Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
”Beyond cash, all a retiree needs is one "bucket" for investments. The portfolio would hold between 50 and 75% in equities for those following the 4% rule or similar retirement spending strategies. The remaining 25 to 50% would be held in intermediate term Treasuries and TIPS.”
That's a good article and video @hank. He seems to be a proponent of 5 years cash and then a portfolio of 50%-60% equity. Well, that seems to me to be a 2 bucket system. Maybe it's just semantics. But his ideas are in line with mine, a cash buffer bucket and then a moderate portfolio bucket. I don't think you need anything fancier unless you are more comfortable separating bonds/income from your equity bucket. Everyone's brain categorizes differently.
Harold EVENSKY, the originator of the bucket system, had just 2 buckets - one for short-term money that didn't belong in the market, and another that was in the market for long-term. It just formalized the idea that the money one needed soon didn't belong in the market.
But his followers, especially Christine BENZ at M*, "refined" it into 3 or more buckets. Then elaborate systems followed to fill them up.
So, this 2010 interview of Evensky by Benz is interesting.
The 3 bucket strategy increases complexity and requires too much maintenance. The author's recommended approach seems prudent: "Beyond cash, all a retiree needs is one 'bucket' for investments. The portfolio would hold between 50 and 75% in equities for those following the 4% rule or similar retirement spending strategies. The remaining 25 to 50% would be held in intermediate term Treasuries and TIPS."
Thanks Yogi. Way back from 2010. Seems in that interview, Evansky was a proponent of 2 buckets. I think he said 2 years cash and the standard 60:40 portfolio. I could hear Christine late in the interview almost edging him on for the idea that more buckets may be better. Maybe I was reading into her intentions. My opinion, stick with KISS.
Is a bucket for a new roof, out of pocket medical care, a new car, estimated taxes, boat repairs and other unexpected expenses and a second bucket for investments flawed? Seems like common sense.
We're in danger of getting into a semantic swamp here with respect to the cash bucket. What exactly is a "normal" expense vs an "unexpected" expense?
To me, a "normal" expense is something that is predictable: a new roof, other major homeowner maintenance, typical major vehicle maintenance, and obviously the normal household operating expenses, including taxes, insurance, food, etc.
So the cash bucket certainly needs to be adequate to cover 3 to 5 years of those normal expenses. We knew well what those normal expenses were because at an early accumulation stage we kept good records of our ongoing expenses, sorted by category, so that we could separate the necessary from the optional. Optional? Things like vacations, restaurants, wine and liquor. Keep records like that and after 3 or 4 years you pretty well know what's necessary and what's optional.
An "unexpected" expense could certainly be a major medical liability or other tragedy not covered by insurance. Since something like that is unanticipated and unpredictable, frankly I don't really know how to protect against that in advance. Worst scenario it might be necessary to partially draw down both buckets for something like that.
All of this depends of course on what the normal expected income is. If the income is greater than the normal expenses, then there is, to an extent, a cushion there in case of disaster.
@Old_Joe,,,, whether expenses are normal or unexpected, funding for such things should not be subject to the vagaries of Mr. Market. Thus a pile of money segregated from our “ main fund.” I sleep better knowing our next car, roof, sails, dental implants and maybe long term care are protected. Some might say the opportunity cost is too high but that’s worth it to us.
Well... If I required of myself (and spouse) that we set aside and grow a segregated bucket full of money sufficient to cover 3 to 5 years' of expenses, I'd never be able to invest, period. So that whole bucket-stuff matters not to me, one iota. The best plan for us is to invest, prudently, for the long haul. We certainly are better off than if we were struggling to fill a pail carrying 5 years' worth of money to cover what we need for that time-period.
Each of us is dealt whatever hand we are dealt. From there, we make choices, and make the best of things. I'm feeling rather fortunate these days--- with zero buckets in the mix. Yes, this stuff in general is indeed very personal, after all is said and done. Using buckets in my case would be like attempting to make a Scientist out of me. I'm not cut out for it.
The author disagrees with the often recommended notion of stashing away 3, 5 or 10 years spending in cash or short term treasuries to ride out potential market downturns. It’s a popular notion often recommended here and across the financial press.
His investment portfolio: ”Beyond cash, all a retiree needs is one ‘bucket’ for investments. The portfolio would hold between 50 and 75% in equities for those following the 4% rule or similar retirement spending strategies. The remaining 25 to 50% would be held in intermediate term Treasuries and TIPS.”
I’m pretty much in agreement with @Crash. I generally don’t bother to maintain a bucket at all, but sell / withdraw from investments “across the board” two or three times during the year for basic needs or major expenses. If the markets get a little “crazy” on the upside, I may pull out an entire year’s spending ahead of time to lock in that extra return. During withdrawals I also rebalance, taking a higher percentage from those assets that have appreciated the most. (I am aware that some here refute the notion of rebalancing at all. )
But your position is probably different. My pension (with some limited cola) and SS (inflation adjusted) could probably cover basic necessities (but not infrastructure maintenance, travel, new vehicles). So I can’t put myself in the position of those who live entirely off investments. It’s a huge difference and so “buckets galore” might well be the preferred route for them.
FWIW - I only started keeping accurate year-by-year records in 2007 (but have some generalized averages from before). Beginning with 2007 (the past 17 years) I’ve had three “down” years. Two resulted in single-digit losses. But ‘08 was nasty with a loss of over 20%. That suggests to me, anyway, that a large cash stash isn’t warranted. To wit - this simplistic analysis overlooks both the magnitude and the duration the market downturn that began in 1929. A multi-year downdraft in equities of that magnitude would inflict greater pain. (But there’d be other more serious issues to worry about.) Recent downturns have been much shorter and may have given some of us a false sense of security. Also, the Japanese experience in the 90s and afterwards should sober any who look at it.
You have to look at your total portfolio. A total 20% loss, is just 20% regardless of how you spin it. The bucket system adds complexity to an already complex retirement situation compared to accumulation. You can achieve the same goals by using several funds without all the moving parts. The bucket system isn't logical. It's just a way to trick your brain...or...if you don't have a real excuse = I sleep better at night.
One thing I noticed. When I retired I planned for about 55k/yr expenses. Now retired 17 years I found I'm averaging 73k+/yr. Some of that is inflation but what adds up is the new cars, new roof, new boat, some large xmas gifts to the kids. i.e. those big expense items spread out over the years add several $k per year to your budget. ADD: I guess some of that additional spending is because I feel comfortable with my results so far.
So the cash bucket certainly needs to be adequate to cover 3 to 5 years of those normal expenses.
@Old_Joe - Nice detailed job outlining conventional wisdom. But ISTM that’s exactly the notion the author is arguing against. If I’m reading him right, he thinks the risk of losing out on potential market gains while sitting on that bucket of cash is greater than the risk of having to pull that money out on a “as needed” basis when markets are lower. (That’s because markets usually go up)
It should be noted,
(1) the article is from 2020 when cash yielded 1-2%, much lower than today’s near 5%.
(2) His recommended “investment” portfolio is quite conservative with up to 50% sitting in intermediate-term Treasuries / TIPS.
No matter how you tweak it, it seems to me the key is to have enough $ in stable value investments ( ie cash and/or short term bonds) to avoid having to sell during a prolonged down market just to get money to live on.
How long the downturn lasts is obviously unknowable in advance, but it could be longer than 2020 and 2008.
I have not read many ideas about handling RMDs in the same way, although you can reinvest the $ if you do not need to spend them all, or I assume transfer equities to your taxable account. But there is the "tax" haircut that is required.
No matter how you tweak it, it seems to me the key is to have enough $ in stable value investments ( ie cash and/or short term bonds) to avoid having to sell during a prolonged down market just to get money to live on. [snip]
I totally agree. The 3 bucket strategy just makes this more complicated than necessary.
Many good points already made. Here's my ten cents worth. Self-directed investing is like running a small business out of the home. It's financial reason for existing is to benefit the household. When I rented out properties I owned, I kept the rental business records separated from the household records. That logic gets applied to my investing activities. The investment account and its records are maintained separately from the household accounts and their records. The only time they come together is when the taxes get paid.
”The investment account and its records are maintained separately from the household accounts and their records. The only time they come together is when the taxes get paid.”
Yes - I agree in maintaining separate records and also in managing both accounts from their own unique perspective. A year’s worth of cash, sitting in reserve and expected to spent within the next 12 months, makes perfect sense to me. But $20,000-$30,000 sitting in cash for the new roof you might need “one of these days” makes little sense to me (unless you are doing so to reap the substantial current rate of interest.)
Perhaps unlike a business, there is an explicit co-mingling of the investment side and the household side.. One would expect under normal circumstances to make periodic transfers of wealth from the investment side into the household side. If not, than why invest in the first place? I think an argument can be made for delaying those transfers out of investments as long as possible to allow the money to grow.
@davfor… I think you nailed it. One thing that this discussion illustrates is that all this stuff is very personal. Unlike Bogleheads group think,,, this group is a big tent. We have the CD crew and one colleague who hunts down obscure individual stocks. Lots of investment styles to learn something from.
$20, 000-$30,000 sitting in cash for the new roof you might need “one of these days” makes little sense to me (unless you are doing so to reap the (substantial) current rate of interest.)
One would expect under normal circumstances to make periodic transfers of wealth from the investment side into the household side. If not, than why invest in the first place?
Agreed on both those points. As to the first point, excess cash in the household account doesn't make sense. But, setting aside $'s over time in the household account for an upcoming roof replacement -- which I am presently doing -- does make sense to me. My method for doing this involves making one annual transfer of all the $'s to be released from my Fido investment account during the year to my Fido household account. This takes about 30 seconds. Investment decisions for the household account are made based on the present mix of the households needs and their related time frames. The household account is mostly invested in FZDXX right now as MM rates are good. But there are also some $'s in bond OEF's.
I don't look at this "bucket" concept as simply having two (or more) separate and inviolable piles of assets. The main consideration is to have a group of assets that can be converted fairly easily to cash to meet immediate expenses which may be in excess of current income. This group protects the other group: long-term investments that may be temporarily devalued due to prevailing economic conditions, and to avoid having to sell those at a market bottom and take a large loss.
Obviously the structure and deployment of those two groups will vary immensely depending upon the needs of each individual.
FWIW Instead of a cash bucket, why not take out a second mortgage, if you have a home. Yes you pay interest, but that bucket would be invested in the market somewhere hopefully making money went Mr Market turns up. Maybe second mortgage should be called home loan ? I don't own a home so guess I need a bucket.
@Derf - Not a bad idea, except mortgage interest rates have rocketed up over past couple years. I actually have a small 3% refi mortgage taken out 5-6 years ago for some remodeling. Hell can freeze over before I’d pay it off. Today you’re probably looking at around 7-8% 6% on any kind of mortgage refinance.* Not an attractive risk / reward proposition IMHO.
* One source I checked shows 15 year fixed refi loans (national average) currently at around 6%. Umm … maybe. Proceed at own risk!
Many good points already made. Here's my ten cents worth. Self-directed investing is like running a small business out of the home. It's financial reason for existing is to benefit the household. When I rented out properties I owned, I kept the rental business records separated from the household records. That logic gets applied to my investing activities. The investment account and its records are maintained separately from the household accounts and their records. The only time they come together is when the taxes get paid.
I never understood "I need cash for an emergency". It's been already over 30 years since I needed lots of cash. Just in the last 1.5 years, we had the following unpredictable expenses: 1) My wife totaled a vehicle and we bought a new one. I took a small loan and paid it in full in 2 weeks because the dealer gave me a $500 discount. He also agreed to charge my Visa 2% cash back for another $10K. I still owed close to $10K which we paid by check because the dealer was willing to wait 4-5 days. 2) First time in my life we just went to see the possibility of replacing the other old vehicle one Saturday, and found a great cheaper option than expected and just bought it. That dealer only allowed me $3K on my Visa 2% cash, the rest was expected in 2 business days. I sold a fund at my broker account on Monday and wired the money on Tuesday. 3) The roof started leaking heavily. First, we covered the hole with a blue tarp. Then, we found a roofer I liked. For the initial pay of just $2K, I used the same Visa again. He charged me 3% (lost 1%) but I did it so I can dispute something in the future while you can't do it with checks. The work was amazing and I paid with a check. 4) The deck suddenly was wobbly and could not be used. Same process as above.
All were "must do/fix it quickly". We just keep several thousand in the bank and the rest is invested in brokerage accounts in the market. Most retirees have safer, short-duration bonds they can always sell. In the last year, MM pay over 5%, again not a problem, but MM will not do that for a long time. I don't invest in anything I think can't generate 6+% annually.
BTW, while I was working I was laid off 4 times, when I needed more money, I just sold 1-2 of my mutual fund. Again no need to hold months of available cash.
All our credit cards and loans over the years were paid in full every month and why we have a very good credit score.
I'm still looking for a logical reason why I need an emergency fund and can't find one...wait, I got 2 needs = illegal drugs or ransom.
Comments
But his followers, especially Christine BENZ at M*, "refined" it into 3 or more buckets. Then elaborate systems followed to fill them up.
So, this 2010 interview of Evensky by Benz is interesting.
https://www.morningstar.com/articles/330323/the-bucket-approach-for-retirement-income
Edit/Add. Also found a related MFO thread from 2021, https://mutualfundobserver.com/discuss/discussion/58461/cash-flow-strategy
The author's recommended approach seems prudent:
"Beyond cash, all a retiree needs is one 'bucket' for investments.
The portfolio would hold between 50 and 75% in equities for those
following the 4% rule or similar retirement spending strategies.
The remaining 25 to 50% would be held in intermediate term Treasuries and TIPS."
To me, a "normal" expense is something that is predictable: a new roof, other major homeowner maintenance, typical major vehicle maintenance, and obviously the normal household operating expenses, including taxes, insurance, food, etc.
So the cash bucket certainly needs to be adequate to cover 3 to 5 years of those normal expenses. We knew well what those normal expenses were because at an early accumulation stage we kept good records of our ongoing expenses, sorted by category, so that we could separate the necessary from the optional. Optional? Things like vacations, restaurants, wine and liquor. Keep records like that and after 3 or 4 years you pretty well know what's necessary and what's optional.
An "unexpected" expense could certainly be a major medical liability or other tragedy not covered by insurance. Since something like that is unanticipated and unpredictable, frankly I don't really know how to protect against that in advance. Worst scenario it might be necessary to partially draw down both buckets for something like that.
All of this depends of course on what the normal expected income is. If the income is greater than the normal expenses, then there is, to an extent, a cushion there in case of disaster.
Each of us is dealt whatever hand we are dealt. From there, we make choices, and make the best of things. I'm feeling rather fortunate these days--- with zero buckets in the mix. Yes, this stuff in general is indeed very personal, after all is said and done. Using buckets in my case would be like attempting to make a Scientist out of me. I'm not cut out for it.
His investment portfolio: ”Beyond cash, all a retiree needs is one ‘bucket’ for investments. The portfolio would hold between 50 and 75% in equities for those following the 4% rule or similar retirement spending strategies. The remaining 25 to 50% would be held in intermediate term Treasuries and TIPS.”
I’m pretty much in agreement with @Crash. I generally don’t bother to maintain a bucket at all, but sell / withdraw from investments “across the board” two or three times during the year for basic needs or major expenses. If the markets get a little “crazy” on the upside, I may pull out an entire year’s spending ahead of time to lock in that extra return. During withdrawals I also rebalance, taking a higher percentage from those assets that have appreciated the most. (I am aware that some here refute the notion of rebalancing at all. )
But your position is probably different. My pension (with some limited cola) and SS (inflation adjusted) could probably cover basic necessities (but not infrastructure maintenance, travel, new vehicles). So I can’t put myself in the position of those who live entirely off investments. It’s a huge difference and so “buckets galore” might well be the preferred route for them.
FWIW - I only started keeping accurate year-by-year records in 2007 (but have some generalized averages from before). Beginning with 2007 (the past 17 years) I’ve had three “down” years. Two resulted in single-digit losses. But ‘08 was nasty with a loss of over 20%. That suggests to me, anyway, that a large cash stash isn’t warranted. To wit - this simplistic analysis overlooks both the magnitude and the duration the market downturn that began in 1929. A multi-year downdraft in equities of that magnitude would inflict greater pain. (But there’d be other more serious issues to worry about.) Recent downturns have been much shorter and may have given some of us a false sense of security. Also, the Japanese experience in the 90s and afterwards should sober any who look at it.
It should be noted,
(1) the article is from 2020 when cash yielded 1-2%, much lower than today’s near 5%.
(2) His recommended “investment” portfolio is quite conservative with up to 50% sitting in intermediate-term Treasuries / TIPS.
Enjoying all the thoughts folks!
How long the downturn lasts is obviously unknowable in advance, but it could be longer than 2020 and 2008.
I have not read many ideas about handling RMDs in the same way, although you can reinvest the $ if you do not need to spend them all, or I assume transfer equities to your taxable account. But there is the "tax" haircut that is required.
Anybody have ideas on that?
The 3 bucket strategy just makes this more complicated than necessary.
Yes - I agree in maintaining separate records and also in managing both accounts from their own unique perspective. A year’s worth of cash, sitting in reserve and expected to spent within the next 12 months, makes perfect sense to me. But $20,000-$30,000 sitting in cash for the new roof you might need “one of these days” makes little sense to me (unless you are doing so to reap the substantial current rate of interest.)
Perhaps unlike a business, there is an explicit co-mingling of the investment side and the household side.. One would expect under normal circumstances to make periodic transfers of wealth from the investment side into the household side. If not, than why invest in the first place? I think an argument can be made for delaying those transfers out of investments as long as possible to allow the money to grow.
Both @LarryB and @davfor make great sense to me.
Yes - a wide spectrum of investment approaches on the board. A lot depends on one’s past experiences, needs, etc. I learn a lot here.
Thanks for sharing.
Obviously the structure and deployment of those two groups will vary immensely depending upon the needs of each individual.
I don't own a home so guess I need a bucket.
7-8%6% on any kind of mortgage refinance.* Not an attractive risk / reward proposition IMHO.* One source I checked shows 15 year fixed refi loans (national average) currently at around 6%.
Umm … maybe. Proceed at own risk!
Have a good week & hope you get some snow melt, Derf
It's been already over 30 years since I needed lots of cash. Just in the last 1.5 years, we had the following unpredictable expenses:
1) My wife totaled a vehicle and we bought a new one. I took a small loan and paid it in full in 2 weeks because the dealer gave me a $500 discount. He also agreed to charge my Visa 2% cash back for another $10K. I still owed close to $10K which we paid by check because the dealer was willing to wait 4-5 days.
2) First time in my life we just went to see the possibility of replacing the other old vehicle one Saturday, and found a great cheaper option than expected and just bought it. That dealer only allowed me $3K on my Visa 2% cash, the rest was expected in 2 business days. I sold a fund at my broker account on Monday and wired the money on Tuesday.
3) The roof started leaking heavily. First, we covered the hole with a blue tarp. Then, we found a roofer I liked. For the initial pay of just $2K, I used the same Visa again. He charged me 3% (lost 1%) but I did it so I can dispute something in the future while you can't do it with checks. The work was amazing and I paid with a check.
4) The deck suddenly was wobbly and could not be used. Same process as above.
All were "must do/fix it quickly".
We just keep several thousand in the bank and the rest is invested in brokerage accounts in the market. Most retirees have safer, short-duration bonds they can always sell. In the last year, MM pay over 5%, again not a problem, but MM will not do that for a long time. I don't invest in anything I think can't generate 6+% annually.
BTW, while I was working I was laid off 4 times, when I needed more money, I just sold 1-2 of my mutual fund. Again no need to hold months of available cash.
All our credit cards and loans over the years were paid in full every month and why we have a very good credit score.
I'm still looking for a logical reason why I need an emergency fund and can't find one...wait, I got 2 needs = illegal drugs or ransom.