The 3 Bucket System: Is it a Great or Lousy Retirement Plan?
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- เผยแพร่เมื่อ 26 มิ.ย. 2024
- Are you using the three bucket method in retirement? Well, if you're using it in the classic fashion, you are likely leaving quite a bit of wealth on table... You can schedule an appointment with one of our Retirement Experts to look at your situation and help you plan for your future. Call us at (920) 544-0576 or go to www.safeguardinvest.com/contact.
Timestamps:
0:00 The Three Bucket Retirement Strategy
0:17 How the 3 Bucket Strategy Works
2:12 The 3 Bucket Strategy During 2008
3:17 2 Benefits of the 3 Bucket Approach
4:17 The Massive Problem with the 3 Bucket Strategy
7:23 3 Bucket Strategy vs. A Classic 60/40
9:33 Benefits Gained with a 60/40
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You don't touch LT Buckets in down Years. You're defeating the whole purpose of buckets.
I am confused about that part as well. Why you would rebalance if the market is down 25%? Bucket 1 should have 3-4 years of expenses not 1 year so that you could get through the down time without having to withdraw money from bucket 2 & 3.
Because u are selling high (bonds) and buying low (stocks on sale) so you are better positioned for the bull market
Exactly!
I agree. If you are rebalancing, then you are not bucketing. If you are bucketing, then you are not rebalancing. Leave 2 years income as cash in the bank, make automatic monthly transfers from a bond mutual fund to the bank to support spending, sell from stocks to replenish bonds up to 5 years when times are good. If bonds are about to run out before better times, sell just enough stocks at market to keep the automatic transfer funded. Done!
@@michaelgeiss741thank you from saving me the next 9 minutes of brainless explanation. Practical explanation of the bucket system explained.
Video explanation = if I was a robot in retirement with a lousy programming code on how to use the bucket system.
Thanks! Looking forward to more videos and the time segmentation approach. Your videos are great!
This is not how I view or use the bucket strategy. My Bucket 1 starts with 4 years cash, my bucket 2 starts with 6 years bonds, and bucket 3 has the remainder. If after year 1 is the market is down significantly (-20%) then I don’t refill bucket 1 because I still have 3 years for cash. I only refill bucket 1 gets down to less than 1 year, and even then I only refill it will money that is doing better from whichever bucket is doing better.
Curious, how'd you decide on 4 years of cash?
@@SafeguardWealthManagement 4 years seems to cover most any downturn, in almost all instances in the last 100 years the market has recovered within 4 years, and even if it doesn’t then you have another 6 years in Bucket 2 (unless bonds also really took a hit) before you need to start tapping you equities. If we go 10 years without any recovery then we are all in deep dodo.
@@bradk7653 This is a great plan .
Some food for thought.
Bucket #1 6 years cash
Bucket #2 4 years bonds
Bucket 3 everything else
Some of advantages
#1 With today's higher rates on safe money in the 4.75 to 5.00 range it makes sense to increase your cash exposure. to reduce the risk.
#2 if the market does have a significant crash of 20% or more
you will have the option to treat a portion of bucket #1 as dry powder to buy back into bucket#3 hence buying stocks on sale
that will payoff when the market reverts back up. .
Most financial planners on youtube don't understand how to build and manage a 3 bucket strategy .
I feel like this representation of the naive 3 bucket strategy is in fact a broken representation of the 3 bucket strategy, like the kid who learns about evolution and then starts looking for ways to get Fido to grow wings. A single individual isn't going to evolve. He's stuck that way. It misses the point. Similarly the point of a 3 bucket strategy is to have safe money for _when taking withdrawals from stocks are a bad idea_. Presumably you took the withdrawal at a good time and stuck it in the cash/bonds bucket. So, of course you shouldn't be shuttling money from stocks to bonds to cash every year.
Rather, we should be deciding whether to draw down the stock or bond bucket each year to cash depending on whether it was a good year for bonds or stocks. If it was a good year for one, we should probably also be rebalancing to one to the other too -- though stocks and bond performance were quite correlated in the 2022 downturn, so it wouldn't have helped then. Looking forward to your next video on this subject.
The whole idea is to have enough in each bucket to wait it out. Just because you lose 25% in the stocks wait out the loss. Having more cash can help, short term losses. No system is perfect, but its better than not having a plan.
Your initial explanation of the bucket strategy isn’t how I interpreted it, as others have said. I think all strategies need to be dynamic, and versions of a 2 or 3 bucket strategy can do that and give peace of mind. I like Joe Kuhn’s videos on the topic, but maybe that’s just me.
I have created my own 3 bucket strategy. I will be retiring next month at 62.5 years old, and plan to take SS at FRA. I do have an annuity which I bought with a lump sum pension. Bucket 1 is 2.5 years cash, cd's, and bonds. Bucket 2 is strong dividend paying stocks & ETF's, which will generate cash to replenish Bucket 1. There will be growth with many of these also. Bucket 3 is growth. Buckets 1 and 2 would get me to SS if it had to, which if that happens, we're all in trouble!
Is your bucket #1 in a brokerage account or high yield account? Love this strategy.
Congrats on making it just under the wire on that FRA!
It’s been a month! How’s retirement?
If dividends aren’t guaranteed how will your plan hold up?
@@user-ji8fu9tp6g Great! Should have done it sooner!!!!
Good video Eric! I appreciate you sharing your observations and clear explanations with everyone. Larry Oman ,Ca.
Thank you Larry!
The bucket strategy has different permutations as you describe. It is really about dealing with sequence of return risk. There is little need to use it when everything is going up.
Time segmentation and a rising equity glide path all make sense.
An aspect not mentioned is the idea that you may not need your whole portfolio, in which case, you can do the opposite. Keep what you need in a 60/40, and the rest can be in whatever you want conservative or aggressive.
Finally, someone who demonstrates the false safety of the three-bucket strategy. In the end, you are still dependent on what the market is doing or you are trying to time the market. Good job.
Thanks 😊
I believe that Eric gives the smartest personal finance advice on TH-cam.
And I have never likes the bucket strategy because the is no safe way to refill bucket one in a falling market.
I go with the "total return" method and just take dividends.
Wow, thank you so much! I like it. No arguments with using dividends in a total return approach.
I have a pension account that I have been managing quite well for 4 years now but want to change it to a bucket strategy.
1 Bucket Cash 12% = 3 years payments
2 Bucket Balanced fund equities 65/defensive 38%
3 High Growth equities 50%
If market is flat or slow it works fine for 3 years the will need topping up from bucket 2. and hopefully these 2 buckets run for 10 years by witch time Bucket 3 has doubled it's value.
It's a plan which is better that what i'm doing now I think.
Most of the time 60/40 systematic strategy will work out fine .
But if you start out your retirement with a secular bear market a properly designed 3 bucket strategy can be the lifesaver.
Example
If you are using a 5% withdrawal rate and between buckets 1and 2 you have 15 years of income your asset allocation will be 25/75
You will now be in position to withstand a severe market crash while you have the dry powder to take advantage of some opportunistic buying of equity,s .
This strategy will follow a rising equity glide path.
Nice Video, I'm doing something closer to your time segmented version. I think a Probability of Success (analysis) would help for each case. Having an average higher potential value is meaningful but more meaningful is controlling the probability of failure. After all, we are too old to get another high performing job like the one we left. Failure is not an option.
Retirement coming within 20 months. I am thinking an 18 month short term bucket. A second bucket which is an emergency fund (also equal to 18 months) that is needed tactically regardless of bucket strategy. Replenishing the short term bucket every 9 months except if there is a down market. If the market remains down exhaust the short term bucket and after which I draw emergency funds (as it truly is an emergency. ) Once market recovers replenish all funds. Total value of short term bucket and emergency fund is 36 months. Of course in a down market , a retiree can always extend the length of those funds by using an austerity plan (lol like in real life). I could easily make these funds last 40 months.
I have settled on a Time Segmentation strategy: bond ladder/bond tent until FRA (7 years out) to guard against sequence of return risk and provide guaranteed income without interest rate risk; with rising equity glidepath post SS FRA. If equity market outperforms during the first "segment" of this strategy, may simply choose to roll bond ladder/tent out further without consuming it.
I'd like to see if using target funds would be a good option to implement the bucket strategy. For example, use an Income fund for funds needed within the next two years, a 2025 fund for funds needed in three years, a 2030 fund for funds needed in 8 years, etc. The benefit being the stock exposure of your portfolio being automatically reduced to the Income fund level when you need to withdraw the funds.
Good explanation. I always been skeptical of the bucket strategy as the replenish method seemed to rely in some unclear rules if the market goes down for a significant amount of time. The bucket strategy hide also quite a bit the importance about your stock bond cash (or others asset class) allication. An alternative is to simply think about your asset allocation and estimate how long of your needed income is in asset class. 12:38
Seems like you don't understand how the bucket strategy works because your "fix" to the bucket strategy is actually how the bucket strategy is supposed to be used. It's not about just moving money between buckets to maintain some pre-defined balance on a set rebalance schedule with out regard to current market conditions. It's about not drawing down on stocks in a bad market, instead, living off the short term and mid term buckets until the market recovers. Only then will you start drawing down from the long term bucket to refill the short term and mid term buckets. If you think about it, the bucket strategy is really just a 60/40 or 70/30 portfolio except you clearly define how you draw down from your accounts.
Odd comment. I explain three different variations to the bucket strategy and that gives you the impression that I don't understand how it works?
This is a video for a general audience. I've seen firsthand retirees use the first explanation of the bucket strategy without a drawdown trigger. The goal was to explain why this creates an issue and better alternatives.
I like the 5 bucket myself...
Safeguard - What makes you say the 3-Bucket System and the 60/40 approach are [necessarily] mutually exclusive? Cash Bucket remains same, and Bucket 3 holds 60% of remainder in stocks, while Bucket 2 retains the remaining 40%. Rebalance periodically; was/rinse/repeat?
My bucket strategy assigns different levels of risk to 'buckets'; of household spending. The base bucket meets basic needs of mortgage, groceries, utilities and out of pocket medical from income from pension, SS and interest from insured deposits.
Next higher risk bucket derives income from income producing ETF's. This covers more discetionary clothing, simple entertainment ( occasional movie out or dinner at our local Vienamese restuarant, Netflix , NFL Sunday Ticket), deferrable maintenance etc.
Next riskiest bucket utilizes capital gains from individual stocks; this covers vacations, gifts, discretionary home improvement, hobbies, more lavish entertainment ,clothing, etc.
A final risk bucket yields cash from trading, options strategies etc.
If these more risky buckets don't make a return then the corresponding spending and spending associated with higher bucket spending also doesn't happen and capital is preserved. If we make a big return on some option play, for example , we will splurge with some of the proft, perhaps a week in Hawaii or something big for our children.
Kind of like our ancestors who only spent the money they had. We never carry abalance and never invade our principal.
please excuse typos, it's late.
Send more info ,
I would love to see a 100% stocks method in this comparison as the baseline because in my mind that's the best chance of all. If the ladder drops 3 rungs you're still far higher because all of your money has been working as hard as it can.
I agree with this. I feel like Bonds are so risky. Vanguard’s BND has only yielded 2.8% since inception.
The bucket strategy seems overly complex to me. I’m nowhere near retirement, so I guess I have time to decide.
Bad premise. The 1st bucket doesn’t get refilled until the market recovers. This means one must have 2 or more years in that 1st bucket. It needs to be bigger
I think more meaningful would be showing last 30 years ... 1992 thru 2022. Several reasons ... recent decades more correctly reflect the macro and political landscapes ... as 30 years is a typical retirement horizon, looking at most recent 30 years again more accurately reflect current times that are relevant. I say this speaking on behalf of those recently retired or approaching retirement in the short term. Of course, for those in 30s and 40s, maybe it doesn't change the conclusion.
He was showing 30 year outcomes.
1992 to 2022 has the lost decade sandwiched between 2 of the greatest bull runs in history.
You could had retired in 1992 with a 100% equity allocation (sp500) with an inflation adjusted 8% withdrawal rate and 30 years later you would still have 100% of your beginning portfolio.
You need more cash /liquid in your bucket 1. 4 years should be in bucket 1 to avoid sequence of return risk. Bucket 2 would be 60/40 stock bonds. Bucket 3 would be 100% stocks.
If the stock market drops -25%, you should prob tap the breaks on spending. Instead of $80k... maybe drop to $60-$70k by deferring large purchases or a vacation.
If you are retired, about 50/50 allocation is a good start (Moderate allocation) and that includes T-Bills, Intermediate Bonds, and your money market fund. And a mix of AVGE, FDIF, and MAGS for your equity exposure and Worldwide coverage. You can pick between MAGS and FDIF if you want to avoid duplicate company coverage; however, both of these ETFs cover AI, go with FDIF which is a fund of funds ETF of "DISRUPTOR" companies in five sector ETFs in the stock market. You can also add the GLTR to add precious metals to your portfolio. I have four buckets with the fourth being a taxable account for my RMD withdrawals.
I do not think the buckets need to be rebalanced. 3-4 years max of cash, money market type investments , will pretty much sequence of return risks, Worst case scenario you have a bear market at the beginning of retirement an you have 4 years of cash available, more if you dynamically make withdrawals. Don't over complicate it.
Dude. If the market dropped 25% you leave the long term and let it regrow. Why would you take in a down market. You live off the short and mid until you regain capital.
80k is more than 4% of 1.5mil.
I think you missed the whole point of bucketing - which is odd, as you mentioned more than once it's about putting a good distance between short term needs and market volatility. Why on earth would you suggest taking money from the LT bucket in a down period when you have a second bucket there to get you through those down times? I hope you're NOT advising your clients to do this - or even explaining the strategy to them in this way. Yikes.
I suggest watching the whole video
60/40 wins in every 30 year span 😮
One thing I hate about the bucket strategy is the cash portion of it. Basically you have cash, very little interest, losing to inflation. Not very good way to go IMO.
Having 3 years in cash isn’t going to kill you.
Depends on how much you have invested in other assets. I have 3 months of expenses in cash. For me that is enough, since almost all of my cashflow comes from dividend paying stocks, unless those dividends get cut substantially I don't need cash. Since almost all of my dividends come from companies that have paid and raised them for over 20 years the risk of that is low. @@Mitzi73
You have away to make this more complicated than it needs to be 3 years cash 1 bucket bucket 2 stocks and bonds refill when stocks are up go to year two when down your not that smart dude your looking for clients it’s not splitting atoms?