Bucket drawdown strategy, what to put in medium term bucket?

GazzaBloom

Linton said:

GazzaBloom said:

I have thought about bucketing but it all falls down for me when I get to the topping buckets up part. So, I decided that a simple 2 asset “barbell” portfolio with 80% risk-on (accumulating equity index funds) and 20% risk-off (cash - currently earning 5.25% interest) is my preference.

I plan to draw down proportionally and rebalance annually starting April 2025.

Yes I agree that with bucketing you need to have a topping up strategy.  But I dont see how your "waterfall" model where money flows down through the buckets in this simple way provides significant benefits compared with say just holding VLS80?  Or do you do something different in a crash? But then you run into timing problems.

I agree, holding a single 80/20 fund such as VLS is my preference to using a bucket strategy. However I prefer to choose my own equity funds and don't particularly like Vanguards mix in the VLS range. I would be happier if they offered a simple 2 element fund of a global stocks and global bonds index fund. I also prefer to hold cash to bond funds.

GazzaBloom

dunstonh said:

I've never really understood what a chronological buckets strategy adds to a basic asset allocation way of organizing a retirement portfolio.

The expectation, where it is appropriate, is that people will be drawing an amount that is likely or has a good chance of eating the capital.    So, if £xxx may only be invested for say 5 years, then the asset mix should reflect that timescale.  If £yyy is going to be invested for 10 years, you can take a bit more investment risk and if £zzzz is going to be invested for 20+ years, a bit more risk still.

If you are drawing an amount that is sustainable with capital erosion not expected, then bucketing is not really of much use beyond a cash float.

Consuming some portfolio capital isn't a bad thing if taken in a controlled way over the lifetime of retirement. Isn't that the purpose of a retirement portfolio?

The kids can have the house, the retirement money is mine.

Pat38493

GazzaBloom said:

dunstonh said:

I've never really understood what a chronological buckets strategy adds to a basic asset allocation way of organizing a retirement portfolio.

The expectation, where it is appropriate, is that people will be drawing an amount that is likely or has a good chance of eating the capital.    So, if £xxx may only be invested for say 5 years, then the asset mix should reflect that timescale.  If £yyy is going to be invested for 10 years, you can take a bit more investment risk and if £zzzz is going to be invested for 20+ years, a bit more risk still.

If you are drawing an amount that is sustainable with capital erosion not expected, then bucketing is not really of much use beyond a cash float.

Consuming some portfolio capital isn't a bad thing if taken in a controlled way over the lifetime of retirement. Isn't that the purpose of a retirement portfolio?

The kids can have the house, the retirement money is mine.

From what I have read (which is obviously not as much as the professionals), my impression is that statistically based on past history, even if you are running down your portfolio, having a 2-3 year cash bucket which is consistently rebalanced, is unlikely to give you a better result than just taking the money each year directly from an 80/20 fund.

However, there is also something to be said for the psychological effect of having 2 years of income in cash available at all times.

The other advantage that people often stated is that you could postpone the rebalancing into cash when markets are in significant drawdown.  That's the easy part.  the problem is that those who advocate this strategy don't seem to give clear guideance on how you decide when you should start filling up the cash bucket again.

Linton

Pat38493 said:

GazzaBloom said:

dunstonh said:

I've never really understood what a chronological buckets strategy adds to a basic asset allocation way of organizing a retirement portfolio.

The expectation, where it is appropriate, is that people will be drawing an amount that is likely or has a good chance of eating the capital.    So, if £xxx may only be invested for say 5 years, then the asset mix should reflect that timescale.  If £yyy is going to be invested for 10 years, you can take a bit more investment risk and if £zzzz is going to be invested for 20+ years, a bit more risk still.

If you are drawing an amount that is sustainable with capital erosion not expected, then bucketing is not really of much use beyond a cash float.

Consuming some portfolio capital isn't a bad thing if taken in a controlled way over the lifetime of retirement. Isn't that the purpose of a retirement portfolio?

The kids can have the house, the retirement money is mine.

From what I have read (which is obviously not as much as the professionals), my impression is that statistically based on past history, even if you are running down your portfolio, having a 2-3 year cash bucket which is consistently rebalanced, is unlikely to give you a better result than just taking the money each year directly from an 80/20 fund.

However, there is also something to be said for the psychological effect of having 2 years of income in cash available at all times.

The other advantage that people often stated is that you could postpone the rebalancing into cash when markets are in significant drawdown.  That's the easy part.  the problem is that those who advocate this strategy don't seem to give clear guideance on how you decide when you should start filling up the cash bucket again.

Why is "a better result"  one that maximises income or wealth at death and the psychological benefits almost an after-thought?  If mximising income thoughout your life is essential to meeting your objectives I would suggest you are taking too much risk. A better objective is maximising well-being. If you have sufficient income to meet your needs, psychological benefits are likely be more important than extra income - Google Maslow

But there is more to it than that.  In my view 2 years of income is too far too little and misses out on much potential benefit.  A major one is flexibility.  With a large low risk bucket (LRB) you can make major spending decisions such as an exotic/expensive holiday or a new car on the spot without replanning the rest of your life and reorganising your investments.

To counter 2 major arguments against having a large LRB:

1) Less income
If you are running a 60/40 portfolio, why not include the LRB as part of the 40%?  Why should the overall income be lower than without the LRB?

2) Refilling LRB
I agree that this is a major hole in the simple strategy of switching income in a crash and would therefore advocate not switching income in a crash.  Put all income from pensions, annuities , SP, dividends/interest, perhaps excess growth, etc  into the LRB and take all expenditure from it.  Over the long term the LRB should increase in value and over the short/medium term should be sufficient to cover major economic downs.

The final problem to solve is inflation.  With current interest rates the LRB should be able to generate enough income internally to largely match inflation but if necessary, rather than selling off growth assets directly for immediate consumption they may be better used to generate extra future stable income.  The net result being that your overall asset allocation will become less growth oriented over time. This is similar to the prime harvesting idea.

JohnWinder

You might be viewing the field as someone with enough to allow some of it to slosh around in a savings account in case an exotic holiday pops into view. We ought keep in mind others for whom maximising income at acceptable risk levels is a priority; those choosing between fish fingers or cat food, or between heating or eating in winter. There's a wide range of situations. 

Linton

JohnWinder said:

You might be viewing the field as someone with enough to allow some of it to slosh around in a savings account in case an exotic holiday pops into view. We ought keep in mind others for whom maximising income at acceptable risk levels is a priority; those choosing between fish fingers or cat food, or between heating or eating in winter. There's a wide range of situations. 

Someone choosing between fish fingers and cat food is unlikely to be worried about things like their pension buffer size and therefore wont be reading his forum for guidance.  Most people who have planned their pension on a SWR or similar are likely to be able to afford exotic holidays when they get past the SOR danger period.

JohnWinder

Most people who have planned their pension on a SWR or similar are likely to be able to afford exotic holidays when they get past the SOR danger period.

But the bucket etc ideas we're talking about are to address SOR risk; when we're old enough to be past that it matters less.

However, I think we might be in agreement underneath it all, but omitting risk every time we talk about returns is an issue - and I'm as guilty as the next woman.

I wonder if your recognition of 'well being' as important is incorporated in how much risk we are prepared to take. When someone prioritises income level for their returns, it's not to say they are compromising well being if their risk level is comfortable. As you noted, if you have sufficient income to meet your needs, move on to psychological benefits. Some of us are working towards the first with the maximum returns for risk, a risk level we're okay with if it's assessed wisely.

Linton

JohnWinder said:

Most people who have planned their pension on a SWR or similar are likely to be able to afford exotic holidays when they get past the SOR danger period.

But the bucket etc ideas we're talking about are to address SOR risk; when we're old enough to be past that it matters less.

However, I think we might be in agreement underneath it all, but omitting risk every time we talk about returns is an issue - and I'm as guilty as the next woman.

I wonder if your recognition of 'well being' as important is incorporated in how much risk we are prepared to take. When someone prioritises income level for their returns, it's not to say they are compromising well being if their risk level is comfortable. As you noted, if you have sufficient income to meet your needs, move on to psychological benefits. Some of us are working towards the first with the maximum returns for risk, a risk level we're okay with if it's assessed wisely.

The bucket strategy I am proposing is addressing far more than SOR.  The requirement it aims to meet is to generate a steady inflation-matching longterm income with the option for one-off expenses  from a medium/high equity investment portfolio with minimal ongoing management effort and zero knowledge or belief about future market behaviour.

So I am not talking about the situation where one's expenditure is covered by a steady reliable income.  As far as this forum is concerned the relevent time period is perhaps 5-10 years before retirement until death. For earlier periods I would advocate a 100% equity portfolio to create the pension pot with separate management of ongoing shorter term  savings.

In terms of risk, the possibility of insufficient money far outweighs the prospect of excess.  However some excess enables extra expenditure to improve one's psychological well-being. Taking measured risks where they do not compromise ongoing income should not be seen as an issue.

Pat38493

Linton said:

Why is "a better result"  one that maximises income or wealth at death and the psychological benefits almost an after-thought? 
 <snip>
But there is more to it than that.  In my view 2 years of income is too far too little and misses out on much potential benefit.  A major one is flexibility.  With a large low risk bucket (LRB) you can make major spending decisions such as an exotic/expensive holiday or a new car on the spot without replanning the rest of your life and reorganising your investments.
The final problem to solve is inflation.  With current interest rates the LRB should be able to generate enough income internally to largely match inflation but if necessary, rather than selling off growth assets directly for immediate consumption they may be better used to generate extra future stable income.  The net result being that your overall asset allocation will become less growth oriented over time. This is similar to the prime harvesting idea.

It's not - in fact my current plan involves something like a 2-3 year cash amount or low risk short term bonds, even though I've seen so much research that this is not the optimal long term strategy.  

Apart from anything else, we are in that rare time when cash returns are higher than inflation for the moment, and bonds are still sinking, so there is little to lose in the short term, but I will move to a more conventional approach at some point.

In fact, I am very likely on the verge of pulling all my TFC out of my largest pension fund to prepare for retirement.

I also am starting with a cash amount which is much larger than 2 years of long term rolling income need but this is mainly because I am bridging to a combined guaranteed income stream in 12 years from now which covers 90% or more of our current annual spend (and way more than 100% of essential expenses).  However I have planned big expenditures in the first 2 years including a new car and caravan and paying off at least 50% of the mortgage maybe more - hence I know that my cash outlays in the first 2 years will be a lot larger.

Raw SWR strategies and statistics are pretty useless for me as my withrawal plan ranges from negative (due to still working making large contributions this year) to 16% next year, but then ramps down to about 6.7% by the 3rd year, about 5% from year 9, but then down to 1.7% in year 14 and way less than 1% after that.  Therefore quoting 3.5% rates for 30 years doesn't really help me in any way.  My risk is between having way too much, or running out in about year 11! (even this wouldn't be catastrophic due to the guaranteed incomes mentioned above).

Also I am prepared to flex my spending if needed whereas I think you have posted in the past that you are not.

JohnWinder

'The bucket strategy I am proposing is addressing far more than SOR.  The requirement it aims to meet is to generate a steady inflation-matching longterm income with the option for one-off expenses'

But surely the bucket strategy is only about SOR risk if you're after steady growth for income and one-off big spending. Imagine stocks returned 2% above inflation every year without variation and without fail. To meet your needs you'd hold 100% stocks, because to do otherwise by holding another asset class that returned less than 2%/year, however steadily, would be to give you less returns for the same risk. You're proposing holding cash for one-off purchases, but the cash in my example barely keeps up with inflation; you're going to get rid of the cash with your purchase whereas you could have been holding stocks instead of cash, and then get rid of the stocks to make the purchase; all the while, the stocks earning more than the cash.

It's only because stocks and bond funds will have a variation in their returns, sometimes too large for comfort, that you need buckets, n'est pas?