Author Topic: The Bucket Strategy  (Read 3023 times)

4n6

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The Bucket Strategy
« on: February 17, 2018, 06:22:23 AM »
Hi everyone,

So the retirement bucket strategy is a popular one and one that makes a lot of sense to me. The question(s) I have is the specific process of how you have/had done it?

If there are 3 buckets (long-term investing, moderate investing, and cash) do you fill the long-term investing first. Then the closer you get to retirement you start to fill the next bucket or move assets to more moderate-term investing that locks in some gains from the long-term, but also gives you a bit of a return. The final bucket would be filled really in the last couple of years pre-retirement where you plow a lot of your savings into a cash position to get you through a couple of years of spending.

For those of you using the bucket strategy how have you gone about doing so? What is the specific process you have discussed, particularly when most of your major assets are probably locked into retirement accounts.

Catbert

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Re: The Bucket Strategy
« Reply #1 on: February 17, 2018, 11:06:44 AM »
Well many here (not me) are 100% stock in the accumulation stage so they would clearly fill the long-term bucket first.

I've always had a bond position, so I filled the long-term and medium term buckets simultaneously.  It was only when I got closer to retirement that I started seriously filling the short-term/cash bucket.  For me the spending bucket is comprised to 1/pension 2/cash flow from real estate 3/bonds maturing 4/cap gains and dividends from mutual funds.

Leisured

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Re: The Bucket Strategy
« Reply #2 on: February 18, 2018, 05:42:25 PM »
The Long Term bucket is more important than some people think. Rich people with a lot of stock see no problem with relying on stock dividends regardless of age. such people plan to pass their stock to the next generation, so their main bucket is always long term.

Life expectancy has risen a lot, so someone who retires at say 55 expects another 30 years or so in retirement.

When young, fill the cash bucket first, say a float of $15K to cater for unexpected problems. Then fill the Long Term bucket, and keep filling it.


aceyou

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Re: The Bucket Strategy
« Reply #3 on: February 19, 2018, 10:53:29 AM »
The Long Term bucket is more important than some people think. Rich people with a lot of stock see no problem with relying on stock dividends regardless of age. such people plan to pass their stock to the next generation, so their main bucket is always long term.

Life expectancy has risen a lot, so someone who retires at say 55 expects another 30 years or so in retirement.

When young, fill the cash bucket first, say a float of $15K to cater for unexpected problems. Then fill the Long Term bucket, and keep filling it.

+1

HipGnosis

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Re: The Bucket Strategy
« Reply #4 on: February 19, 2018, 11:38:23 AM »
I don't subscribe to the 'bucket' strategy (never heard of it, actually)
But
Cash is first.  That's your emergency fund.
Then it's pretty much ignored, but it's size does occasionally need to be adjusted as your situation changes.

wenchsenior

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Re: The Bucket Strategy
« Reply #5 on: February 19, 2018, 02:51:33 PM »
I always thought the term 'bucket' strategy referred to how you divide your stocks and bonds/cash up between short and long term investment vehicles.  Something about how you want your stocks in taxable accounts because of the lower tax rates? And bonds in tax exempt accounts?  I could be wrong about this, though.

boarder42

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Re: The Bucket Strategy
« Reply #6 on: February 20, 2018, 07:10:34 AM »
when just starting to save with no safety nets around i can see the value of a typical cash E Fund.

Once someone has amassed a sizeable taxable account dumping the EFund into investments and holding no cash is a better play in accumulation and likely in FIRE as well. 

startingsmall

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Re: The Bucket Strategy
« Reply #7 on: February 20, 2018, 08:29:35 AM »
I've recently started thinking about our finances in this way.

I love Our Next Life blog, and they've basically split their FIRE funds into buckets.
https://ournextlife.com/2016/02/17/how-we-calculated-our-numbers-for-each-phase-of-early-retirement/

After giving it some thought, I decided that I liked it and I'm doing the same... mentally, at least. Right now, FIRE is still far enough out that my asset mix in all of my investment accounts is the same, but I'll change it as I get closer to the start date for using each type of account. I mainly just like mentally separating out traditional vs. early retirement.

The first bucket is "traditional retirement." I include all "retirement" accounts in there - 401k, Roth, whatever weird letters/numbers represent my husband's church retirement account, etc. I plan to start drawing from that pool at 58.5. (The first year will be Roth contributions.) So my spreadsheet tells me what the retirement bucket will be worth at 58.5 years old (assuming 7% gains) and what my 4% SWR works out to be. I'm 39 years old right now and that number is doable-but-very-lean right now, so we're no longer maxing those accounts but we're still contributing.

My second bucket is "early retirement." I lump everything in there that isn't an age-restricted account - cash, taxable investing accounts, HSAs (I save all of my receipts and therefore could get most of that money back easily). My spreadsheet currently reflects us starting to pull from that at 52yo, though we're currently not anywhere close to that being a number we can live off of. That's the goal, though. Right now, if we didn't add anymore, we could hit lean FIRE when I'm 57.... so still lots of work to be done. Focusing on that bucket right now.

I know that you can do Roth conversion ladders and all of that other stuff to address the early part of early retirement, and I'm sure we will do that to some extent (since I'll never want to forego a 401k match, I suspect we'll overshoot by a good bit), but I like having a backup plan in case Roth conversion ladders ever go away, and I like having this money mentally separated so I can mentally check off periods of our life as we cover them. 

boarder42

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Re: The Bucket Strategy
« Reply #8 on: February 20, 2018, 08:37:06 AM »
I've recently started thinking about our finances in this way.

I love Our Next Life blog, and they've basically split their FIRE funds into buckets.
https://ournextlife.com/2016/02/17/how-we-calculated-our-numbers-for-each-phase-of-early-retirement/

After giving it some thought, I decided that I liked it and I'm doing the same... mentally, at least. Right now, FIRE is still far enough out that my asset mix in all of my investment accounts is the same, but I'll change it as I get closer to the start date for using each type of account. I mainly just like mentally separating out traditional vs. early retirement.

The first bucket is "traditional retirement." I include all "retirement" accounts in there - 401k, Roth, whatever weird letters/numbers represent my husband's church retirement account, etc. I plan to start drawing from that pool at 58.5. (The first year will be Roth contributions.) So my spreadsheet tells me what the retirement bucket will be worth at 58.5 years old (assuming 7% gains) and what my 4% SWR works out to be. I'm 39 years old right now and that number is doable-but-very-lean right now, so we're no longer maxing those accounts but we're still contributing.

My second bucket is "early retirement." I lump everything in there that isn't an age-restricted account - cash, taxable investing accounts, HSAs (I save all of my receipts and therefore could get most of that money back easily). My spreadsheet currently reflects us starting to pull from that at 52yo, though we're currently not anywhere close to that being a number we can live off of. That's the goal, though. Right now, if we didn't add anymore, we could hit lean FIRE when I'm 57.... so still lots of work to be done. Focusing on that bucket right now.

I know that you can do Roth conversion ladders and all of that other stuff to address the early part of early retirement, and I'm sure we will do that to some extent (since I'll never want to forego a 401k match, I suspect we'll overshoot by a good bit), but I like having a backup plan in case Roth conversion ladders ever go away, and I like having this money mentally separated so I can mentally check off periods of our life as we cover them.

this strategy works if you're "old" b/c age restricted accounts will be accessed with the roth ladder for those of us that are younger - the only "early retirement" funds a person needs is the 5 year bridge funds til the roth ladder gets started and those include roth contributions as well as taxable accounts.   Thinking of accounts that are tax advantaged as the retirement accounts is a poor way to view it as its suboptimal in almost all cases for FIREes to not max tax advantaged accounts up until they retire.  So while this strategy you propose may work for those retiring near retirement age its a sure fire way to delay FIRE for most of the younger crowd visiting this blog.  following your strategy i'd have to quit funding trad. 401k's immediately at 31 b/c that money will grow incredibly large by the time i'm old enough to withdraw it based on age.  then i'd have to delay my FIRE time considerably if i was planning to have taxable investment accounts reach what i'd need for the first 30 or so years of FIRE. 

in addition to the roth ladder there is SEP 72t and the math done by MadFientist that shows even taking the 10% penalty is better than a taxable account for most people.

startingsmall

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Re: The Bucket Strategy
« Reply #9 on: February 20, 2018, 09:17:33 AM »
I've recently started thinking about our finances in this way.

I love Our Next Life blog, and they've basically split their FIRE funds into buckets.
https://ournextlife.com/2016/02/17/how-we-calculated-our-numbers-for-each-phase-of-early-retirement/

After giving it some thought, I decided that I liked it and I'm doing the same... mentally, at least. Right now, FIRE is still far enough out that my asset mix in all of my investment accounts is the same, but I'll change it as I get closer to the start date for using each type of account. I mainly just like mentally separating out traditional vs. early retirement.

The first bucket is "traditional retirement." I include all "retirement" accounts in there - 401k, Roth, whatever weird letters/numbers represent my husband's church retirement account, etc. I plan to start drawing from that pool at 58.5. (The first year will be Roth contributions.) So my spreadsheet tells me what the retirement bucket will be worth at 58.5 years old (assuming 7% gains) and what my 4% SWR works out to be. I'm 39 years old right now and that number is doable-but-very-lean right now, so we're no longer maxing those accounts but we're still contributing.

My second bucket is "early retirement." I lump everything in there that isn't an age-restricted account - cash, taxable investing accounts, HSAs (I save all of my receipts and therefore could get most of that money back easily). My spreadsheet currently reflects us starting to pull from that at 52yo, though we're currently not anywhere close to that being a number we can live off of. That's the goal, though. Right now, if we didn't add anymore, we could hit lean FIRE when I'm 57.... so still lots of work to be done. Focusing on that bucket right now.

I know that you can do Roth conversion ladders and all of that other stuff to address the early part of early retirement, and I'm sure we will do that to some extent (since I'll never want to forego a 401k match, I suspect we'll overshoot by a good bit), but I like having a backup plan in case Roth conversion ladders ever go away, and I like having this money mentally separated so I can mentally check off periods of our life as we cover them.

this strategy works if you're "old" b/c age restricted accounts will be accessed with the roth ladder for those of us that are younger - the only "early retirement" funds a person needs is the 5 year bridge funds til the roth ladder gets started and those include roth contributions as well as taxable accounts.   Thinking of accounts that are tax advantaged as the retirement accounts is a poor way to view it as its suboptimal in almost all cases for FIREes to not max tax advantaged accounts up until they retire.  So while this strategy you propose may work for those retiring near retirement age its a sure fire way to delay FIRE for most of the younger crowd visiting this blog.  following your strategy i'd have to quit funding trad. 401k's immediately at 31 b/c that money will grow incredibly large by the time i'm old enough to withdraw it based on age.  then i'd have to delay my FIRE time considerably if i was planning to have taxable investment accounts reach what i'd need for the first 30 or so years of FIRE. 

in addition to the roth ladder there is SEP 72t and the math done by MadFientist that shows even taking the 10% penalty is better than a taxable account for most people.

Wow. Okay, somehow I had missed that Mad Fientist post (and the RPF episode that triggered it). Thank you!!

rudged

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Re: The Bucket Strategy
« Reply #10 on: March 19, 2018, 09:38:22 AM »
Well many here (not me) are 100% stock in the accumulation stage so they would clearly fill the long-term bucket first.

I've always had a bond position, so I filled the long-term and medium term buckets simultaneously.  It was only when I got closer to retirement that I started seriously filling the short-term/cash bucket.  For me the spending bucket is comprised to 1/pension 2/cash flow from real estate 3/bonds maturing 4/cap gains and dividends from mutual funds.

I have to share I am also confused. JL Collins discusses buckets in terms of two tax advantaged accounts (e.g employer retirement plans and traditional IRAs that delay when taxes are paid; Roth IRAs that are funded by income after taxes) and a third bucket (cash and investments outside of retirement plans). As I understand it, bonds (with the exception of municipal bonds and Federal treasury notes) should always be held within tax advantaged accounts, e.g. your employer's retirement plan. It's unclear to me how the three bucket strategy (long, medium, and short term) incorporates the distinction between tax advantaged and other accounts (with the exception of cash), particularly for someone who anticipates one day having to deal with required minimum distributions.

bortman

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Re: The Bucket Strategy
« Reply #11 on: March 20, 2018, 04:32:11 PM »
This reminded me that I made a note in my digital notebook back in 2011 after I overheard a friend's father talking about "buckets". He told me that his financial adviser explained it this way:

Quote
Rule used to be that you would just withdraw 4% of retirement savings each year. You could expect to make up that 4% with what remained in your 401k.

Divide kitty into three buckets

Bucket 1: Liquid
keep as much liquid as you need to live on
still within 401k, but in cash

Bucket 2: Medium Term 3-4%
treasury bonds or other CD-type vehicle

Bucket 3: Long Term Stock Market
expect to make 7-10% over the long term

as needed, money moves between buckets, but ...
money doesn't move directly between 1 and 3, only 1-2-3 or 3-2-1

The "still within 401k" part points to this being for someone retiring at "traditional" age rather than ER. I don't plan to do it exactly this way but, on the surface, it doesn't seem like a terrible strategy.

rudged

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Re: The Bucket Strategy
« Reply #12 on: March 24, 2018, 08:35:54 AM »
This reminded me that I made a note in my digital notebook back in 2011 after I overheard a friend's father talking about "buckets". He told me that his financial adviser explained it this way:

Quote
Rule used to be that you would just withdraw 4% of retirement savings each year. You could expect to make up that 4% with what remained in your 401k.

Divide kitty into three buckets

Bucket 1: Liquid
keep as much liquid as you need to live on
still within 401k, but in cash

Bucket 2: Medium Term 3-4%
treasury bonds or other CD-type vehicle

Bucket 3: Long Term Stock Market
expect to make 7-10% over the long term

as needed, money moves between buckets, but ...
money doesn't move directly between 1 and 3, only 1-2-3 or 3-2-1

The "still within 401k" part points to this being for someone retiring at "traditional" age rather than ER. I don't plan to do it exactly this way but, on the surface, it doesn't seem like a terrible strategy.

What does the "kitty" refer to? The entire portfolio? If so, you presumably need to keep track of what is held in retirement accounts and outside. If not, i.e. the kitty only refers to just the 4% withdrawal from the 401k, I don't know what to make of this.