Who do you think is right? Let us know in the comments. Don't miss the show notes on this ep! We've got *tons* of information you can use: twosidesoffi.com/bucketstrategy
Rebalancing and buckets I contend are exactly the same. The difference is that with buckets you think in years not percents. This conversation to years provides significant peace of mind. Which prevents impulse actions.
Good summary, Joe, and one of the reasons I've always struggled with why Karsten calls it a "cheap gimmick". We're both doing essentially the same thing!
Thanks, Joe. They're awfully similar, no disagreement there. Sometimes it's all about how you frame things since concepts resonate differently based on on individual experiences to date and how we're wired.
Hey Joe, first thanks for your shout out on one of our latest videos. I am the guy from Austria. Hopeing to receive soon a red dot on your map. In my opinion rebalancing and buckets are quiet similar but not exactly the same. Like i understand it, rebalancing is to decide on an allocation and follow it strictly and rebalance for example every quarter. And buckets is more like to decide for an allocation rebalance every quarter but to have the option to do nothing in rare cases. Both systems will serve well. I think it only matters with which system someone feels better. Thank you all for the great content.
Excellent discussion. I've been using three-bucket strategy for seven years now in my retirement, which began unexpectedly at 59. I always say that my retirement is the best decision I never made.
@@TwoSidesOfFI I've been sharing lessons learned on my TH-cam channel, @IwasRetired. I have a series of videos that I share how I manage asset allocation across all my buckets, including how to think of three tax buckets too. Note, I'm more conservative than you two. I'm currently at about 55% equity, up from about 50/50 at retirement when I was sitting on a large cash cushion that helped me crash land my retirement. I'm now working my way up to 60% since I'm one year into a small pension.
Another terrific interview/discussion with two great guests. I'll be checking out both of their blogs for more detail, but very enlightening discussion. Thanks again for producing such great content for us near-retirement viewers out there!
Thanks very much! So glad you liked it. We packed a lot into the show notes including the articles they've each written. Check them out! twosidesoffi.com/bucketstrategy/
I learned about the bucket strategy about 7-8 years ago, and I like that plan. Having 1-5 years in bucket 1---Having 4-8 years in bucket 2 and bucket 3 is main portfolio (maybe having a 4th bucket (or a 3a and a 3b bucket) if its a different investment plan [like a separate brokerage bridge account]. To me this set up give more time on the horizon - I feel like I see a bigger picture, you see it coming and can plan. Like seeing a interstate sign that say 30 miles to X town rather than seeing next 5 exits are X town. The other strategy of selling principle amounts of the portfolio, after the passive income comes in, feels like I am opening the refrigerator like 5 times rather then 2 times. But we can all agree is that any withdrawal strategy is trying to not touch the principle amounts-want that money tree to keep growing! With the bucket strategy I will need to save up cash before I retire, like setting up my bucket 2 first then bucket 1. If I have to sell some portfolio assets to kick start bucket one that should be OK, I just don't want to do it all at once when I retire. I am still young so maybe something will change down the road. Have 25 years to retirement!
Thank you! I will have to check out your blog. I am curious to learn your thoughts on momentum/trend, a la Meb Faber, Wes Gray, Gary Antonacci, etc. I am becoming convinced that retail investors (granted, of a resilient mindset) can do better than buy/hold/rebalance with mechanical, tactical models on risk-adjusted and even absolute return basis. I want to keep an open mind to counter-arguments, however.
Karsten Jeske strategy is simplistic but well researched in the end that limits human errors. He did all the modeling & testing prior to retirement & has kindly shared that research on his blog. IOW he’s shown his woken& provided the tools to replicate with our own numbers. Having confidence in the plan makes retirement stress free. I can just execute the plan bc if all that testing shows X drawdown plan survived the Great Depression this is a nonissue. Ignoring macro economics & helping me work around my emotional shortcomings (market timing being the main one tbh) . I can be trusted to keep a portfolio balance because I have practice rebalancing.~ but the bucket strategy isn’t some thing I can be trusted with.
This was excellent, thanks, for bringing Karsten and Fritz together. In the end it seems like you have to design a withdrawal strategy that fits with your psychology. If you are very analytic and can stick to a plan very precisely, then strategic asset allocation is you for you. Maintain a cash allocation as part of your overall allocation and rebalance periodically (monthly, quarterly, annually etc) and pull from your cash allocation to create that retirement "paycheck". If you find that it's hard to follow mechanical rules, then maybe a bucket strategy is better, where you make general rules about what to put in each bucket and when to move money between buckets - and then do your best to follow them. As long as you can stay out of the trap of market timing, you should do fine either way!
Glad you liked it, Jack. Rebalancing is essential in either case as is thinking long term. Staying out of market timing is indeed a trap worth avoiding!
My goal is not to sweat the times when I need to liquidate some assets, even when everything is down. I have to remember that I have had the benefit of many prosperous years in the markets. I have to expect down years and try not to lament them too much. I am just easing into full retirement so we’ll see how this goes. Thank you for your thoughtful content.
Eric said it: "I would rather have a simple rule set." That is what nearly everyone is looking for and it should be your personal rule set, not "I'm following this guy, so your guy is wrong" approach. People are fearful of paying someone AUM fees, but then they aren't comfortable developing their own, personal strategy (or aren't able to). It points out that the rule-set needs to be more strategic than tactical and individualized for you. There are many paths, and yours needs to be yours. This was a great, and needed, discussion to point out that there are many different ways to plan your retirement and design a withraw strategy. It's also great to listen to Karsten and Fritz (and Jason) talk about post-FIRE life. I am approaching 1 year post-FIRE and really understand that it is my plan. What rule-set makes your plan for retirement work? I am certian mine is totally different than Eirc or Jason's plan.
Thanks, Steven. This is well put. All plans must be individualized, and respect both one's risk capacity (most commonly covered in these kinds of posts) but also their risk tolerance. Personal finance is personal!
I agree with you guys and Rob Berger that there really isn’t a material difference between the two strategies. In a sense the bucket strategy helps determine your asset allocation by using the lens of years of expense needed. Otherwise it’s just a matter of when you rebalance.
Yep! I liked Karsten's several analogies in this episode to that point. Most of it doesn't matter (unless you do really tragic things). If optimizing little things feels good, so be it! If you prefer more autopilot knowing that you're maybe "giving up" a few basis points of potential gains? That's ok too! Rebalancing is essential, indeed.
Very nice episode! To my knowledge, the bucket concept was ‘invented’ by Harold Evensky, but not so much as an investment strategy per se, but more so as a communication tool helping his clients to visualize how a certain strategy and asset allocation / set of rebalancing rules would result in a cash flow to fund living expenses.
Great discussion! But the caveat is that Ern's method is a clear rule based one, while there are as many bucket strategy implementations as there are practitioners. Bucket strategy gives you more optionality. For good or bad. Bucketing lets the practitioner to set their own rules for managing the buckets, so it gives them a sense of agency, on the positive side, but also leaves them with the burden of deciding each year on their own, somehow timing the market. Frtiz's implementation is one of them, a very sensible one. But Fritz's implementation is not a 'pure' bucketing strategy, since he cares about overall asset allocation and makes corrections based on some judgement call. So it is a hybrid between both approaches, that develops as time goes by. Now, I don't see how rebalancing and 'pure bucketing' are compatible. One undoes the other: If you rebalance your overall asset allocation after drawing from any bucket, you just undo what you just did and you end up in Ern's camp. I mean, if you draw from bonds so you don't sell stocks which are down, you are changing your portfolio asset allocation to a bigger stock percentage than before. If THEN you rebalance, you have to sell stocks to buy bonds. So you DID sell stocks anyway. The 'pure' bucket strategy does not care about the overall percentage of stocks and bonds, it is a result of your liabilities over time and your behaviour and rules relative to the performance of the market each year. It results in your asset allocation to change with every drawdown. It is your own, customized asset allocation. If you then rebalance, you end up in the same place as if you withdrew from any other bucket. Of course I maybe wrong, but it looks like simple math to me. What am I missing?
Thanks for another great episode. I actually relate most to Jason's approach... research the different perspectives of drawdown strategies from people who are experts in their methods and tailor the best drawdown strategy to meets personal circumstance. A 3-bucket approach explained by Fritz incorporating analytical forecasting such as utilizing CAPE ratios by Karsten provides a good balanced approach in my opinion. Good points made all around here. Also, the bond ladder for a 2nd cash bucket source was a good piece that Fritz brought up.
Love your straightforwardness in the manner you show us the mix-ups as well as the triumphs. Your posts are genuinely uplifting, showing us all the significance of profit investing...my prompt for students is to assemble here and get an enduring answer for their effective financial planning nightmares...no information is a waste.
Great discussion as usual gentlemen. I know that neither of you are big fans of holding rental houses as part of your investments, but what do you think about a potential strategy where half of your net worth is tied up in real estate, whether commercial or residential, and living off the income generated by the rentals, rather than having to sell any equities or bonds to fund the cash bucket. If you live frugally, I believe that the income from the rental properties can be used to add money to each bucket, growing your nest egg, rather than having to spend it down. Does that make any sense at all ?
Thanks! Many people certainly have real estate as a key part of their portfolios and we don't have any issues with that. However, given our bent towards diversification, 50% of NW tied up in real estate sounds like too much for our taste. That's not to say it's a "bad" strategy, just one that is more heavily concentrated in one kind of asset - and therefore will carry higher risk.
I think both approaches make sense. This is where personal preferences and comfort come into play. I have heard fritz speak before and always learn from him. Karsten is new for me - I am really interested to learn more from him. His hands off approach is appealing as is his analytical/finance background. I do believe a lot of people overthink and complicate their approach. Excellent podcast!!
Thanks, Joseph! You’re right about personal preferences. Did you see our earlier chat with Karsten? You’ll find it and some other useful info in today’s show notes twosidesoffi.com/bucketstrategy/
really great stuff here getting into the bucket strategy ......... love the idea of having enough cash so u dont have to worry about the stock market but still having some in fixed ... then rest into stocks
Great discussion !! Love getting real world feedback and actual execution during a bear market. We are planning similar buckets but with more cash. We have 4 years expenses in cash but that is allocating 20K to extended travel so we can turn that and some other things down if we needed to. Knowing that the longest bear market was just under 3 years in all the history of the market, we chose 4 years cash as extra buffer. We will pull off conservative funds in down years just to meet ACA qualifications and could go a year or 2 without pulling anything down but would have to pay for private insurance in that case so we have factored that in. Then in years where the big IRA buckets are getting 10,15,20+ % returns as they bounce around, take some gains off the table to back fill cash and/or conservative bucket. If SS is still around and I believe it will be but may change taxes or time to qualify, age of FRA, etc. then when we get to that currently my estimated SS will cover 90% or more of our household expenses. Then a small pension gets turned on and we no longer would need to pull from investments at all ! Then add spouse SS and we actually will have far more money to just burn if we want. Cheers !
Great show guys, really enjoy the input from Karsten and Fritz. I am a fan of all 4 of you, but I have to feel bad for Eric, he was the odd man out 😂. I am recently retired, @60, currently sitting a little heavy in cash, but that is just to keep the wife happy. Once SS kicks in I will likely lower our cash position because our SS and rental income will cover our living expenses.
Great interview! These guests of a very similar mindset in my opinion. I've not myself personally felt like I was in a 'bucket strategy' myself, most times I've heard of it, it seems like folks are regularly rebalancing and that would drive me nuts! LOL. I'm basically 70% equities/30% "safe" in that I have a cd ladder and a 3 yr MYGA on the safe side. I will begin withdrawing in April but I have several more yrs in the "safe" side than the guests. I will look at everything at the end of the year but may not move anything, depending on what current conditions apply. So it's good to hear I'm not far off, I'm just not going to micromanage moving funds around all the time. LOL.
Thanks, Pete! Do you have an IPS to define your asset allocation and rebalancing rules? It's a great tool to take any emotions out of the process and ensure you're sticking to your investing philosophy. th-cam.com/video/quMTC_z4rvg/w-d-xo.html
Looking to retire in 19 months (at 58). What about 70/30 (bucket 2) + 3 years cash (bucket 1). Barbell (2 buckets) =>. 70% i would probably do S&P 500 index, 30% Bonds etc.... I think in part its just a mental thing makes me feel better in a down market to spend money when i can take it from bucket 1. Could just be a mental toughness issue. WHAT A GREAT LISTEN !
Hi Beth, definitely check out Fritz' Bucket strategy posts in the show notes if you haven't yet. You'll find them solid background in considering your strategy. Fritz or Karsten might reply to you here as well! twosidesoffi.com/bucketstrategy/
Two buckets definitely work, it's really just how you define things. The key is deciding whether having a formal cash buffer would bring peace of mind in your retirement. I know it does for me, only you can decide for you.
Cheers, Andy...thanks for watching! We're big fans of Karsten + Fritz, please be sure to check out their respective blogs + Fritz also has an excellent book.
@@theretirementmanifesto3379 thanks Fritz, anytime You or Karsten or JL Collins are on, I won’t miss an episode. Keep up the good work and thanks for sharing your thoughts and counsel. Much Appreciated!
Great conversation! Thanks for sharing this Episode! I'm on the simplicity side of this topic, so more with Karsten Jeske (and as Jason mentioned Rob Berger), never thought about bringing a fake airplane “steering wheel” to a flight 🤣, just sit back and relax hahaha 🛫 ✌😁
Great show - having discovered you guys it's like scales have been taken from my eyes and I can now better see past FI (2024) and through to the other side of the telescope. Bucket aka portfolio reallocation and the importance of having cash to live I get. Seems to me that CABE is a pretty fundamental variable both in setting the safe withdrawal rate and when also considering extent of portfolio reallocation (within guardrails). I'm still reading through Karsten's blog but it seems that his CABE analysis is US centric and I'm wondering if the parameters may be a little different for those of us on the "other side of the pond" where we may have less US centric equity holdings?
Thanks for another great show! I would love to see some content about people who have retired early but are not continuing to make income. It's probably biased because earning income is a natural effect of making content, but it seems like a lot of the content providers in the FI space continue making income and don't need to rely on their investments as much. I understand that many early retirees may pick up gigs here or there. That being said, it would be interesting to hear from those that aren't into producing content and how that can also lead to a successful early retirement.
Jason here - Thanks, Nick! I've got good news for you: that's me. Eric and I earn very little from the show after we pay for web hosting, podcast hosting, and software licenses. The income I receive from content creation and the once a week (when not traveling) pouring wine is around 5% of my monthly withdrawal rate from my portfolio. This little bit of "fun money" is primarily mine to use as I see fit and doesn't impact our household budget, nor was it planned as retirement income. I can drop it tomorrow and not materially impact our retirement finances in the least. That means that 100% of our normal expenses are covered by our standard withdrawal rate. I hope that helps!
Hey Jason! Thanks for getting back to me. I definitely appreciate your perspective, it's one of the reasons I love your content. Personally, it's nerve wracking being on this path when it seems like most creators in this space give advice but don't need to follow it. We're not all creative types : ) In any case, I feel like more stories that come up about those who are successful in early retirement without further ventures may provide more balance to the space.
@@TwoSidesOfFI I agree with Nick, would love to see you guys interview non-content-creators/non-rental property owners/non-pension havers. Just regular people, living off investments only. I feel like that's always the missing variable for me, and why I love this channel. Really appreciate the effort and thought you guys put into every video. Keep it coming!
How do you treat an annuity in your asset allocation strategy? For example if you purchase an annuity with some of your net worth and you have a 70/30 asset allocation, do you rebalance to 70/30 after you purchase? Or do you consider the annuity value in some way (maybe in the 30%)? Or in the bucket strategy, is it part of it at all?
Another way to think of it: you're only funding the "gap" Income - Expenses = Gap), so the annuity is reducing your Gap. Annual Bucket Strategy amount declines as a result. So, you can essentially ignore the annuity when managing the bucket strategy. You could also run two asset allocations: one w the annuity (as bond/fixed income), and one excluding it (for rebalancing purposes to feed the buckets). Just a thought...
Typing this before watching, because I'll forget after the fact, but I am not a big fan of the bucket strategy. My own plan is to effectively decumulate in reverse of my accumulation strategy...DCA. On a regular schedule, the money will be sold out of the investments(in the appropriate quantities from each account) and as a nearly unrelated transaction, there will be Roth rollovers up to the appropriate amount for that year relative to taxes and income. Money will be spent out of the the cash account, of course. There is no plan to try to time the market by including multiple withdraw time-frames for the purpose of deciding when to refill.
Nearly half way through and it sounds like Fritz and I agree. DCA in...DCA out. No need to spend energy trying to time things and use excessive time on moment management, when the goal is to remove myself as much as possible from that process.
Does UC Berkeley offer a way to audit the class Karsten is teaching while not getting credit? Would love to watch/follow the class, but already graduated 15 years ago ;-)
Not sure, but this would appear to be the course if you want to follow up extension.berkeley.edu/search/publicCourseSearchDetails.do?method=load&courseId=80056003
I am still in accumulation-phase..and, even I use a bucket-strategy, cosisting of approx. three years of basic survival costs in money market accounts..20 yrs in laddered individual t-notes and T.I.P.S..20 year and beyond money, is in a total-stock-market index fund. I'm currently 59, and I will completely liquidate my equities "bucket", the first time that the total-stock-market hits an all-time-high, the first time after I turn 80..and put the proceeds entirely into appropriately laddered T.I.P.S, assuming a maximum life-expectancy of 110 yrs. Although, I doubt that I will make it that far, since no one in my family has yet to make it past 91 yrs old..but, you NEVER KNOW; with all of the advancements that surely will come in medical-technology, in the remainder of my life.
Thank you, interesting. I know all lost aversion bias, and read Kahneman, Thaler, Shiller, Fama & more, but bucket strategy is not to try to time the market ? I mean, if you remove the psychological part, 100% equities with even no cash, and ajusting from 2,5% to 7% withdraw rate is not better ? Because I heard you can ajust to make 3 years of cash becoming 4 years of cash. At the end, is this not better 60% of 1 million, and selling 60% of 1 million $, than 100% of 500 000$ ? My point is, we should not fear to sell equites even after 40% fall, because in long-term, specially if we are able to ajust withdraw rate, it's mathematically better (OK I admit I go far with 100% equities with no cash, it's just to make my point clearer, but 100% equities + 2/3 years cash should be better in maths, and I like when Eric explains it's trying to time the market, I think precisely like him ;-))
I got the answer by reading again JL Collins, and I agree totally with this strategy : 1) accumulation phase : buy 100% equities VTSAX because time in the market counts, useless to buy something else 2) some years before retiring, if market down, you can keep buying 100% equities VTSAX, if not, you can buy only bond to reach 80-20 to 90-10 And always some cash Of course, I talk about maths here, not psychological part, and in my case, 90-10 or 100% equities is not a problem. Warren Buffen advises 90-10 too
I don't think it's timing the market, or if it is it's a trivial thing. Not retired, but I was going to do a partial Roth conversion in-kind this year and the stock I was going to move dropped significantly in Jan. Since Roth conversions are very fast when both accounts are with the same broker, I decided to pull the trigger as soon as I realized it was low to move more shares for less cost. When you see something you're going to buy on sale and you accelerate financial moves, is that market timing?
@@5metoo I think so. Buying (or not selling after dips), or selling (or not buying) after rises are assuming things will mean-revert until you are forced to. That's market timing.
@@5metoo oh, I'm sorry. I think I misinterpreted your comment. If you are doing a Roth conversion when it's down and moving to similar investments it's absolutely not market timing. It's actually very similar in spirit to tax loss harvesting in taxable accounts, and minimizing your lifetime tax bill.
Wow if I find money in a bear market it will go straight into the market. Or use it for paying taxes on a mega Roth conversion which is a great idea in a bear market.
It's a gimmick. Re-balancing your globally diverse investments each year will automatically mean you sell winners and buy losers and allows you to free up cash. Having 2-4 years of cash so you don't have to sell when the market is down is critical.
Not related to the content... Did you guys tweak the audio? Sounds much lower in pitch compared to 'normal' At first I thought Jason had a mild cold, but Eric's voice sounds off, too.
Then I guess we have bigger problems than anything we'd be discussing here! In all seriousness, ensuring you have an international allocation in your portfolio is a good start. But that kind of financial crisis would likely have ripples all around.
The losers will be down, so selling them will not further upset your asset allocation. Also, past returns are poor predictors of future returns. Caveat emptor
With a cash bucket percentage you’ve effectively already sold the market to that percentage . A fixed percentage in a cash bucket is a diluter to CAGR and provable adds risk to a portfolio in the long run.
Pretty stupid to even discuss a 4% withdrawal strategy when I can buy CD’s yielding 4.6%. You could easily have a large portion in very stable dividend stocks yielding over 5% and never touch your money. Why does anyone sell shares? Seems like a sure fire way to leave your kids nothing.
![ILLSLICK - KILLSHOT REMIX [FULL VERSION]](http://i.ytimg.com/vi/RIK8RrqIAzE/mqdefault.jpg)
Who do you think is right? Let us know in the comments. Don't miss the show notes on this ep! We've got *tons* of information you can use: twosidesoffi.com/bucketstrategy
ERN is hands-down the greatest mind in retirement economics talking on the greatest retirement podcast on youtube...bravo!
We agree 100%! Thanks
Thanks for having us one the show - great discussion on the pros and cons of The Bucket Strategy!
It was our pleasure! It's always great talking to you both.
A great show. Thanks for bringing both of them together.
Rebalancing and buckets I contend are exactly the same. The difference is that with buckets you think in years not percents. This conversation to years provides significant peace of mind. Which prevents impulse actions.
Good summary, Joe, and one of the reasons I've always struggled with why Karsten calls it a "cheap gimmick". We're both doing essentially the same thing!
Thanks, Joe. They're awfully similar, no disagreement there. Sometimes it's all about how you frame things since concepts resonate differently based on on individual experiences to date and how we're wired.
Hey Joe, first thanks for your shout out on one of our latest videos. I am the guy from Austria. Hopeing to receive soon a red dot on your map.
In my opinion rebalancing and buckets are quiet similar but not exactly the same.
Like i understand it, rebalancing is to decide on an allocation and follow it strictly and rebalance for example every quarter.
And buckets is more like to decide for an allocation rebalance every quarter but to have the option to do nothing in rare cases.
Both systems will serve well. I think it only matters with which system someone feels better.
Thank you all for the great content.
Excellent discussion. I've been using three-bucket strategy for seven years now in my retirement, which began unexpectedly at 59. I always say that my retirement is the best decision I never made.
Thank you! Have you made any changes to strategy over that time, or learned any lessons you can share?
@@TwoSidesOfFI I've been sharing lessons learned on my TH-cam channel, @IwasRetired. I have a series of videos that I share how I manage asset allocation across all my buckets, including how to think of three tax buckets too. Note, I'm more conservative than you two. I'm currently at about 55% equity, up from about 50/50 at retirement when I was sitting on a large cash cushion that helped me crash land my retirement. I'm now working my way up to 60% since I'm one year into a small pension.
@@IwasRetired Thanks for sharing
Another terrific interview/discussion with two great guests. I'll be checking out both of their blogs for more detail, but very enlightening discussion. Thanks again for producing such great content for us near-retirement viewers out there!
Thanks very much! So glad you liked it. We packed a lot into the show notes including the articles they've each written. Check them out! twosidesoffi.com/bucketstrategy/
I learned about the bucket strategy about 7-8 years ago, and I like that plan.
Having 1-5 years in bucket 1---Having 4-8 years in bucket 2 and bucket 3 is main portfolio (maybe having a 4th bucket (or a 3a and a 3b bucket) if its a different investment plan [like a separate brokerage bridge account].
To me this set up give more time on the horizon - I feel like I see a bigger picture, you see it coming and can plan. Like seeing a interstate sign that say 30 miles to X town rather than seeing next 5 exits are X town. The other strategy of selling principle amounts of the portfolio, after the passive income comes in, feels like I am opening the refrigerator like 5 times rather then 2 times.
But we can all agree is that any withdrawal strategy is trying to not touch the principle amounts-want that money tree to keep growing!
With the bucket strategy I will need to save up cash before I retire, like setting up my bucket 2 first then bucket 1. If I have to sell some portfolio assets to kick start bucket one that should be OK, I just don't want to do it all at once when I retire.
I am still young so maybe something will change down the road. Have 25 years to retirement!
Awesome discussiion! Thanks for hosting this!
Talking with you and Fritz always makes for really enjoyable exchange. Thanks for joining us!
Thank you! I will have to check out your blog. I am curious to learn your thoughts on momentum/trend, a la Meb Faber, Wes Gray, Gary Antonacci, etc.
I am becoming convinced that retail investors (granted, of a resilient mindset) can do better than buy/hold/rebalance with mechanical, tactical models on risk-adjusted and even absolute return basis. I want to keep an open mind to counter-arguments, however.
Karsten Jeske strategy is simplistic but well researched in the end that limits human errors. He did all the modeling & testing prior to retirement & has kindly shared that research on his blog. IOW he’s shown his woken& provided the tools to replicate with our own numbers. Having confidence in the plan makes retirement stress free. I can just execute the plan bc if all that testing shows X drawdown plan survived the Great Depression this is a nonissue. Ignoring macro economics & helping me work around my emotional shortcomings (market timing being the main one tbh) . I can be trusted to keep a portfolio balance because I have practice rebalancing.~ but the bucket strategy isn’t some thing I can be trusted with.
We like rule sets that are easy to follow!
This was excellent, thanks, for bringing Karsten and Fritz together. In the end it seems like you have to design a withdrawal strategy that fits with your psychology. If you are very analytic and can stick to a plan very precisely, then strategic asset allocation is you for you. Maintain a cash allocation as part of your overall allocation and rebalance periodically (monthly, quarterly, annually etc) and pull from your cash allocation to create that retirement "paycheck". If you find that it's hard to follow mechanical rules, then maybe a bucket strategy is better, where you make general rules about what to put in each bucket and when to move money between buckets - and then do your best to follow them. As long as you can stay out of the trap of market timing, you should do fine either way!
Glad you liked it, Jack. Rebalancing is essential in either case as is thinking long term. Staying out of market timing is indeed a trap worth avoiding!
My goal is not to sweat the times when I need to liquidate some assets, even when everything is down. I have to remember that I have had the benefit of many prosperous years in the markets. I have to expect down years and try not to lament them too much. I am just easing into full retirement so we’ll see how this goes. Thank you for your thoughtful content.
That's great perspective, EllenMarie. We agree 100%. Best wishes to you in all things!
Eric said it: "I would rather have a simple rule set." That is what nearly everyone is looking for and it should be your personal rule set, not "I'm following this guy, so your guy is wrong" approach. People are fearful of paying someone AUM fees, but then they aren't comfortable developing their own, personal strategy (or aren't able to). It points out that the rule-set needs to be more strategic than tactical and individualized for you. There are many paths, and yours needs to be yours.
This was a great, and needed, discussion to point out that there are many different ways to plan your retirement and design a withraw strategy. It's also great to listen to Karsten and Fritz (and Jason) talk about post-FIRE life. I am approaching 1 year post-FIRE and really understand that it is my plan.
What rule-set makes your plan for retirement work? I am certian mine is totally different than Eirc or Jason's plan.
Thanks, Steven. This is well put. All plans must be individualized, and respect both one's risk capacity (most commonly covered in these kinds of posts) but also their risk tolerance. Personal finance is personal!
I agree with you guys and Rob Berger that there really isn’t a material difference between the two strategies. In a sense the bucket strategy helps determine your asset allocation by using the lens of years of expense needed. Otherwise it’s just a matter of when you rebalance.
Yep! I liked Karsten's several analogies in this episode to that point. Most of it doesn't matter (unless you do really tragic things). If optimizing little things feels good, so be it! If you prefer more autopilot knowing that you're maybe "giving up" a few basis points of potential gains? That's ok too! Rebalancing is essential, indeed.
Excellent discussion. Thank you for the insights!
Thanks!
Very nice episode! To my knowledge, the bucket concept was ‘invented’ by Harold Evensky, but not so much as an investment strategy per se, but more so as a communication tool helping his clients to visualize how a certain strategy and asset allocation / set of rebalancing rules would result in a cash flow to fund living expenses.
Thanks! That sounded familiar and on looking it up, seems to be correct.
Great content please do more ot this kind of shows.
Glad you liked it!
Great interview. Always look forward to your shows
Thanks!
Great discussion! But the caveat is that Ern's method is a clear rule based one, while there are as many bucket strategy implementations as there are practitioners. Bucket strategy gives you more optionality. For good or bad. Bucketing lets the practitioner to set their own rules for managing the buckets, so it gives them a sense of agency, on the positive side, but also leaves them with the burden of deciding each year on their own, somehow timing the market. Frtiz's implementation is one of them, a very sensible one.
But Fritz's implementation is not a 'pure' bucketing strategy, since he cares about overall asset allocation and makes corrections based on some judgement call. So it is a hybrid between both approaches, that develops as time goes by. Now, I don't see how rebalancing and 'pure bucketing' are compatible. One undoes the other: If you rebalance your overall asset allocation after drawing from any bucket, you just undo what you just did and you end up in Ern's camp. I mean, if you draw from bonds so you don't sell stocks which are down, you are changing your portfolio asset allocation to a bigger stock percentage than before. If THEN you rebalance, you have to sell stocks to buy bonds. So you DID sell stocks anyway.
The 'pure' bucket strategy does not care about the overall percentage of stocks and bonds, it is a result of your liabilities over time and your behaviour and rules relative to the performance of the market each year. It results in your asset allocation to change with every drawdown. It is your own, customized asset allocation. If you then rebalance, you end up in the same place as if you withdrew from any other bucket.
Of course I maybe wrong, but it looks like simple math to me.
What am I missing?
Thanks for asking what they are doing in life! So interesting! ♥️ Love the fence project Fritz is involved in, what a great idea!
Thanks Tricia...we agree! They're both making the most of their time, giving back and living life. Something to aspire to for all of us!
I love the fence project Fritz is involved in, too. Wink.
Thanks for another great episode. I actually relate most to Jason's approach... research the different perspectives of drawdown strategies from people who are experts in their methods and tailor the best drawdown strategy to meets personal circumstance. A 3-bucket approach explained by Fritz incorporating analytical forecasting such as utilizing CAPE ratios by Karsten provides a good balanced approach in my opinion. Good points made all around here. Also, the bond ladder for a 2nd cash bucket source was a good piece that Fritz brought up.
Thanks! Glad you liked it.
Thank you for the outstanding show, gentlemen!!! Per one of the original Bogleheads:” There is more than one road to Dublin.”🎯🎯🎯
You’re welcome! Very true
Love your straightforwardness in the manner you show us the mix-ups as well as the triumphs. Your posts are genuinely uplifting, showing us all the significance of profit investing...my prompt for students is to assemble here and get an enduring answer for their effective financial planning nightmares...no information is a waste.
Thanks, Tblaze
Great discussion as usual gentlemen. I know that neither of you are big fans of holding rental houses as part of your investments, but what do you think about a potential strategy where half of your net worth is tied up in real estate, whether commercial or residential, and living off the income generated by the rentals, rather than having to sell any equities or bonds to fund the cash bucket. If you live frugally, I believe that the income from the rental properties can be used to add money to each bucket, growing your nest egg, rather than having to spend it down. Does that make any sense at all ?
Thanks! Many people certainly have real estate as a key part of their portfolios and we don't have any issues with that. However, given our bent towards diversification, 50% of NW tied up in real estate sounds like too much for our taste. That's not to say it's a "bad" strategy, just one that is more heavily concentrated in one kind of asset - and therefore will carry higher risk.
I think both approaches make sense. This is where personal preferences and comfort come into play. I have heard fritz speak before and always learn from him. Karsten is new for me - I am really interested to learn more from him. His hands off approach is appealing as is his analytical/finance background. I do believe a lot of people overthink and complicate their approach. Excellent podcast!!
Thanks, Joseph! You’re right about personal preferences. Did you see our earlier chat with Karsten? You’ll find it and some other useful info in today’s show notes twosidesoffi.com/bucketstrategy/
really great stuff here
getting into the bucket strategy ......... love the idea of having enough cash so u dont have to worry about the stock market
but still having some in fixed ... then rest into stocks
Glad you liked it, Matthew
Great discussion !! Love getting real world feedback and actual execution during a bear market. We are planning similar buckets but with more cash. We have 4 years expenses in cash but that is allocating 20K to extended travel so we can turn that and some other things down if we needed to. Knowing that the longest bear market was just under 3 years in all the history of the market, we chose 4 years cash as extra buffer. We will pull off conservative funds in down years just to meet ACA qualifications and could go a year or 2 without pulling anything down but would have to pay for private insurance in that case so we have factored that in. Then in years where the big IRA buckets are getting 10,15,20+ % returns as they bounce around, take some gains off the table to back fill cash and/or conservative bucket. If SS is still around and I believe it will be but may change taxes or time to qualify, age of FRA, etc. then when we get to that currently my estimated SS will cover 90% or more of our household expenses. Then a small pension gets turned on and we no longer would need to pull from investments at all ! Then add spouse SS and we actually will have far more money to just burn if we want. Cheers !
Thanks, Bob! We're glad you liked it. Sounds like you've thought things through well. Best wishes to you!
Great show guys, really enjoy the input from Karsten and Fritz. I am a fan of all 4 of you, but I have to feel bad for Eric, he was the odd man out 😂. I am recently retired, @60, currently sitting a little heavy in cash, but that is just to keep the wife happy. Once SS kicks in I will likely lower our cash position because our SS and rental income will cover our living expenses.
Thanks, Brad. Don't feel bad - he'll be on the other side of FI before too long!
Great interview! These guests of a very similar mindset in my opinion. I've not myself personally felt like I was in a 'bucket strategy' myself, most times I've heard of it, it seems like folks are regularly rebalancing and that would drive me nuts! LOL. I'm basically 70% equities/30% "safe" in that I have a cd ladder and a 3 yr MYGA on the safe side. I will begin withdrawing in April but I have several more yrs in the "safe" side than the guests. I will look at everything at the end of the year but may not move anything, depending on what current conditions apply. So it's good to hear I'm not far off, I'm just not going to micromanage moving funds around all the time. LOL.
Thanks, Pete! Do you have an IPS to define your asset allocation and rebalancing rules? It's a great tool to take any emotions out of the process and ensure you're sticking to your investing philosophy. th-cam.com/video/quMTC_z4rvg/w-d-xo.html
Pretty awesome discussion, loved it!!
Glad you enjoyed it!
Looking to retire in 19 months (at 58). What about 70/30 (bucket 2) + 3 years cash (bucket 1). Barbell (2 buckets) =>. 70% i would probably do S&P 500 index, 30% Bonds etc.... I think in part its just a mental thing makes me feel better in a down market to spend money when i can take it from bucket 1. Could just be a mental toughness issue. WHAT A GREAT LISTEN !
Hi Beth, definitely check out Fritz' Bucket strategy posts in the show notes if you haven't yet. You'll find them solid background in considering your strategy. Fritz or Karsten might reply to you here as well! twosidesoffi.com/bucketstrategy/
Two buckets definitely work, it's really just how you define things. The key is deciding whether having a formal cash buffer would bring peace of mind in your retirement. I know it does for me, only you can decide for you.
Fantastic show guys, the best out there. Thanks to Kirsten and Fritz for great content!
You're welcome, thanks for listening!
Cheers, Andy...thanks for watching! We're big fans of Karsten + Fritz, please be sure to check out their respective blogs + Fritz also has an excellent book.
@@TwoSidesOfFI I know, have it both in print and kindle..! Good stuff!
@@theretirementmanifesto3379 thanks Fritz, anytime You or Karsten or JL Collins are on, I won’t miss an episode. Keep up the good work and thanks for sharing your thoughts and counsel. Much Appreciated!
As I continually seem to be pointing out, x25 pot with a 2yr cash buffer is just a x27 pot with a 7.4% allocation to cash
16:26
Great episode!
Thanks!
Great conversation! Thanks for sharing this Episode!
I'm on the simplicity side of this topic, so more with Karsten Jeske (and as Jason mentioned Rob Berger), never thought about bringing a fake airplane “steering wheel” to a flight 🤣, just sit back and relax hahaha 🛫 ✌😁
Thanks! Glad you liked it. Grab your steering wheel and hold on for the ride!
Great show - having discovered you guys it's like scales have been taken from my eyes and I can now better see past FI (2024) and through to the other side of the telescope. Bucket aka portfolio reallocation and the importance of having cash to live I get. Seems to me that CABE is a pretty fundamental variable both in setting the safe withdrawal rate and when also considering extent of portfolio reallocation (within guardrails). I'm still reading through Karsten's blog but it seems that his CABE analysis is US centric and I'm wondering if the parameters may be a little different for those of us on the "other side of the pond" where we may have less US centric equity holdings?
Thanks for another great show! I would love to see some content about people who have retired early but are not continuing to make income. It's probably biased because earning income is a natural effect of making content, but it seems like a lot of the content providers in the FI space continue making income and don't need to rely on their investments as much. I understand that many early retirees may pick up gigs here or there. That being said, it would be interesting to hear from those that aren't into producing content and how that can also lead to a successful early retirement.
Jason here - Thanks, Nick! I've got good news for you: that's me. Eric and I earn very little from the show after we pay for web hosting, podcast hosting, and software licenses. The income I receive from content creation and the once a week (when not traveling) pouring wine is around 5% of my monthly withdrawal rate from my portfolio. This little bit of "fun money" is primarily mine to use as I see fit and doesn't impact our household budget, nor was it planned as retirement income. I can drop it tomorrow and not materially impact our retirement finances in the least. That means that 100% of our normal expenses are covered by our standard withdrawal rate. I hope that helps!
Hey Jason! Thanks for getting back to me. I definitely appreciate your perspective, it's one of the reasons I love your content. Personally, it's nerve wracking being on this path when it seems like most creators in this space give advice but don't need to follow it. We're not all creative types : ) In any case, I feel like more stories that come up about those who are successful in early retirement without further ventures may provide more balance to the space.
@@nickp5491 You're welcome! Yeah, that's a fair point, and one Eric and I have talked about on the show and off. We appreciate the feedback!
@@TwoSidesOfFI I agree with Nick, would love to see you guys interview non-content-creators/non-rental property owners/non-pension havers. Just regular people, living off investments only. I feel like that's always the missing variable for me, and why I love this channel. Really appreciate the effort and thought you guys put into every video. Keep it coming!
@@teemarie1580 thanks for your support. Did you see this one?
How I Plan to Retire Early on a $50K Salary
th-cam.com/video/hxIoHvV5AUw/w-d-xo.html
How do you treat an annuity in your asset allocation strategy? For example if you purchase an annuity with some of your net worth and you have a 70/30 asset allocation, do you rebalance to 70/30 after you purchase? Or do you consider the annuity value in some way (maybe in the 30%)? Or in the bucket strategy, is it part of it at all?
Many if not most people would consider this part of your 30% fixed income allocation.
Another way to think of it: you're only funding the "gap" Income - Expenses = Gap), so the annuity is reducing your Gap. Annual Bucket Strategy amount declines as a result. So, you can essentially ignore the annuity when managing the bucket strategy. You could also run two asset allocations: one w the annuity (as bond/fixed income), and one excluding it (for rebalancing purposes to feed the buckets). Just a thought...
Typing this before watching, because I'll forget after the fact, but I am not a big fan of the bucket strategy. My own plan is to effectively decumulate in reverse of my accumulation strategy...DCA.
On a regular schedule, the money will be sold out of the investments(in the appropriate quantities from each account) and as a nearly unrelated transaction, there will be Roth rollovers up to the appropriate amount for that year relative to taxes and income. Money will be spent out of the the cash account, of course.
There is no plan to try to time the market by including multiple withdraw time-frames for the purpose of deciding when to refill.
Nearly half way through and it sounds like Fritz and I agree. DCA in...DCA out. No need to spend energy trying to time things and use excessive time on moment management, when the goal is to remove myself as much as possible from that process.
Couple other good books 'Spend til the end' & 'The essential retirement guide: A contrarian's perspective'
Thanks!
Does UC Berkeley offer a way to audit the class Karsten is teaching while not getting credit? Would love to watch/follow the class, but already graduated 15 years ago ;-)
Not sure, but this would appear to be the course if you want to follow up
extension.berkeley.edu/search/publicCourseSearchDetails.do?method=load&courseId=80056003
No auditing allowed in UCB zoom classes
@@jeske100 Bummer. Thanks for checking!
I am still in accumulation-phase..and, even I use a bucket-strategy, cosisting of approx. three years of basic survival costs in money market accounts..20 yrs in laddered individual t-notes and T.I.P.S..20 year and beyond money, is in a total-stock-market index fund. I'm currently 59, and I will completely liquidate my equities "bucket", the first time that the total-stock-market hits an all-time-high, the first time after I turn 80..and put the proceeds entirely into appropriately laddered T.I.P.S, assuming a maximum life-expectancy of 110 yrs. Although, I doubt that I will make it that far, since no one in my family has yet to make it past 91 yrs old..but, you NEVER KNOW; with all of the advancements that surely will come in medical-technology, in the remainder of my life.
You switched sides! I'm confused!
Did we? Let us know what you think after you're done watching
@@TwoSidesOfFIYes, Jason is on the left and Eric on the right. I can’t handle the change! 😊
We wondered how quickly someone would point it out :)
I thought it was about pre/post FI, but plot twist...turns out it's left and right sides of the screen!
Eric on the left, Jason on the right. This is the way.
Thank you, interesting. I know all lost aversion bias, and read Kahneman, Thaler, Shiller, Fama & more, but bucket strategy is not to try to time the market ?
I mean, if you remove the psychological part, 100% equities with even no cash, and ajusting from 2,5% to 7% withdraw rate is not better ? Because I heard you can ajust to make 3 years of cash becoming 4 years of cash.
At the end, is this not better 60% of 1 million, and selling 60% of 1 million $, than 100% of 500 000$ ? My point is, we should not fear to sell equites even after 40% fall, because in long-term, specially if we are able to ajust withdraw rate, it's mathematically better (OK I admit I go far with 100% equities with no cash, it's just to make my point clearer, but 100% equities + 2/3 years cash should be better in maths, and I like when Eric explains it's trying to time the market, I think precisely like him ;-))
I got the answer by reading again JL Collins, and I agree totally with this strategy :
1) accumulation phase : buy 100% equities VTSAX because time in the market counts, useless to buy something else
2) some years before retiring, if market down, you can keep buying 100% equities VTSAX, if not, you can buy only bond to reach 80-20 to 90-10
And always some cash
Of course, I talk about maths here, not psychological part, and in my case, 90-10 or 100% equities is not a problem. Warren Buffen advises 90-10 too
Where can I find Karsten's 56-part publication?
Show notes/description
In summary: maintain your target allocation. Withdrawing more/less from stocks if it's up/down (i.e. bucket strategy) is trying to time the market.
I don't think it's timing the market, or if it is it's a trivial thing. Not retired, but I was going to do a partial Roth conversion in-kind this year and the stock I was going to move dropped significantly in Jan. Since Roth conversions are very fast when both accounts are with the same broker, I decided to pull the trigger as soon as I realized it was low to move more shares for less cost. When you see something you're going to buy on sale and you accelerate financial moves, is that market timing?
@@5metoo I think so. Buying (or not selling after dips), or selling (or not buying) after rises are assuming things will mean-revert until you are forced to. That's market timing.
@@FernandoFernandesJr Sure, but trivially so if you didn't plan to do it. In those cases it is simply taking advantage of opportunities.
@@5metoo oh, I'm sorry. I think I misinterpreted your comment. If you are doing a Roth conversion when it's down and moving to similar investments it's absolutely not market timing. It's actually very similar in spirit to tax loss harvesting in taxable accounts, and minimizing your lifetime tax bill.
@@FernandoFernandesJr No worries
Wow if I find money in a bear market it will go straight into the market. Or use it for paying taxes on a mega Roth conversion which is a great idea in a bear market.
It's a gimmick.
Re-balancing your globally diverse investments each year will automatically mean you sell winners and buy losers and allows you to free up cash. Having 2-4 years of cash so you don't have to sell when the market is down is critical.
Not related to the content... Did you guys tweak the audio? Sounds much lower in pitch compared to 'normal' At first I thought Jason had a mild cold, but Eric's voice sounds off, too.
Zoom recording this time...easiest way to record the four of us!
Well if people are taking out 1/2 while they keep investing the rest they can't be caught out anyway!!!
How to set up bucket two
If you check out my Bucket Strategy links in the show notes, you'll find a lot of detail on how I set up the buckets. Hope it's helpful!
What happens if the dollar collapses due to losing the reserve status.
Then I guess we have bigger problems than anything we'd be discussing here! In all seriousness, ensuring you have an international allocation in your portfolio is a good start. But that kind of financial crisis would likely have ripples all around.
@@TwoSidesOfFI Yes that is where Gold and Silver would be a good way to store your value.
Don't sell the winners, sell the losers. The winners have a better chance of still being winners in the future than the losers having a turnaround.
The losers will be down, so selling them will not further upset your asset allocation. Also, past returns are poor predictors of future returns. Caveat emptor
With a cash bucket percentage you’ve effectively already sold the market to that percentage . A fixed percentage in a cash bucket is a diluter to CAGR and provable adds risk to a portfolio in the long run.
31:19
❤🎉
Pretty stupid to even discuss a 4% withdrawal strategy when I can buy CD’s yielding 4.6%. You could easily have a large portion in very stable dividend stocks yielding over 5% and never touch your money. Why does anyone sell shares? Seems like a sure fire way to leave your kids nothing.
26:31