionary spending for about a decade if need be. In every Monte Carlo simulation I have run the longevity of the portfolio decreases proportionally as the percentage of bonds increases.
@@user-bt9cm7ze4cactual bonds are great. People don’t buy them because they only pay out twice a year but you can lock in your returns for years
@@user-bt9cm7ze4c Possibly. Below are the Trailing Returns (%) for Vanguard's Total Bond Fund (BND) as of 5/31/24. Of course, we know why this happened as interest rates were at historical lows for a very long period of time, and then the Fed raised the Fed Funds rate 11 times in the span of about 1.5 years. So even though the BND historical data for last 10 years is not impressive, the question becomes where does it go from here?
Monthly Total Returns
BND
Category
YTD
-3.13%
-
1-Month
-2.41%
3-Month
-2.93%
1-Year
-1.36%
3-Year
-3.49%
5-Year
-0.11%
10-Year
1.19%
Just read an article from Franklin Templeton that provided some interesting insight. It provides a graph showing fixed income sector returns before and after the Fed Funds Rate peaks. Twelve months before Fed Fund Rates peak, the return for Core Bonds was -0.47%. Six months before, it was 0.27%. Now the good news. Six months after the peak, it grew to 7.12% and twelve months after the peak, it grew to 11.56%. The data went back to 1994.
I appreciate the argument and case you present…and can see in the end it may not matter, but I like the Bucket Strategy for the simplicity of knowing I have 5 years of funds to wait out any market with Bucket #1 and additional years with Bucket #2 before needing to sell stocks. It is the psychological comfort I need.
Thank you for explaining in enough detail to explain your points.
I am an engineer and have been reviewing different withdrawal strategies using a spreadsheet.
In general I liked the bucket strategy but using my spreadsheet I kept having issues with when to move money into the different buckets.
So you have given me lots to think about.
Yes, it seems like the bucket allocation requires too many decisions based on a guess by the person and in a sense "time" the market - which we all know is terrible.
Still, the bucket strategy can help in one situation: both bonds and stocks are down. This did happen in recent years.
Yes, Rob's (who I respect immensely) presentation here, at least as presented, assumes negative correlation between stocks and bonds, which clearly is not always the case.
I definitely planning on using bucket list. Retiring in 4 years. Slowly filling in my cash bucket, Selling my overpriced stocks
Great Video. It was always a bit "fuzzy" to me how to keep your short-term(cash bucket) filled, all the while balancing your intermediate(bond) and long term(stock) bucket.
Rob, Why sell stocks to replenish the cash account if you are going to rebuy with bond money? Unless you are taking a loss on a stock that is down, why not just move money from the bonds to cash, getting you closer to the 60/40 split and save a step?
My thoughts exactly. Didnt understand making that extra step
Exactly. And now (year later), a simple two bucket strategy has destroyed the performance of this 60/40 presentation. But who knew bonds could get hammered the same time stocks do?
Yeah…he was off on that example. You should figure out what the amounts after the replenishing of the cash account first. In this case it would be $530K stocks and $353 bonds. Sell $42K bonds for the cash account and then sell $30K bonds and buy stocks.
Exactly! I went through these exact scenarios! Your proposal seems like a good balance… and simpler!
Thank you Rob! I'm a Morningstar subscriber and love Christine's articles. I actually printed out her bucket strategy article to use as a model for our retirement planning. The 60/40 rule makes much more sense to me. I am learning that it planning doesn't need to be so complicated. I'm a Berger subcriber now!
How are those bonds doing?
Thank you so much for this video. I am learning so much from you and the discussions in the comment sections. I am needing to take over financial management unexpectedly, and the learning curve is steep for me. Thanks to all for your input.
This is a great video. I've been thinking a lot about the bucket strategy and this actually looks simpler and easier to manage. Having a bucket with cash still makes all the sense in the world to me, but what to do systematically with the other buckets wasn't so obvious. This brings greater clarity.
I saw the bucket strategy recommended as a decumulation rather than perpetual strategy. The idea being that the bucket sizes represent the ratio of cash-bonds-stock relative to where the person is in their deculumation. The buckets were meant to give a bit more predictably to deculumation budgeting while still allowing for some risk. I'll have to rethink.
Look forward to reading your new book.
I love your thinking! logical and K.i.s.s ... keep it coming Rob, we love it!!
Hello Rob, first of all your videos are quite helpful. Thank you for the detailed explanations as well. You mentioned some inflation protected bonds Etf's in your previous videos. Considering recent news about inflation increase in USA, is it better to focus more on inflation protected bonds or it is still good idea to maintain the %20 inflation protected and %20 intermediate bond option. In other words; %45 VTI, %15 VXUS, %20 BND, %20 SCHP (or the relevant vanguard one) or just %45 VTI, %15 VXUS and %40 SCHP?
I saw a video on the bucket strategy for the first time last night, he had 3, and I was asking the exact same question: why not just take the money you need from your say 60 / 40 allocated portfolio and make sure you are always at this percentage by rebalancing once or twice a year. I am following the latter and thought that I seemed sound enough. You are also allocated at the percentages that you are comfortable with. Thank you for our great informative video.
Another great thing about the say 60 / 40 approach is that your 200k or so is not sitting in a Checking acct for x number of years getting 0.5 % or less in interest. You are always invested in the market at the percentages you can stomach
I don’t get how it’s that different to a 3 bucket strategy that you balance every year?
It’s the same thing just with a simple rebalancing approach
Excellent Rob. Thank you. I too have found the bucket strategy difficult and cumbersome to implement in retirement. Yours is an interesting, contrarian approach and the simplicity of your proposed alternative is appealing. I also often wonder how a retiree's Social Security annuity should be appropriately considered when determining allocations and "buckets." Love the new whiteboard. Helpful. I'm ready to order your new book - I think drawdown receives short shrift as the industry is incentivized primarily to drone on about the accumulation phase.
It would be interesting to have you and Christine go at it in a toe-to-toe throwdown debating buckets vs. no buckets! Take off your PC gloves Rob (You did not challenge her bucket case forcefully when you interviewed her, IMO.)!
Christine seems to be such a nice person. Her intentions I'm sure are good, but definitely I agree some questions need to be answered more thoroughly. Harold Evensky too! 😊
Social security and other sources of income, like a pension or income annuity, should definitely be considered before anyone allocates a bucket strategy. You also need to spend some time estimating your expenses for the first five years of your retirement (or longer) and compare with income so that you know how much income you need to draw from your investment accounts. This is basic retirement planning but is definitely needed before you know how much cash to set aside.
@@stevenobrien595 Does Evensky still push the bucket strategy? Seems like maybe he backtracked on it like Ray Dalio did with bonds. Christine is super awesome, and I wouldn't be surprised if she re-thought or at least adjusted some things.
Very informative and eye opening video. Question: Is their a drawback in thinking of you cash portion separately and just using the remaining amount of your portfolio to calculate or maintain as your Stock/bond split. Basically leaving out the cash portion in setting up your asset allocation
I don't think so, if the cash represents a year or so of expenses. If it's say 5 years, you'd want to make sure that your asset allocation, including the cash, makes sense in light of your goals and views about the 4% rule.
Your question is great and actually what Harold Evensky invented and recommended as a 2 bucket strategy in the mid 80s.
@@rob_berger I see people are still submitting comments on this thread, so I'll add one. Perhaps a middle-ground here is for people to consider their "safety net"/bucket approach to simply influence their chosen asset allocation over time. This could shift year to year based on one's needs or perhaps their five-year view. Maybe even shifting from a 60/40 allocation, early in retirement, to a 70/30 later if needs change.
After seeing few of your videos, I KNOW I came to the right place to consider everything from a different angle. Subscribed and watching, greetings from North Macedonia.
Love this video. Finally someone willing to think outside the bucket. Thanks Rob looking forward to the new book.
Bad advice
Wow! That was really great. Makes total sense. I'm getting down to the details of figuring out my retirement income plan and trying to figure out what those bucket rules would be. Your video shows a simpler and better way to approach this. Thanks.
What if stocks and bonds both go down? You'd be selling in a down market then, unless you have enough cash to avoid selling.
A one or two year EF would solve that wouldn't it? Though stocks could be down for several years straight History has proven most dips lasted for 2 years or less. Hopefully...
Exactly. The correlation is increasing between stocks and bonds from what I have read.
like in 2022...
Outstanding Rob. I have been a huge fan of buckets but I have been rethinking. This video helps. Well done.
Question. Doesn't the bucket strategy assist in allocations? For example, if I am sipping from my accounts, why not have more than 75% in stocks if I have 5 to 8 years of income needs more 'safe'? Also, what happens if my account starts to dwindle. If I am 90 and only have 5 to 8 years worth of future withdrawals in my account, should I really have 60% of my account still in stocks? Doesn't this strategy offer more flexibility and appreciate allocation at different life and account balance points?
Awesome video as usual…I’m in the process of setting up the 4% method after watching your videos of course… does it makes sense to use a highly rated balance fund such as Vanguard Wellington or Fidelity balance to achieve the equity to bond percentages of 60 to 40 with the fund doing the rebalancing?
Good question. I was wondering the same thing.
What do you do if stocks and bonds are both down for the year?
Best video explaining withdraw strategy. Thank you
Great video. So if rebalancing is the best tool to use, then it requires multiple funds as different asset classes can perform differently. Is a simple 3 fund portfolio good enough? Even within US Large Cap in 2022, growth stocks tanked and value actually did okay. So should I have a fund for each so I'm selling value & buying growth when I rebalance?
Greetings from Asia - Thank you Rob - Truly appreciated your analysis.
good point. I've thought the same for years but didn't think about it the way you did.
@Ben Berger, thank you for this video. This has given me a new perspective. I have a question for you? How does your emergency fund factor into this?
Problem with bonds is the long term price trend has nowhere to go but down. I have a fixed DB pension and that plus federal benefits provides a baseline minimum, so there's really no need for supplemental fixed income, so my portfolio is simply a mini-business empire of cash flow streaming hard assets. REITs, utilities, mortgages, a variety of hard asset based covered call ETFs all paying out a pretty reliable cash stream. I also have a significant gold holding (15%) as disaster insurance and even part of that streams a cash flow of about 6.5 points from an ETF that writes covered call options on 1/3rd of GLD shares. My 700k portfolio throws off about $40000 annually. No plan to sell anything.
Thanks for explaining what bucket is and why not to do it!
The use of the white board and examples explains the withdrawal and rebalancing approach perfectly. It's what I've been struggling with to understand for weeks on how to do it! LOL. Thanks again, Steve
I don't think it takes into consideration tax efficiency, though.
If you sell $42K of stock to cover expenses, then you still need to sell $70K of bonds to purchase enough stock to bring the portfolio back into 60/40. And as others point out in this section, you run into the wash sale rule.
If you sell $42K of bonds to cover expenses, then you need to sell only $30K more bonds to purchase enough stock to bring the portfolio back into 60/40.
@@AlumniQuad I think you are looking at it all wrong and so is Rob. You don't have to sell $42k of Stock or Bonds and then transfer from one to the other if your goal is to pull $42k out of your retirement and then have a 60/40 balance. Just sell 60% of the $42k in stocks ($25,200) and 40% of $42k of bonds ($16,800). No need to do any rebalancing. An even easier approach if you want simple is to just invest your money in the Vanguard Wellington fund and just withdraw each year and the fund does the balancing for you. :)
@@jeffhenry8586 I'm curious if bouncing between the Vanguard Wellington and Balanced Funds would trigger a wash sale...
A book on "How to manage your portfolio in retirement" by you is definitely a book I will buy, trust and follow
That would be a fantastic follow up book to Retire Before Mom and Dad!
Boris vlada manages my funds, im up 142k
just this year alone.
@@garretttodd2182 contact please.
@@grantvlada2229 just email him.
Thank you rob, I'm learning so much about retirement. ;)
Rob, really enjoyed this, as I do all your videos. A question though: How does today's video relate to your thinking expressed in last year's "The Bucket Strategy & 4% Rule: How Retirees can survive a bear market?" Is it a tweaking, a refinement, or a new outlook? Thanks!
Great question. In the last video I was trying to deal with the inherent problems with the bucket strategy without completely trashing it. I've now given up that effort. The bucket strategy is really worthless in my view. There's no point trying to save it. If you want to call keeping a year or two worth of expenses in a checking account a "bucket strategy," that's fine. But otherwise, I see no use for it.
@@rob_berger Thanks for the quick reply! Two follow-ups: 1) Are you still a proponent of the 4% rule to ensure not running out of money in retirement, and 2) Do you still believe it is important to keep 5 years' projected expenses in cash?
@@jalexander63 Yes on the 4% rule. I think it's still valid today, although I wouldn't follow it religiously. I'd probably start a bit higher and use guardrails to monitor everything, as I've described in the 4% Rule series. I've softened on the 5 years of cash, but it really depends on your overall portfolio. My bond portfolio is all US gov't bonds of short to intermediate term duration. Much of that acts like cash and is actually more than 5 years worth of expenses. If a bond portfolio is much riskier (high yield, emerging markets), the 5 years of cash may be more important.
I agree, the only “bucket” you might want is just one cash bucket, to keep 1-2 years of expenses at a given time
Thanks. I was a bucket guy after listening to Christine. Then I read Estrada’s article last night and found your channel today. Great video for clarity.
Need your new book! Excellent logic on this!
Love your videos Rob. Would love at some time for you to cover asset location, particularly using M1. I’m trying to put high risk high reward assets in Roth’s and lower risk lower reward assets in IRAs. But it’s a pain because pies in M1 are account related. Any good tools out there to simplify? Thank you in advance!
PS totally agree that baskets are useless. Crazy how popular that is.
Again...I like the videos.. Question: what area does a new car or a wedding fit in? is that part of the "cash on hand" or somewhere else? thx for all the information!
I wonder the same
Wow! Tremendous explanation, Thanks !
Rob how do you allocate your portfolio according to the sectors? Since sectors are always changing the evolving how and how often do you adjust your sector within your portfolio?
Rob, Nice Video! Thanks for the diligence and effort you put into your work. You made a reference to Kitces' viewpoint on bucket strategy. But you haven't mentioned anything about Kitces' 'bond tent' strategy for folks that are approaching retirement. I want to hear your opinion on the bond tent strategy. Thanks again.
Who wants bonds with them losing value each time interest rates go up and not paying enough interest to overcome even CPlie, much less inflation and capital loss from the last rate hike?
@@BillsSpamMailKitces means to buy actual laddered Bonds years you want secured expenses. Cash out each year for your expense.
Great video! Have u looked at the 3 percent signal?
Looking forward to the book
I totally agree with you Bob.
So glad I found this video! There's someone else who I watch and he uses the bucket strategy and now I'm wondering why because he says he watches your videos! You've given me good data to show why I shouldn't use the bucket strategy next year when I retire - and I was planning to do so!
Rob,
I've been following & researching the 3-bucket strategy for over 2 years and found this video to be one of the best, thank you!... I have a question about your reference on the "bond" portion you referred to in the video. Are you referring to actual Treasury bonds or Bond ETFs?
Well, it could be either or both, right. A bond ETF could hold just treasury bonds. Generally I keep my bonds in U.S. Treasury bonds and bills.
@@rob_berger Would the TSP G fund be considered "bond" in your video? Great video, I myself have always question the complexity of a bucket strategy. Will stick to a 60/40 allocation (and include the cash as part of the 40).
Excellent points Rob. Stay the Course.
That sounds like a good idea for Vanguard wellington fund
Thank you for this. The complexity of the bucket strategy must have been why I was so confused about to implement it.
After listening to you and others, I think it’s pretty clear that the bucket method can be harmful. I saw another video that went into more depth on how they used the bucket strategy with historical data and the standard portfolio with annual rebalancing beat it in every single scenario.
Certainly having these 3 buckets makes managing your investments in retirement waaay more complex. And to the person who mentioned it helped when both stocks and bonds are down, I would point out that it only “helps “for the period of time that you don’t have to touch the bucket. The downside is that you may have more stuff sitting somewhere not earning its keep.
Personally what you said at the end, about keeping a “bucket” for your cash to spend and varying the size of that bucket to your comfort level. I would definitely bet the bigger that bucket of cash, the worse off your portfolio would do long term. You’ll pay for that piece of mind. Simplest thing is just keep your portfolio in whatever ratio you decide on and take your 4% (or whatever) allocation each year and rebalance.
Most importantly, remember all these CFP’s are designingbthesebstrategies to get you to pay them. Most of it is a scam. Do your homework and take control of your own future
I have a lot of buckets. One is multiple annuities, real estate, a pension, and mutual funds. I try to limit bonds because my pension should be about half my income.
Another issue I see is how/when do you prepare these 3 buckets?
What about tax strategies with withdrawals? Doesn't the bucket approach with cash bucket allow you to determine the most ideal withdrawal strategy to avoid taxes?
I think a good rule of thumb for any financial strategy is to try to imagine writing a computer program/algorithm for whatever strategy we may consider implementing.
If an algorithm can be written simply and still follows sound general financial ideas, then it may be a good strategy.
If an algorithm cannot be written simply or cannot be written at all, then whether it follows sound general financial ideas or not, it probably will not be a good strategy.
I recently created a withdraw decision strategy for money needed before retirement, while I'm still in the accumulation phase (emergencies and/or other large purchases throughout life that are not a part of a normal budgeting routine). I didn't write a computer program for it, but could if I wanted to and did make a flowchart for it. Since the decision rules are generally simple, I feel confident with my plan.
Thank you very good video. Very good points and my opinion of bucket strategy. My only issue is I hate Bonds! Maybe I just haven't found bond funds I like...
I am new to this, thanks for the video. I don’t believe it is expressly stated, but is it implied that dividends and capital gains distributions are reinvested or are you taking those as income and then adding the proceeds of selling the 40-42k of stock? Since this seems based on the 4% rule, and 40k is 4% of the $1MM, it seems like dividends and cap gain distributions are just reinvested. Perhaps I am over thinking it? 😉
I think the answer turns on taxes. In a taxable account, I'll spend the dividends and interest since they get taxed anyway. In retirement accounts, it really doesn't matter, IMO.
Rob - Great video, as always.
I’m confused. On one hand, you speak against the “bucket” strategy. On the other hand, you promote a 60/40 strategy that is rebalanced each year. It seems like what you are promoting is merely an example of a simple “bucket” strategy. - - - What did I miss? Please clarify.
Thank you for this video. When I first heard the bucket strategy, I thought it totally made sense. But when it comes to how to fund the cash and bond bucket, I felt at loss. Your balancing strategy will make the decision making very simple. I have a question. Through out years, I invested a lot in Vanguard Wellington fund because I felt safe to invest in a balanced fund. Should I sell this fund and invest in stock fund and bond fund so I can rebalance each year? Or should I hold this fund? Thank you.
Why not keep the Wellington fund let it do the rebalancing for you?
@@rubbermallett4396 that’s probably what I’ll do. It is a good fund. I don’t want to part with it.
Hold Wellington! It’s an excellent fund, and the manager will rebalance as needed. I pulled out of it in 2012 and am kicking myself now. Had I kept my money there and in Wellesley (another excellent Vanguard Fund) I’d have $1.5M.
@@raymann2578 Your bond portion then is locked into the fund. You can’t access it, which you may want when you’re retired. You would have to sell entire fund shares (bonds and stocks). You will also not be able to change your asset allocation of bonds vs stocks if you wish to if you hold a balanced fund.
Great video. Shouldn't one be careful to avoid the wash sale rule when rebalancing after selling stocks in a down market to refill the cash bucket (assuming these stocks are held in a taxable account)?
Just sell 60% of the $42k in stocks ($25,200) and 40% of $42k of bonds ($16,800). No need to do any rebalancing.
@@jeffhenry8586 But what if stocks are super down and bonds are up? Wouldn't you want to only sell bonds?
@@SKITTLELA Yes, I think I was stating that you can just sell the right amount of stocks or bonds that would result in the correct balance after the sell. There might be good reasons why he recommends doing it this way (like taxes) but you can have the right balance (in most cases) just by selling the a properly calculated amount of stocks and/or bonds.
Very educational and simple to understand for first time listener.
Great vid thanks
In the video, you mention several times that you never want to sell stocks in a down market, but repeat that you would sell stocks in a down market (to fund expenses) and then rebalance. I am not following how your rebalancing strategy protects you if you get 2-3 down market years in row. Early in retirement, this sequence of return would crush your portfolio regardless of rebalancing after the fact. I would prefer to have the guaranteed peace of mind of cash in a down market to fund expenses, giving my portfolio time to recover, and then still rebalance my portfolio every year to get the best of all worlds. Some may say this is too complicated, too many decision rules - but managing your portfolio to account for sequence of returns risks, tax optimization and leveraging social security strategies are all full of decisions that should be managed for the ideal retirement income outcome.
very well said and I agree 100%
100% agree with this. Rob keeps saying that "there's decisions that need to be made" like that's a bad thing. There is no autopilot strategy for this. You will have to make decisions and adjust what you're doing along the way based on market performance. The 3 bucket strategy allows for a ~7 year cushion to ride out a bear market. If the market is down, refill bucket 1 (spending cash) from bucket 2 (fixed income) so that you can still have money to spend. But nothing says you have to refill bucket 2 immediately from bucket 3 (stocks). If the market is down, don't sell those stocks. Yes, bucket 2 will have less money, but that's the point. It allows you to have a time cushion so that you don't have to sell stocks from bucket 3 during a downturn. If the market recovers next year, you sell then to refill bucket 2 and even then, you may not refill it all at once. If the market is still down in another year, don't sell assets in bucket 3, continue drawdown from bucket 2. Yes, now you only have 5 years cushion (bucket 1 + bucket 2), but that's the points, it's a flexible cushion. If you're facing a 3+ year market downturn, that's great depression territory and no strategy is going to predict/adjust for that -- you buckle up and hope to ride it out.
Regarding buying stocks when the market is down. Look, if you have no additional income source other than your retirement funds, you may not be in a position to buy more stocks. That's no different than pre-retirement investing. If you don't have the money to do it, don't buy more stocks. You may be able to make it happen by adjusting your spending accordingly and reduce bucket 1 withdrawals downward (down market, I'll live on less money) and apply that same downward withdrawal rate to bucket 2, then yes, you may have sufficient funds to invest in bucket 3 in a down market, but nothing says you HAVE TO.
Exactly. Very practical.
100% agree. If you retired in 1973/1974 your portfolio was decimated and you never recovered. If you retired in 1975/1976, you were golden. Having a cash bucket to avoid sequence of return risk in early retirement makes good sense. Also, you can hold bonds and stock in your second bucket. I wouldn't hold 100% stock in my second bucket during retirement.
@@timma8510 The static strategy takes away the decision making process and that's the biggest benefit. You are not timing the market and you don't have to decide when the market is high and when it is low based on your perception which may or may not be true. Rule based rebalancing essentially automatically makes you buy more stocks when the market is down. In a multi-year bear market, this will deplete your bond portion in an accelerated manner but once the stock market recovers and you rebalance in subsequent years, your bond portion would not only be replenished, you will have more than you previously did. Of course all this assumes that you have enough in the bond portion to ride out a long bear market. Yes, it's dangerous if bear market continues for too many years but then a lot of people would get rekt anyway.
The purpose of a Cash bucket = Preservation of Capital.
The purpose of a Bond bucket = Income of Capital.
The purpose of a Stock bucket = Growth of Capital.
I see this as a math question: In a retirement situation, where 4% income is required annually, what is the best way to balance these buckets? And, what if: Stocks & Bonds are both over-valued? In an over-valued situation, given a statistical regression to the mean in the long-run, means having cash so that you can buy into that situation, but timing it with cash, due to over-valuation reasons has its risk/reward too, which may be harder to determine than a simple 60/40 portfolio. Which is worse: FOMO at a market top, or waiting to buy in a market that is trending up?
well said...this approach - 1) cash (3-4yrs) , 2) bonds/dividend paying stocks ( 5-8yrs) and 3) stocks (8+yrs)...it's not that hard to manage...at the 16 min mark he suggested multiple transactions fees, sell stock and then sell bonds and repurchase stock, if stock are down, just sell the bonds to fund cash...if stock are up, then sell them...I might be missing something though
@@nd1irish901 Thank you for your reply. I think, It's important not to out-live your retirement, as well as being able to have future generations inherit the nest-egg upon death. A 4% withdrawl rule can appoximate a lifestyle that is sustainable, during Bull Markets and Bear Markets, but its not absolute, I think. In your asset allocation mix, it has a max of 20 years of savings to live-on in retirement - It should be at least 25+ years, to use the 4% withdrawl rule. Also, having 10+ years of growth stocks compounding at 10%+ a year is sustainable for the nest-egg, statistically, as each year you gain a year of savings, statistically, as you lose a year due to consumption. However, the income bucket should fulfill a retirement lifestyle based on its yield, so that growth doesn't have to be comprimised, allowing it to grow, while cash gives an opportunity to buy into a better growth and/or income bucket situation, given over-valuation of the market, and market timing. I am interested in how this is quantified, and aiming at your intent (not knowing the exact math) - 40% income bucket (10+ years) is possible, putting half of that amount (5+ years into cash), assuming the income bucket and growth bucket can be timed, while not-worrying because of cash, being able to sleep at night too.
Thanks Rob great video. I’ve been looking at the bucket strategy to manage withdrawals in retirement. It seems like a lot of unnecessary work to say on top of things. I’m now looking at a couple of really good balanced funds that auto rebalance each year then 2 years of cash.
"then 2 years of cash" -- sounds like a bucket strategy :-) They all don't have to look like Rob presented in his video.
@@markb1697 the difference i guess, the balanced funds rebalance themselves.
Thanks Rob. I’m planning on retiring next year and plan to put 90% of our retirement money in a Vanguard Wellington fund letting that rebalance itself what are your thoughts on that?
PS looking forward to your book!
Semper Fi sir
I still have many years before retirement (just turned 53) but That is likely what I will do. I would recommend having at least 3 years of "cash" which you can keep in your retirement vehicle like an IRA, but don't have it invested in anything so that you only pay tax when you transfer to your checking account. That way if the market drops you can just draw from that without drawing down your investments. If you are very risk adverse, you could do the Wellesley Fund which is 40/60 Stocks/Bonds.
So what happens if we see a 5 year declining marker? Your 3 years of cash is gone and now you’re forced to sell your Wellington fund in a down market.
@@Riverplace80 I said AT LEAST 3 years. If you are worried about a 5 year down-turn then you should have 5 years in your cash bucket. A long down-turn at the beginning of your retirement is what everyone fears, but it actually rarely happens. It has never happened 5 years straight and having a large down-turn at the beginning of retirement has only happened a handful of years in the past 100+ years. Nobody knows if it will happen to them, but if you have many years of buffer you can do things like spend less in down years to try to stretch your cash bucket. Everyone is just guessing and doing their best to prepare but nobody knows what will happen in the future so we are just trying to come up with a plan that has the best chance of surviving long term.
The bucket strategies I have seen, prior to this video, describe what you are suggesting. You keep 2-3 years of expenses (bucket 1), you withdraw (from bucket 2 & 3) into bucket 1 and rebalance the remaining bucket 2 & 3.
I agree with you, but I found it interesting you didn't mention the scenario when both stocks and bonds are down. In that case we'd be selling what was down less to buy what was down more. So it's not always about selling high. Even with that scenario, though, the total return rebalancing strategy is better than using buckets over the long run.
I think what you are saying is totally correct
That is what I was thinking throughout the video!
I think you’re right, but I’m guessing he didn’t talk about it because it’s so extremely rare. I’ve been rebalancing twice a year for decades, and have never had to deal with stocks and bonds being down at the same time that I can recall, until very recently.
Yes it rare for that to happen when they are both down. But I believe this is where having a strong cash reserve is needed for the long haul and you do nothing and wait for the market to recover. We all know the market has ebbs and flows so why get emotional about every fluctuation? This is why I like dividends so I won’t matter if the market is up or down I still will receive cash flow which will be used for income.
first - good references of the current literature - and good thinking thru many of their suggestions
Can't wait for the book!
In reality, my real buckets are cash, taxable, pre-tax, and post-tax. Which one I draw down each year is based on tax rules and brackets. RMD comes first. If I have a major expense to make, such as long term care, it would be nice to be able to take it from a post-tax Roth bucket to avoid a big tax hit, etc. A 5th "bucket" is discretionary real-estate such as rental property. The 6th bucket is the primary residence. The longevity of my portfolio looks a lot better when factoring in the last 2 buckets.
Great point. And it can get really tough dealing with both the order of accounts for distributions AND rebalancing.
i agree with the realistic and practical buckets you have added (but perhaps not understanding the primary residence as a bucket). Anyway, what rules do you follow for rebalancing?
Rob, why not invest in a mutual or index fund such as Wellington, ,Wellesley and recalibrate yearly based on performance and market conditions? They have a long history of strong performance.
For me Wellington is a little rich on the expense at .24 and less control on an objective of 60 / 40 mix.
Not as tax efficient could be a reason.
Follow up question and level-set....Does it matter what asset class you sell, and is there an advantage to having different funds in different markets as opposed to an all-in-one? Say instead of VT, you have VTI and VXUS, and VTI is up and VXUS is down. Would it be better to sell one over the other? Based on your logic it doesn't sound like it would matter. It would either present an opportunity to either sell when an asset class is high, or buy when a asset class is low. Correct?
What I found interesting was that Mrs. Benz wrote a chapter in a recent book entitled "How I invest my money" she didn't mention the word "bucket" once!
Compelling ! Great Video!
Could someone explain at what point you would consider the market is down enough to protect your portfolio. When do you start pulling from your cash reserves? When the market/portfolio is down 1%, 5%, 10%, or 20% etc etc?
What I'm still trying to wrap my head around are possible benefits from drawing down the cash bucket when both stocks and bonds are falling.
I am 46 but already thinking of how to draw down my fund in retirement. I will have my 5 years cash cash reserve this not only help me sleep well at night but its also my bond replacement and I will 100% in stock.
That is the two bucket strategy and is exactly what he is stating you should not do. I've spent a bit of time researching and he makes very valid points that it is very difficult to make decisions when to replenish the cash in a down market. You have plenty of time to get educated on your best strategy, but don't discount his arguments. I agree having several years of "cash" is best strategy even if you have a 60/40 investment strategy. Your outlook will be different when you are in the drawdown phase of life and not the accumulation phase. For right now having 100% stock is good plan (I'm 53 and also have 100% stock). I will likely put a lot of my portfolio in something like Wellington (about 60/40) when I get close to retirement and sell about 3 years worth of expenses but keep inside my IRA so that I only pay tax when I transfer to checking.
This whole discussion excludes other variables like: age, portfolio size, basic income and other sources of retirement income.
Does it? He's basically advocating your portfolio should never deviate from 60/40, and re-balance when or after it does.
So could you go further and auto pilot this by investing in something like Vanguards lifestyle moderate growth fund, which is 60/40, which will automatically rebalance? Just sweep your annual needed amount out and leave the account alone. Would that accomplish the same end result?
Nice point. I think that would work. You do want to consider the tax implications if you hold these funds in a taxable account. Here's a good resource on that question: www.bogleheads.org/wiki/Vanguard_LifeStrategy_Funds_tax_distributions
That’s exact where I thought this was going and I was a little disappointed that it ended without giving such a clear pointer.
If it is like Vanguard's Target Retirement Date funds you will save a lot on fees by looking at their portfolio holdings and buying those yourself. But still you will have the problem that these funds will put 40% into bond funds, though you shouldn't want to own bond funds until interest rates have finished rising (they haven't even started rising yet and bonds have negative capital returns for the year).
VBIAX and you are done. Thank you Jack Bogle!
One opinion from a retirement planner with a podcast I like suggests that lifestyle funds might be fine in the accumulation stage, but not very good in retirement when we start to draw down our funds. This is partly due to the high expense ratio and the likely allocation during the draw-down years.
when is the book coming out?
Excellent information.
Hi Rob! Thank you for your important videos. Can you please do a quick review of my dividend portfolio?
I thought I already did. Did you send over a different portfolio?
@@rob_berger That was my ROTH IRA and thank you for that review. It helped a lot! This is my individual dividend portfolio: m1.finance/3OpfMDijoQCU As always APPRECIATE your insightful thoughts on the market!
This was interesting and different than what I had learn the bucket strategy to be. I under stood the bucket strategy to be having one of each of the following in some form 401k, ira/ roth ira , & a brokerage account to invest an excess cash. then in retirement you can be more flexible in how you withdraw money.
Same... I though the term "bucket strategy" meant having assets in a variety of different tax statuses.
how did your strategy work in 2022 when both bonds and stocks went down?
@Rob Berger It is common recommended placement of Stocks in Roth, Bonds in Tax Deferred (Traditional), and Cash in a normal (brokerage) Money Market. The problem is, as a retiree (no earned income), you can no longer put money in a Traditional account and there are tax implications when balancing from a Traditional. Thus I’m thinking of allocating 50% of assets into Roth with a 90% diversified mutual fund stock portfolio / 10% Short-Term Bonds, 30% assets into Traditional with a 10% Stock / 90% Bonds, and 20% assets in normal brokerage account with a 30% Stock harvested yearly / 40% Municipal Bonds / 30% Money Market split. This stuff gets really complicated when attempting to factor balancing 60/40 stock/bond into the 3 different taxable accounts, and I’m not even factoring in RMDs yet. Anyway your thoughts would be appreciated.
I'm currently 75/25 with a 2.75% SWR. I never thought I had a bucket strat but I do have rebalancing rules. I pull from bonds in down markets and only balance one way back into bonds during market highs.
I'll give your way more thought but I wonder how does an aggressive allocation change how it works?
Also a volatile market would play havoc on bond duration & holding onto intermediate bonds for their duration.
Rob I enjoyed the discussion. One thing that came to mind with the bucket strategy is that if you are fortunate to have a hefty nest egg you would not necessarily be required to rebalance during market gyrations.
When is the new book coming out?
hi Rob. Great video. You created it 2 years ago and I'm wondering if two years later you still feel this way and follow this advice now. I've been considering the bucket strategy but you're presenting a good argument just to keep a 60/40 portfolio. Thanks!
Question. I assume this means you can’t use mixed funds that include stocks and bonds. In short you’d have bond funds and stock funds separately. Example of S&P etf for 60% stock and 40% in some sort of bond etf or mutual fund? I realize that is simple.
In a retirement account I think you could use balanced funds. They could create tax issues in a taxable account, however.
What if the bucket strategy is used but living expenses are provided by the interest and dividends from the bond and stock portfolio?
I waited too long to start Cash Bucket! About 1 yr and I want to Retire in July! How shud I add to Cash Bucket in this bi-polar market? I am 61 w pension and $300K in IRA. Want to take Soc Sec at 65? Should I do smaller distributions from IRA to Cash Bucket? My IRA does pro rata distributions so I wud want my Cash Bucket in Separate account even if still tax Deferred u til I need it?
Rob, What would be your view if stocks & bonds were down at the same time?
So, to summarize, you seem to be including cash (for living expenses) with bonds for allocation purposes. I'm guessing that in a year when stocks & bonds are down, you could simple start in on another year of cash (if you had 2 or more years in it) without selling either to refill the cash bucket, just reallocating between the stock & bond portion. Is that correct?
The original Evensky plan works (and does what you suggest) when properly implemented: X number of yrs of "safe" cash/short-term with annual rebalancing. The only requirement is to determine X so that you can buy when rebalancing; and "X" should be re-calculated as part of the rebalancing process. Unfortunately, "X" is too personal to ever use general rules. Every person (or their FP) needs to make this determination.
I appreciate your frank comments on the bucket strategy. It's one of those things that sounds nice superficially but makes less sense the more you consider how it would work in practice in different scenarios. In long-term investing, many things that intuitively seem correct to the layperson (e.g., liquidating your stocks when the market is crashing) are actually terrible ideas, and the bucket strategy seems to be in this category.