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.
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.
@@LazyWay-m1w 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.
You and Rob are saying the same thing, really. His approach is to have a % in cash. Yours is to have x years in cash. Each of you rebalances to achieve that periodically. Whether it's years or %, it's just a form of rebalancing. Fwiw, I prefer your approach, unless until percentages get a bit too far out of whack.
It’s all a bucket strategy whether it is called a bucket or portfolio. People just adjust the bucket/portfolio capacities to fit their personal needs and preferences. I view it as more of a lever system. For xyz result I need to push this lever or pull that lever. It’s all the same concept just like Jack Daniel’s is both a bourbon and a Tennessee Whiskey.
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
Bucket 1 suggests 4 years worth of living expenses that can be easily touched. Ok. But that’s a hella lot of money gaining at most 5%. That sounds wasteful.
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.
People work their entire lives, then are asked to become economists, accountants, professional money managers, etc. in a crash course fashion. Retirement shouldn’t be complicated, but unfortunately it is.
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.
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.
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.
The thing that kills the 3 bucket strategy is: "How & when do you refill the cash bucket?" It turns out that there is no successful way to refill it. Rebalancing once a year when you take your withdrawal is by far best.
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?
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.
Agree with you. This is what I would call rebalancing by "reverse DCA". Periodically move money into cash from the part of the portfolio that is overbalanced, be it stocks or bonds.
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.
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...
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.
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 see your point, but when you said “ keep whatever portion you feel is necessary in checking or savings, as part of your bond portfolio” isn’t that basically the three bucket method.? I plan to implement a 65/35 split and just ensure I have x years in cash + bonds equaling 35% and the rest in equities. I would plan to rebalance annually or biannually or if the market spikes, perhaps. However, in down years, just rebalance the bond and stock portion and ride it out with existing cash…. I am planning to keep 3 years in cash covering all expenses between 62/63 and 67 (FRA- start SS), then keep 3 years in cash based on total expenses minus SS, thus a lesser amount. But I will always have to manage it as three segments, or buckets, since I want cash, bonds and equities. Keep up the good work, I hope you realize how much you are helping us pre/retirees think through their plans and bring us thoughtful topics. Thank you very much, Rob!
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.
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.
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.
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.
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.
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!
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?
Rob - Your "60/40" strategy is TOO rigid when in retirement. The bucket strategy is much more flexible and is designed to combat the sequence of returns risk. You're strategy does not factor that Social Security IS a bond. The bucket strategy makes it easier to manage the sequence of returns risk whether or not you are taking Social Security. Example: You retire at 62 and want to take Social Security at 70. The 1st 3 years are cash (bucket 1), the next 5 years are bucket 2, and the rest in bucket 3. When you hit 70 and start taking Social Security (which is a bond), your cash bucket is MUCH less and your bucket 2 is MUCH less. This frees up bucket 3 to have MUCH more in stocks.
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.
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.
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?
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 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.
Thank you Rob, I know I'm a couple of years late, but the timing of me watching this was perfect for me. I've been watching a lot of folks recommending the 3-bucket strategy and it all sounds nice and easy to set up, but I could never understand how it functioned over the course of a couple of down years (as you noted where do you get the money to replenish the buckets). Like so many of the commenters on here and your advise, its simpler to follow the financial advice we've followed all our lives for have an emergency fund (i.e. cash in hand) and then re-balance your investments based on your allocation strategy. I'd be really interested in understanding how others strategize the balance of drawing from the emergency fund and investments during a down market. I'm using a stepped approach for drawing from my emergency fund. I will withdrawal from my investments in a down market, but the greater the down the less I draw from investments and the more I draw from the emergency fund. My goal is to stretch my emergency fund minimize loss in a market that might be down for multiple years. Probably overly conservative, but give me peace of mind.
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.
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.
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.
@thoryan3057 You can do that in an Excel spreadsheet. That's what I did. And it clearly showed that the separate cash bucket strategy is much worse that simply rebalancing to your desired asset allocation.
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.
Bucket strategy has caused me absolutely zero stress during this market downturn. You’re wrong on this.. can’t wait to stick my bucket 1 in 5+% for years.
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.
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.
Annuitize (with a GIB) an amount to cover your basic living expenses each year, and then use the other stock/bond segments of your portfolio for the discretionary spending over the years. This covers everything even in years when both stocks AND bonds are down.
I have had time to review the different strategies. The issue is how do you protect your retirement from a market drop during the first few years of your retirement? (sequence of returns risk) I very much like your solution except I will not be replenishing the cash account. I will let it run dry. Cash account - Put 2-4 years into cash just to protect me from a down market for the first 2-4 years. Retirement account - The remainder 60/40 portfolio that you rebalance every year. So no matter what happens in the market (up or down) the first 2-4 years you spend the cash and you rebalance the 60/40. After the cash runs out (2-4 years of retirement) you are safe from sequence of returns risk and you just have a simple 60/40 portfolio.
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!
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?
Rob- You're right. "Bucketing" is an unworkable strategy for most retirees, because the whole issue of how to perpetually replenish bucket#3, goes completely ignored. I can only see this working, if a retiree had such large starting reserves, in relation to their ongoing income needs, OR; had very substantial Social Security and pension income, which would allow them to periodically replenish bucket #3. Otherwise..I do not see how the ultimate total liquidation of bucket #3, could possibly be avoided.
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
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).
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.
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.
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?
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.
Rob, one scenario that you did not show is when you need to withdrawal money when the stock market is down say 40% and the bonds are down 20%. You are forced to withdraw from bonds because you don’t have a large enough cash bucket. This is where the bucket strategy will shine over your 60/40 rebalance strategy. And don’t tell me that stocks and bonds won’t drop at the same time. Thanks
Well, even in that scenario you'll rebalance, resulting in buying more stocks. Also, for bonds to be down 20%, you are probably in high yield, long term or emerging market debt. Short and intermediate term U.S. gov't bonds down 20%, while not impossible I guess, would be unusual. For say the Vanguard short-term u.s. gov't fund, which has a duration of 2 years, you would need to see rates rise to more than 10% for the fund to be down 20%. Even an intermediate term fund would need to see rates rise 400 to 500 basis points to see a 20% decline.
I think the bucket strategy is for people who retire debt free including no mortgage. They don't really have to rebalance every year. The cash is more for an emergency or for travel.
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?
The dow is down 6% over the past 12 months. Bond Indexes show bonds are down over 10% for the past year. Neither the bucket strategy nor the yearly rebalancing scenario seem to address this. I have never been a bond fan given previously low interest returns in relation to stocks and dividend returns and their value dropping in times of interest rate increases as we are in now. Too me bonds arent any less risky than a balanced stock portfolio. Are there other strategies for your safer money portion such as good old blue chip dividend paying stocks?
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.
Most bear markets last an average of 2 years. So if you have a 2 bucket strategy with 3 to 5 years cash in bucket 1 and your growth bucket in bucket 2, wouldn't this solve your concerns?
Another angle to the question of balancing the ratio of bonds/fixed income to equities is managing the tax bite of eventual RMDs. For those peeps who were able to retire in their early 60s and continue to grow the equity portfolio at 8-10% a year, that portfolio could easily top $1.5M. At today's rate, the yearly RMD for a $1.5M portfolio for a 72 year old is $58K Add that to SS, pensions, dividends, etc. and a person's AGI could easily top $100K.
Very good points. However, if we take your scenario, what income is being used if they retire in their "early 60s"? Most advisers will tell you to use your tax-deferred accounts (401k, IRA, etc) as your income source and don't touch your Roth accounts in your early retirement years. That way you can draw down your taxable account and reduce or eliminate the RMDs.
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 looked at Christine Benz 3 bucket strategy. She has roughly 4 yrs in cash bucket 1 maybe 1 year duration treasuries, bucket 2 in intermediate treasuries. 1& 2 giving about 10 yrs worth of income. And 3rd bucket in a more risky strategy, but I don't think that was 100% equities. And you needed to be flexible, so if bucket 3 gave really good returns say by year 3,you could take some profit and top up bucket 1&2 for example. Or a 2 bucket strategy could be cash and a 60/40 lifestrategy fund or in US vanguard balanced fund maybe or just do your own 60% Equity & 40% bond portfolio and rebalance once per year. She also said equities usually do well over 10 year periods but I guess there's no guarantees, so if you were showing a good returns on your more risky equity part you could bank some profits just to be safe
This was a super helpful explanation of the basic idea behind the bucket strategy. Great video. Many of the other videos I watch didn't really give an adequate explanation of the 3 Bucket Strategy
I know this is an older video but have been searching content for 3-bucket strategy and this came up. Most of the videos seem to be supportive and how-to’s for the bucket strategy. Yours is the only that is taking the opposite view. Before I even started watching these videos I had landed on something that looks a lot like the bucket strategy, but is less complicated. First, my plan is for SSA and pension to cover my living expenses, and I’m putting 4 years of “go money” into cash or cash-like assets that I will use in a down market. I will use my retirement accounts (mostly stocks) in an up market and to replenish the cash bucket. I’m focused on the expense side of the equation. All this rebalancing seems like more work than necessary. I have just two rules.
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.
@@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.
Rob, I am just discovering you and the thousands of others thinking hard about retirement so I'm late to this conversation. I appreciate this video on the Bucket strategy, especially sharing the research. I too have struggled to comprehend the mechanics of bucket refilling, but I understood it differently than you presented, in two ways. First, I imagine bucket three would be configured as a modern portfolio, not merely all stocks. It would be as one is constructed in the accumulation phase. Maybe a 60/40 or 80/20 stock/bond, or maybe a pinwheel or a Swenson. That way the buckets are not overall more aggressive as you suggest. Bucket 3 can get rebalanced annually just as one would do in accumulation. Second, bucket 2 would be comprised of a bond ladder. That way when bonds mature annually the pay out gets moved into cash. What about if there's a downturn? Well, maybe before buying that next bond for the bond ladder using Bucket 3 you wait. The bucket strategy allows you to buy time during the downturn. If there are 5 rungs in the ladder then your bucket 3 portfolio has 5 years to recover. When it reaches its previous high you rebuild your bond ladder. I am not in a position to argue with the research but I do ask what assumptions they used and the mechanism were employed, or if they were consistent from one case to the next. Perhaps it ruins wealth as Larry says. Perhaps as you suggest you can accomplish the same goal by rebalancing. In reality, there are no buckets. It's just a way to think about how to manage your allocated assets. Thanks for the thought provoking video.
At the beginning you show 20% bucket with cash and an 80% bucket with stock... and then note that this is too aggressive for most people. Why not have the longer term bucket include a mix of stocks and bonds(or cash) and rebalance that? Also, why do most planners act like stocks and bond funds are negatively correlated or that bond funds are safer?
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.
@@Boulder836 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.
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!
I plan 3 buckets. In Aus we have a little different aged income rules. I plan 10% cash. 50% in superannuation which is tax free but which you have to take out a minimum 4% (which increases with age). 40% in direct property which gives a stable income and ties net wealth to the biggest market and which should be more stable. The cash covers down years in super where the draw down % result falls as the gross value falls. This can be replenished in strong years where the income drawdown becomes higher. The real estate should provide a stable yield which is tied to rent with capital increases or decreases in line with the property market which is generally more stable. Now just saving hard to make the buckets big enough to allow a stable income for a good retirement. Ideally 3yrs plus in the cash bucket gets the minimum. 5 years ideally. At 3 yrs cash then the superannuation will be equal to 15 yrs and at 4% is 60% of annual income needed. Property would be equal to 12 years and at 4% would be 48% of annual income needed. So together these are 108% of income needed and cash remains untouched! Quest is now to get to those levels without debt and home ownership
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.
Agreed. Followers of JL Collins seem to be big proponents of the buckets. The amounts for the buckets always seemed arbitrary to me so thanks for breaking down this concept.
That would surprise me. My understanding is that JL Collins is pretty aggressive with his asset allocation and he himself does not use a bucket strategy.
I've been using portfolio visualizer since I saw you using it in one of your videos. One of the tools is the monte carlo portfolio simulation and if you run that just as it opens with 100% VOO, start with $1000000, withdraw 45k annually-over 98 of portfolios survive. Now if you increase withdrawal rate to 55k you can push survival rate down to around 80%. Here is my questions-At any particular withdrawal rate, I have been unable to improve survival by mixing in any amount of bonds. Is this model flawed? Why is it so optimistic? Should I just go into retirement 100% equity? Do bonds not help anymore? What am I missing? Thanks! I enjoy you videos.
Here in Canada we already have 1 year GIC rates at 4% and probably 5% by next year. With your $1 million portfolio, you could make $40k a year risk free and never touch your principal.
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.
In Canada, the best approaches to put a lot of money in 5% GICs. And you can get cashable GICs for slightly less. These are guaranteed income investments that will not go below what the guarantee is. In fact, you could put your whole portfolio into 5% GIC and do quite well in retirement and not worry about the stock market at all. The problem is as you grow your investments you put them into RRSP’s, which are simply investments in the stock market. So your ratio ends up being quite high with RRSPs until you have enough of a portfolio to feed the GIC part. We also have tax-free savings accounts called TFSAs, where we are allowed to put a percentage into this account annually to build up effectively a tax-free investment. But these investments are subjected to the stock market as well. So cashable GICs versus cash is much better.
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
The way I understood the bucket strategy is to keep taking money out of the bonds/cash buckets, until the market changes, completely violating the stock to bond ratio. I never heard what to do if the market turns around with only very modest gains. How long to keep taking money out of bonds.
Sounds all complicated. I retired 7 years ago and use a barbel strategy which works well and very simple. 5 years cash and the rest is Fidelity Balanced Fund (FBALX). I only rebalance if the market is up. So far there hasn't been a 5 year down market.
This assumes withdrawing annually? How often would one withdrawal from a retirement account and why not semi annually or quarterly? I've never seen this question answered anywhere.
I agree, it would seem more prudent to withdraw multiple times a year. So in that case, I would assume it would be better to rebalance after every withdrawal?
I’ve never been a fan of 60/40 or 70/30. And it’s good thing last year(2022)- bond funds did not perform very well. If you have to buy bonds buy individual corporate bonds.
Rob, Great video...really glad I found it as this makes a lot more sense and much...much easier. My question is.... should you only rebalance annually ? or is quarterly or twice a year better in your opinion ?
Rookie question (not retired yet). Isn't bucket or no the same thing IMHO? You have a cash account to pay the bills, then got bonds and stocks. You can treat bonds/stocks as one bucket or two buckets. You can do the balancing like you say and still keep filling your cash bucket from this second bonds/stock bucket.
Rob, thanks for this very thorough video. My in-retirement 60/40 allocation looks like this... 60% S&P 500 Index Fund, 14% Intermediate Bond Fund, 14% Short-term Bond Fund, and 12% in the Vanguard Money Market Fund. At a 4% withdrawal rate, this gives me 3-yrs of cash for withdrawals... which should outlast most down markets. And, the Money Market Fund works quite well with the current inverted yield curve. Also, thanks for hammering home the cruel reality of the 2008-09 crash... the people hurt the most in that stock market were the ones who had to sell stock to buy groceries.
I think Rob eventually got around to where I've always viewed the buckets strategy - the cash bucket is outside of the allocation strategy. My plan is to have 3-4 years cash in accessible accounts earning inflationary returns and the rest of our money in something like the Vanguard Balanced fund or Wellington. Those funds do the rebalancing for us and we have the cash available for down years and emergencies (unplanned expenses). I can't think of an easier way to manage our funds for the future.
i agree - this seems a straw-man, easily-demolished argument. No one I know in retirement uses. $200k-- /$800k = cash/stock or 80% equity portfolio in retirement. Too risky and you have no way to sell anything to fill up your cash if the stock market hits a 3-yr down trend - which does occur but 3 years is the longest down-stockmarkets, so you are covered. The standard buckets I've seen are what you identify - the "80%" is a diversified portfolio, 'outside' of the cash bucket. I have seen the 3yr cash | 7yr bond bucket | 15yr stock bucket which if you lump the safe investments together come out to be the 10/15 or a 40/60 'bond'/stock portfolio. Rebalancing is no problem and seems to fit well with a fill the cash bucket from Kitces & Pfau's research - use RMD's not a 4% rule. The bond-tent or 40% baseline of safe investments which kicks off the rising equity glidepath still gives high-enough returns after sequence of return risk. The main issue is a suboptimal solution - maybe - but it allows risk-averse people who don't read academic papers to sleep well at night. re-balancing for taxes and being risk averse is ok - but Rob comes to the final completely right thought : COMFORT is all.
Question about the Vanguard Wellington and Balanced Funds: Does the re-balancing generate taxable events (and thus capital gains) each time if it's held in a taxable account? I would assume so.
Jack Bogle never favored rebalancing, he said you were better off not doing it. I ran several scenarios on a back tester using one or two stock funds and a bond fund all index funds, and always came out a head not overbalancing. So I showed making more money overall. Also if you're going to have a bucket with a few years of money in it for living expenses why not just sell what ever bonds and stocks needed to fill the living expenses bucket, keeping the stocks and bond funds at what ever ratio you want instead of balancing them, then selling again to fill the expense bucket, sounds like a waste of time and effort and for some people might cost them more money if they're paying transaction costs. Or what am I missing? Anyway keep up the great work on the videos, very informative and you're asking the questions I'm always asking so this clears a lot of things up. Thanks
By "keeping the stocks and bonds at whatever ratio you want", isn't that in effect, rebalancing? I understand what you are saying about transaction costs, but at least with my Vanguard accounts, those costs are zero.
@@wd3574 I should have been more clear. For people that are not contributing or taking anything out yet, I've seen Morningstar and others talk about re balancing annually. I've actually heard fiduciaries talk about doing that for customers annually, just didn't make sense because of the fees, if any but in all of the scenarios I've ran you did better not messing with it. If when you go to retire and you're higher than you wanted to be in stocks why not just sell those and adjust the ratios at that time? I just wanted to see if I'm missing something, that's all.
@@robsteal3887 My understanding of the reasoning to allocate a portfolio between stocks and bonds, and to rebalance periodically, is NOT to increase returns, but to reduce risk. Although, in a previous video posted presented a case where a 100% stock portfolio provides the best chance of not running out of money during retirement! Personally, I won't do that, because seems very risky and I can't stomach the swings. As far as fees, I do the periodic rebalancing on my own and I've never seen any fees assessed, by Vanguard at least.
Jack Bogle lived through the times of American prosperity, so he was right, can it be said for the future? How many countries stock market have never recovered or recovered after decades from the heights? Somebody who have not rebalanced vs somebody who was all the way rebalancing up before the crash, whom do you think will survive the multi decade of underperfomance?
I think the problem with this is the stock market will always outperform bonds over time, so of course they're going to gain the most. Like someone else mentioned, though, it's also about risk, and bonds/cash/etc. lowers that risk. Doesn't matter if you don't need the money in a few years, though, so always choose stocks in that case. P.S. I believe Jack Bogle was one of the greatest humans ever, but he wasn't always 100% correct and context could also be missing. He also said there's no reason to invest outside the US because of how much international US includes, which I think might be a bit short-sighted (he also might have only said that because of the P/E ratios at the time, but I kinda doubt 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.
@@LazyWay-m1wactual 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
@@LazyWay-m1w 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.
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"
Check bc😢g zh😢tggw is so gso NBC zt
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.
You and Rob are saying the same thing, really. His approach is to have a % in cash. Yours is to have x years in cash. Each of you rebalances to achieve that periodically. Whether it's years or %, it's just a form of rebalancing.
Fwiw, I prefer your approach, unless until percentages get a bit too far out of whack.
I definitely planning on using bucket list. Retiring in 4 years. Slowly filling in my cash bucket, Selling my overpriced stocks
It’s all a bucket strategy whether it is called a bucket or portfolio. People just adjust the bucket/portfolio capacities to fit their personal needs and preferences. I view it as more of a lever system. For xyz result I need to push this lever or pull that lever. It’s all the same concept just like Jack Daniel’s is both a bourbon and a Tennessee Whiskey.
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
Bucket 1 suggests 4 years worth of living expenses that can be easily touched. Ok. But that’s a hella lot of money gaining at most 5%. That sounds wasteful.
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.
People work their entire lives, then are asked to become economists, accountants, professional money managers, etc. in a crash course fashion. Retirement shouldn’t be complicated, but unfortunately it is.
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.
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.
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.
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.
The thing that kills the 3 bucket strategy is: "How & when do you refill the cash bucket?" It turns out that there is no successful way to refill it. Rebalancing once a year when you take your withdrawal is by far best.
@@Fred2-123 Bingo
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.
Agree with you. This is what I would call rebalancing by "reverse DCA". Periodically move money into cash from the part of the portfolio that is overbalanced, be it stocks or bonds.
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.
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...
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.
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.
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.
I feel like I’d just do a balanced index fund with some cash reserves. Maybe a chunk of cash in the S&P 500 and leave it for the long term.
I see your point, but when you said “ keep whatever portion you feel is necessary in checking or savings, as part of your bond portfolio” isn’t that basically the three bucket method.? I plan to implement a 65/35 split and just ensure I have x years in cash + bonds equaling 35% and the rest in equities. I would plan to rebalance annually or biannually or if the market spikes, perhaps. However, in down years, just rebalance the bond and stock portion and ride it out with existing cash…. I am planning to keep 3 years in cash covering all expenses between 62/63 and 67 (FRA- start SS), then keep 3 years in cash based on total expenses minus SS, thus a lesser amount. But I will always have to manage it as three segments, or buckets, since I want cash, bonds and equities.
Keep up the good work, I hope you realize how much you are helping us pre/retirees think through their plans and bring us thoughtful topics. Thank you very much, Rob!
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.
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.
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.
Outstanding Rob. I have been a huge fan of buckets but I have been rethinking. This video helps. Well done.
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?
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?
Rob - Your "60/40" strategy is TOO rigid when in retirement. The bucket strategy is much more flexible and is designed to combat the sequence of returns risk. You're strategy does not factor that Social Security IS a bond. The bucket strategy makes it easier to manage the sequence of returns risk whether or not you are taking Social Security. Example: You retire at 62 and want to take Social Security at 70. The 1st 3 years are cash (bucket 1), the next 5 years are bucket 2, and the rest in bucket 3. When you hit 70 and start taking Social Security (which is a bond), your cash bucket is MUCH less and your bucket 2 is MUCH less. This frees up bucket 3 to have MUCH more in stocks.
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.
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?
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.
Thank you Rob, I know I'm a couple of years late, but the timing of me watching this was perfect for me. I've been watching a lot of folks recommending the 3-bucket strategy and it all sounds nice and easy to set up, but I could never understand how it functioned over the course of a couple of down years (as you noted where do you get the money to replenish the buckets). Like so many of the commenters on here and your advise, its simpler to follow the financial advice we've followed all our lives for have an emergency fund (i.e. cash in hand) and then re-balance your investments based on your allocation strategy. I'd be really interested in understanding how others strategize the balance of drawing from the emergency fund and investments during a down market. I'm using a stepped approach for drawing from my emergency fund. I will withdrawal from my investments in a down market, but the greater the down the less I draw from investments and the more I draw from the emergency fund. My goal is to stretch my emergency fund minimize loss in a market that might be down for multiple years. Probably overly conservative, but give me peace of mind.
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.
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.
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.
@thoryan3057 You can do that in an Excel spreadsheet. That's what I did. And it clearly showed that the separate cash bucket strategy is much worse that simply rebalancing to your desired asset allocation.
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.
Bucket strategy has caused me absolutely zero stress during this market downturn. You’re wrong on this.. can’t wait to stick my bucket 1 in 5+% for years.
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.
Exactly! I went through these exact scenarios! Your proposal seems like a good balance… and simpler!
Rob, you are full of wisdom and common sense, and the clarity with which you share that knowledge is phenomenal. Thank you!
What do you do if stocks and bonds are both down for the year?
Another issue I see is how/when do you prepare these 3 buckets?
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.
Annuitize (with a GIB) an amount to cover your basic living expenses each year, and then use the other stock/bond segments of your portfolio for the discretionary spending over the years. This covers everything even in years when both stocks AND bonds are down.
I have had time to review the different strategies.
The issue is how do you protect your retirement from a market drop during the first few years of your retirement? (sequence of returns risk)
I very much like your solution except I will not be replenishing the cash account.
I will let it run dry.
Cash account - Put 2-4 years into cash just to protect me from a down market for the first 2-4 years.
Retirement account - The remainder 60/40 portfolio that you rebalance every year.
So no matter what happens in the market (up or down) the first 2-4 years you spend the cash and you rebalance the 60/40.
After the cash runs out (2-4 years of retirement) you are safe from sequence of returns risk and you just have a simple 60/40 portfolio.
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!
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?
Rob- You're right. "Bucketing" is an unworkable strategy for most retirees, because the whole issue of how to perpetually replenish bucket#3, goes completely ignored. I can only see this working, if a retiree had such large starting reserves, in relation to their ongoing income needs, OR; had very substantial Social Security and pension income, which would allow them to periodically replenish bucket #3. Otherwise..I do not see how the ultimate total liquidation of bucket #3, could possibly be avoided.
Bucket 3 shouldn’t need to be replenished if it has stocks that grow most years.
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.
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.
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?
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.
Rob, one scenario that you did not show is when you need to withdrawal money when the stock market is down say 40% and the bonds are down 20%. You are forced to withdraw from bonds because you don’t have a large enough cash bucket. This is where the bucket strategy will shine over your 60/40 rebalance strategy. And don’t tell me that stocks and bonds won’t drop at the same time. Thanks
Well, even in that scenario you'll rebalance, resulting in buying more stocks. Also, for bonds to be down 20%, you are probably in high yield, long term or emerging market debt. Short and intermediate term U.S. gov't bonds down 20%, while not impossible I guess, would be unusual. For say the Vanguard short-term u.s. gov't fund, which has a duration of 2 years, you would need to see rates rise to more than 10% for the fund to be down 20%. Even an intermediate term fund would need to see rates rise 400 to 500 basis points to see a 20% decline.
That sounds like a good idea for Vanguard wellington fund
I think the bucket strategy is for people who retire debt free including no mortgage. They don't really have to rebalance every year. The cash is more for an emergency or for travel.
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?
The dow is down 6% over the past 12 months. Bond Indexes show bonds are down over 10% for the past year. Neither the bucket strategy nor the yearly rebalancing scenario seem to address this. I have never been a bond fan given previously low interest returns in relation to stocks and dividend returns and their value dropping in times of interest rate increases as we are in now. Too me bonds arent any less risky than a balanced stock portfolio. Are there other strategies for your safer money portion such as good old blue chip dividend paying stocks?
My strategy has been to use three categories: 30% cash, 30% Bond/fixed income and 35% stocks and 5% gold (ETF)
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.
Most bear markets last an average of 2 years. So if you have a 2 bucket strategy with 3 to 5 years cash in bucket 1 and your growth bucket in bucket 2, wouldn't this solve your concerns?
Another angle to the question of balancing the ratio of bonds/fixed income to equities is managing the tax bite of eventual RMDs. For those peeps who were able to retire in their early 60s and continue to grow the equity portfolio at 8-10% a year, that portfolio could easily top $1.5M. At today's rate, the yearly RMD for a $1.5M portfolio for a 72 year old is $58K Add that to SS, pensions, dividends, etc. and a person's AGI could easily top $100K.
Very good points. However, if we take your scenario, what income is being used if they retire in their "early 60s"? Most advisers will tell you to use your tax-deferred accounts (401k, IRA, etc) as your income source and don't touch your Roth accounts in your early retirement years. That way you can draw down your taxable account and reduce or eliminate the RMDs.
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 looked at Christine Benz 3 bucket strategy. She has roughly 4 yrs in cash bucket 1 maybe 1 year duration treasuries, bucket 2 in intermediate treasuries. 1& 2 giving about 10 yrs worth of income. And 3rd bucket in a more risky strategy, but I don't think that was 100% equities. And you needed to be flexible, so if bucket 3 gave really good returns say by year 3,you could take some profit and top up bucket 1&2 for example. Or a 2 bucket strategy could be cash and a 60/40 lifestrategy fund or in US vanguard balanced fund maybe or just do your own 60% Equity & 40% bond portfolio and rebalance once per year. She also said equities usually do well over 10 year periods but I guess there's no guarantees, so if you were showing a good returns on your more risky equity part you could bank some profits just to be safe
This was a super helpful explanation of the basic idea behind the bucket strategy. Great video. Many of the other videos I watch didn't really give an adequate explanation of the 3 Bucket Strategy
I know this is an older video but have been searching content for 3-bucket strategy and this came up. Most of the videos seem to be supportive and how-to’s for the bucket strategy. Yours is the only that is taking the opposite view. Before I even started watching these videos I had landed on something that looks a lot like the bucket strategy, but is less complicated. First, my plan is for SSA and pension to cover my living expenses, and I’m putting 4 years of “go money” into cash or cash-like assets that I will use in a down market. I will use my retirement accounts (mostly stocks) in an up market and to replenish the cash bucket. I’m focused on the expense side of the equation. All this rebalancing seems like more work than necessary. I have just two rules.
I love your thinking! logical and K.i.s.s ... keep it coming Rob, we love it!!
This was a great perspective on telling half the story on bucket strategy.
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.
Look forward to reading your new book.
There was one part of this video that bothered me….. you draw your zeros clockwise.
Rob, I am just discovering you and the thousands of others thinking hard about retirement so I'm late to this conversation. I appreciate this video on the Bucket strategy, especially sharing the research. I too have struggled to comprehend the mechanics of bucket refilling, but I understood it differently than you presented, in two ways. First, I imagine bucket three would be configured as a modern portfolio, not merely all stocks. It would be as one is constructed in the accumulation phase. Maybe a 60/40 or 80/20 stock/bond, or maybe a pinwheel or a Swenson. That way the buckets are not overall more aggressive as you suggest. Bucket 3 can get rebalanced annually just as one would do in accumulation. Second, bucket 2 would be comprised of a bond ladder. That way when bonds mature annually the pay out gets moved into cash. What about if there's a downturn? Well, maybe before buying that next bond for the bond ladder using Bucket 3 you wait. The bucket strategy allows you to buy time during the downturn. If there are 5 rungs in the ladder then your bucket 3 portfolio has 5 years to recover. When it reaches its previous high you rebuild your bond ladder. I am not in a position to argue with the research but I do ask what assumptions they used and the mechanism were employed, or if they were consistent from one case to the next. Perhaps it ruins wealth as Larry says. Perhaps as you suggest you can accomplish the same goal by rebalancing. In reality, there are no buckets. It's just a way to think about how to manage your allocated assets. Thanks for the thought provoking video.
At the beginning you show 20% bucket with cash and an 80% bucket with stock... and then note that this is too aggressive for most people. Why not have the longer term bucket include a mix of stocks and bonds(or cash) and rebalance that?
Also, why do most planners act like stocks and bond funds are negatively correlated or that bond funds are safer?
Such an important video. We can’t wait for your book.
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.
@@Boulder836 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.
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!
I plan 3 buckets. In Aus we have a little different aged income rules. I plan 10% cash. 50% in superannuation which is tax free but which you have to take out a minimum 4% (which increases with age). 40% in direct property which gives a stable income and ties net wealth to the biggest market and which should be more stable. The cash covers down years in super where the draw down % result falls as the gross value falls. This can be replenished in strong years where the income drawdown becomes higher. The real estate should provide a stable yield which is tied to rent with capital increases or decreases in line with the property market which is generally more stable. Now just saving hard to make the buckets big enough to allow a stable income for a good retirement. Ideally 3yrs plus in the cash bucket gets the minimum. 5 years ideally. At 3 yrs cash then the superannuation will be equal to 15 yrs and at 4% is 60% of annual income needed. Property would be equal to 12 years and at 4% would be 48% of annual income needed. So together these are 108% of income needed and cash remains untouched! Quest is now to get to those levels without debt and home ownership
is there any evidence that having bonds in your portfolio is actually beneficial? From what I've seen and experience bonds just loose money.
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.
Thanks for explaining what bucket is and why not to do it!
Agreed. Followers of JL Collins seem to be big proponents of the buckets. The amounts for the buckets always seemed arbitrary to me so thanks for breaking down this concept.
That would surprise me. My understanding is that JL Collins is pretty aggressive with his asset allocation and he himself does not use a bucket strategy.
I've been using portfolio visualizer since I saw you using it in one of your videos. One of the tools is the monte carlo portfolio simulation and if you run that just as it opens with 100% VOO, start with $1000000, withdraw 45k annually-over 98 of portfolios survive. Now if you increase withdrawal rate to 55k you can push survival rate down to around 80%. Here is my questions-At any particular withdrawal rate, I have been unable to improve survival by mixing in any amount of bonds. Is this model flawed? Why is it so optimistic? Should I just go into retirement 100% equity? Do bonds not help anymore? What am I missing? Thanks! I enjoy you videos.
But what about when bonds are down AND stocks are down like this year?
Here in Canada we already have 1 year GIC rates at 4% and probably 5% by next year. With your $1 million portfolio, you could make $40k a year risk free and never touch your principal.
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.
In Canada, the best approaches to put a lot of money in 5% GICs. And you can get cashable GICs for slightly less. These are guaranteed income investments that will not go below what the guarantee is. In fact, you could put your whole portfolio into 5% GIC and do quite well in retirement and not worry about the stock market at all. The problem is as you grow your investments you put them into RRSP’s, which are simply investments in the stock market. So your ratio ends up being quite high with RRSPs until you have enough of a portfolio to feed the GIC part. We also have tax-free savings accounts called TFSAs, where we are allowed to put a percentage into this account annually to build up effectively a tax-free investment. But these investments are subjected to the stock market as well. So cashable GICs versus cash is much better.
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
You nailed this on every level. Great comment.
The way I understood the bucket strategy is to keep taking money out of the bonds/cash buckets, until the market changes, completely violating the stock to bond ratio.
I never heard what to do if the market turns around with only very modest gains. How long to keep taking money out of bonds.
Sounds all complicated. I retired 7 years ago and use a barbel strategy which works well and very simple. 5 years cash and the rest is Fidelity Balanced Fund (FBALX). I only rebalance if the market is up. So far there hasn't been a 5 year down market.
This assumes withdrawing annually?
How often would one withdrawal from a retirement account and why not semi annually or quarterly? I've never seen this question answered anywhere.
I agree, it would seem more prudent to withdraw multiple times a year. So in that case, I would assume it would be better to rebalance after every withdrawal?
Does this then work a bit like dollar cost averaging in reverse?
I’ve never been a fan of 60/40 or 70/30. And it’s good thing last year(2022)- bond funds did not perform very well. If you have to buy bonds buy individual corporate bonds.
I still see three buckets--cash. stocks, bonds
Rob, Great video...really glad I found it as this makes a lot more sense and much...much easier. My question is.... should you only rebalance annually ? or is quarterly or twice a year better in your opinion ?
Rookie question (not retired yet). Isn't bucket or no the same thing IMHO? You have a cash account to pay the bills, then got bonds and stocks. You can treat bonds/stocks as one bucket or two buckets. You can do the balancing like you say and still keep filling your cash bucket from this second bonds/stock bucket.
good point. I've thought the same for years but didn't think about it the way you did.
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.
There is a lot of value in simplicity. A life strategy fund and cash is a lot easier than making decisions on bucket rules.
Rob, What would be your view if stocks & bonds were down at the same time?
Rob, thanks for this very thorough video. My in-retirement 60/40 allocation looks like this... 60% S&P 500 Index Fund, 14% Intermediate Bond Fund, 14% Short-term Bond Fund, and 12% in the Vanguard Money Market Fund. At a 4% withdrawal rate, this gives me 3-yrs of cash for withdrawals... which should outlast most down markets. And, the Money Market Fund works quite well with the current inverted yield curve. Also, thanks for hammering home the cruel reality of the 2008-09 crash... the people hurt the most in that stock market were the ones who had to sell stock to buy groceries.
We will study this video carefully. In the meantime, write that book. Thank you, Rob.
I think Rob eventually got around to where I've always viewed the buckets strategy - the cash bucket is outside of the allocation strategy. My plan is to have 3-4 years cash in accessible accounts earning inflationary returns and the rest of our money in something like the Vanguard Balanced fund or Wellington. Those funds do the rebalancing for us and we have the cash available for down years and emergencies (unplanned expenses). I can't think of an easier way to manage our funds for the future.
i agree - this seems a straw-man, easily-demolished argument. No one I know in retirement uses. $200k-- /$800k = cash/stock or 80% equity portfolio in retirement. Too risky and you have no way to sell anything to fill up your cash if the stock market hits a 3-yr down trend - which does occur but 3 years is the longest down-stockmarkets, so you are covered. The standard buckets I've seen are what you identify - the "80%" is a diversified portfolio, 'outside' of the cash bucket. I have seen the 3yr cash | 7yr bond bucket | 15yr stock bucket which if you lump the safe investments together come out to be the 10/15 or a 40/60 'bond'/stock portfolio. Rebalancing is no problem and seems to fit well with a fill the cash bucket from Kitces & Pfau's research - use RMD's not a 4% rule. The bond-tent or 40% baseline of safe investments which kicks off the rising equity glidepath still gives high-enough returns after sequence of return risk.
The main issue is a suboptimal solution - maybe - but it allows risk-averse people who don't read academic papers to sleep well at night. re-balancing for taxes and being risk averse is ok - but Rob comes to the final completely right thought : COMFORT is all.
Very well said.
I agree with you completely. Why not just use Wellington and let their managers do the work for you and rebalance
Question about the Vanguard Wellington and Balanced Funds: Does the re-balancing generate taxable events (and thus capital gains) each time if it's held in a taxable account? I would assume so.
@@SKITTLELA Yes
Jack Bogle never favored rebalancing, he said you were better off not doing it. I ran several scenarios on a back tester using one or two stock funds and a bond fund all index funds, and always came out a head not overbalancing. So I showed making more money overall. Also if you're going to have a bucket with a few years of money in it for living expenses why not just sell what ever bonds and stocks needed to fill the living expenses bucket, keeping the stocks and bond funds at what ever ratio you want instead of balancing them, then selling again to fill the expense bucket, sounds like a waste of time and effort and for some people might cost them more money if they're paying transaction costs. Or what am I missing? Anyway keep up the great work on the videos, very informative and you're asking the questions I'm always asking so this clears a lot of things up. Thanks
By "keeping the stocks and bonds at whatever ratio you want", isn't that in effect, rebalancing? I understand what you are saying about transaction costs, but at least with my Vanguard accounts, those costs are zero.
@@wd3574 I should have been more clear. For people that are not contributing or taking anything out yet, I've seen Morningstar and others talk about re balancing annually. I've actually heard fiduciaries talk about doing that for customers annually, just didn't make sense because of the fees, if any but in all of the scenarios I've ran you did better not messing with it. If when you go to retire and you're higher than you wanted to be in stocks why not just sell those and adjust the ratios at that time? I just wanted to see if I'm missing something, that's all.
@@robsteal3887 My understanding of the reasoning to allocate a portfolio between stocks and bonds, and to rebalance periodically, is NOT to increase returns, but to reduce risk. Although, in a previous video posted presented a case where a 100% stock portfolio provides the best chance of not running out of money during retirement! Personally, I won't do that, because seems very risky and I can't stomach the swings. As far as fees, I do the periodic rebalancing on my own and I've never seen any fees assessed, by Vanguard at least.
Jack Bogle lived through the times of American prosperity, so he was right, can it be said for the future? How many countries stock market have never recovered or recovered after decades from the heights? Somebody who have not rebalanced vs somebody who was all the way rebalancing up before the crash, whom do you think will survive the multi decade of underperfomance?
I think the problem with this is the stock market will always outperform bonds over time, so of course they're going to gain the most. Like someone else mentioned, though, it's also about risk, and bonds/cash/etc. lowers that risk. Doesn't matter if you don't need the money in a few years, though, so always choose stocks in that case.
P.S. I believe Jack Bogle was one of the greatest humans ever, but he wasn't always 100% correct and context could also be missing. He also said there's no reason to invest outside the US because of how much international US includes, which I think might be a bit short-sighted (he also might have only said that because of the P/E ratios at the time, but I kinda doubt it.)