Simple Bucket Question

Qyburn

Hi,
I'm trying to simplify ideas and plans to the extent that I fully understand, rather than blindly following a recipe. To that end I am leaning towards two buckets, cash and investments.

Cash for say three years, covering shortfall between desired income and SP and DB income. In today's money let's call that £30k (for three years).

Then there's the investments and my understanding is the cash buffer allows these to be higher risk.

The question is how does one monitor the balancing between cash and investments? Cash will deplete at a steady rate, but if I moved £10k/year from investment to cash then I'm not doing any buffering. Is there a simple rule of thumb to decide how much and when to withdraw? I assume the idea would be to take a lower amount if investments are down, for example take only £5k if they're down by 50%. Then at other times take more to replenish the cash buffer.

JohnWinder

You can dream up your own rule based on common sense, others have offered rules that worked during this or that period of stock/bond/cash returns. There can’t be a perfect rule that will maximise returns, since a rule that works best during a ‘crash’ can’t work optimally during a non-crash. A rule could however give you optimal ‘peace of mind’, if for example it kept x years of spending as cash regardless of how painful it was cashing at times that were dictated by the rule. 

Linton

Qyburn said:

Hi,
I'm trying to simplify ideas and plans to the extent that I fully understand, rather than blindly following a recipe. To that end I am leaning towards two buckets, cash and investments.

Cash for say three years, covering shortfall between desired income and SP and DB income. In today's money let's call that £30k (for three years).

Then there's the investments and my understanding is the cash buffer allows these to be higher risk.

The question is how does one monitor the balancing between cash and investments? Cash will deplete at a steady rate, but if I moved £10k/year from investment to cash then I'm not doing any buffering. Is there a simple rule of thumb to decide how much and when to withdraw? I assume the idea would be to take a lower amount if investments are down, for example take only £5k if they're down by 50%. Then at other times take more to replenish the cash buffer.

If the only bucket is a small buffer simply holding zero return cash then there is little point since the cash will need to be frequently replenished from the main pot. You would need very constrained market timing rules as to when to stop and start replenishing in a crash.

However consider the situation if the bucket was able to cover known short term one-offs and to comfortably and safely generate sufficient money for ongoing needs but not for long term inflation matching.  For example higher interest cash would now be fine for the purpose. Then you would only need to replenish very occasionally from your equity investments when inflation made your basic income inadequate.

So the sole purpose of the equity bucket is to provide a reserve to ensure long term inflation matching on a strategic level. Most years it would not be touched at all and hence 100 % equity could be appropriate.

Bostonerimus1

Buckets is just another way to think of asset allocation. You are really asking about drawdown methods and they fall into two basic categories; dynamic/variable and constant percentage plus inflation. An example of the first would be "Guyton Klinger" and the other type is is the classic "Bengen 4% rule". Do a search on drawdown methods and you'll find lots of information.

Albermarle

Bostonerimus1 said:

Buckets is just another way to think of asset allocation. You are really asking about drawdown methods and they fall into two basic categories; variable and constant percentage plus inflation. An example of the first would be "Guyton Klinger" and the other type is is the classic "Bengen 4% rule". Do a search on drawdown methods and you'll find lots of information.

As explained here in simple terms, although they do not actually mention Guyton Klinger.
Setting a strategy for retirement withdrawals (vanguard.com)

Qyburn

Linton said:

If the only bucket is a small buffer simply holding zero return cash then there is little point since the cash will need to be frequently replenished from the main pot. You would need very constrained market timing rules as to when to stop and start replenishing in a crash.

I was thinking in terms of at least three years in cash, but naturally I'd try to get the best interest rate as well while still keeping it available when needed. Maybe there years isn't enough, meaning an intermediate bucket of low risk low growth potential is also needed. But to illustrate the point two buckets are enough.

gm0

McClung - Living off your Money is a wide ranging book on this very subject.  But it is a bit of a tome.

Spoiler

There are apparent marginal gains to be had from access method in deaccumulation - some approaches backtest and montecarlo and simulated stress test better than others. 

But confidence to follow a plan is more important than the exact plan chosen

Willingness to tolerate somewhat variable income seems to help.

If you want to rely on prior and simulated market "testing" as part of being confident in an approach then don't pick n mix with a bit of this one and a bit of that one and kid yourself it's the same thing.  You are likely changing how it reacts to sequence of return.