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What's your experience with bucket approach to build a retirement portfolio?

#1
I am watching a video from Morningstar (presenter Christine Benz) on bucket approach for building a retirement portfolio.
The simple theory is keep your 1 to 2 years expense need in Cash or cash equivalents; year 3 to 10 in high quality bonds; year 11 and beyond in stock and high yield bonds.
Wanted to reach out to this community to see how this approach has been adopted by some members and the outcome/usefulness in real life.
 
Thanks in advance for sharing your experience and feedback.
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#2
I have used my three-bucket approach from day-1, 2011 retirement.  Mine is grouped differently than Morningstar's. but the format is similar.  It has worked out very well in this market.  I think we all use some derivative of a bucket approach, i.e. we set aside funds for future needs or projects.  My three retirement buckets are more formalized -based on Net Asset Value.
 
Bucket-1 Cash/Cash equivalents for emergency and living expense - 5% to 20% of my NAV, represents 18-60 months of basic and discretionary expense  (currently at 20% for the past year in this top heavy equity market).
Bucket-2 SEP/IRA and Brokerage account for Bucket-1 quarterly replenishing -currently 56% of my NAV.  This consist mostly of equity funds and corporate and muni bonds (nearly 50-50 split).
Bucket-3 ROTH IRA, HSA and Second home real estate (personal vacation property) for longevity needs and present enjoyment (second home).  Currently at 24% of NAV and consist of equity funds and a few corporate bonds and cash (21% cash waiting for opportunity investing).
 
I believe that I am too cash heavy in Bucket-3.  Had some called bonds and sold some as well.  Just can't find a comfortable entry point into the equity market or bond market.
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#3
I don't think you're hurt a bit by your strategy. Your thinking is perfectly sound. Difficult finding entry point on anything for me too, other than continuing to add a little to existing positions on weakness. Building cash more now and it's a legitimate position in my portfolio. I agree most folks take some kind of bucket approach to our investments. My plan that is unfolding nicely is to have 1/3 of my annual income from dividends held in my taxable brokerage account at Fidelity. Another 1/3 comes from owned real estate (commercial office buildings ) that will be debt free in 18 months, and the other 1/3 come from RMD's from my IRA. Health issues notwithstanding, will still be working at age 70. Not as hard, but still at my business.
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#4
Depending on personal situation, retirement planning and achieving financial goals can be a very complex problem. A dynamic and adaptive solution requires adoption and usage of different approaches and ideas in combination. Additionally, each individual is good (or bad) with a specific problem-solving skill, e.g., one may be very good at "seeing the big picture" but bad at being methodical, whereas another may be very disciplined about things but unable to stay focused on the forest instead of trees. So even if 2 individuals are in identical situation with similar financial/retirement requirements, each may solve the problem differently using their own strengths that they are good at, and yet arrive at the same goal. The more one can depend on their unique and natural problem-solving strength, the better chance of success.
 
When I come across an approach, I take it as a "isolated solution to an isolated problem". Since the problems involved in financial planning are interrelated instead of being isolated, I seek to find out what is the problem that the approach is trying to solve. I try to internalize the idea behind it, so that when I see a similar pattern of problem as part of a bigger problem, I can apply the "idea" to my problem, instead of fitting the approach as-is into my overall solution. More often than not, a reverse-engineering of my overall solution reveals that I'm using a flavor of a specific idea/approach for part of my solution. I take this approach because it aligns with my personal problem-solving skill - I'll be less unsuccessful to do it differently.
 
The overall idea of bucket approach is simple. There are different flavors of bucket approach that can be applied to different context. Some example usage:
 
  • Someone worried about longevity risk (outliving money) can use it for solving the worst-case scenario: Keep aside the minimum amount of money required for scaled-down survival in long-term inflation-protected asset so that if everything goes against the plan, this becomes the catch-all fallback plan after a certain age. With this "divide-and-conquer" mindset in place, the individual can now focus on optimizing the planning up to that certain age.
 
  • Someone with constrained access to existing assets (e.g., IRA that can't be touched until a certain age) can use it for partitioning assets in different accounts so that assets with high volatility that are appropriate for longer time-horizon (e.g. small caps, equities) can go in there, but the income generating portion stays elsewhere. A similar usage is for taking into account future incomes (e.g. social security income that will come after certain age).
 
  • Someone can use bucket simply for drawdown strategy, i.e. have 4-5 years of expense in cash-equivalent and the rest in poorly diversified assets. The idea is that one can weather the 4-5 years of poor performance and hence can avoid any diversification penalty.
 
Note that I'm not recommending any of these approaches to anyone. These are merely examples of how the notion of bucketing can come into play indirectly, instead of retrofitting a specific bucket recommendation into one's overall financial solution.
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#5
Kind of a mental bucket approach .... cash (mmf short term bonds, bond funds), bonds, stocks. I like to keep enough in cash for 2 to 3 years of basic expenses (amount needed to add to SS and pension), bonds for next 3 years of expenses, then the rest in in longer term bonds and stocks.

I don't include my real estate in any of this.
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#6
(12-18-2018, 11:23 AM)DaMa Wrote: Kind of a mental bucket approach .... cash (mmf short term bonds, bond funds), bonds, stocks.  I like to keep enough in cash for 2 to 3 years of basic expenses (amount needed to add to SS and pension), bonds for next 3 years of expenses, then the rest in in longer term bonds and stocks.

I don't include my real estate in any of this.

We do the same, ignore the value of our home for planning purposes. You have to live somewhere. If we happen to sell and replace with something lower cost or rent, then fine and dandy. Meanwhile it is a zero in the financial planning column.

I think that is sound advice.
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#7
I have never seen a huge difference between Christine's bucket approach and a simple 60/30/10 portfolio rebalanced at regular intervals. It seems mostly a matter of perspective... cash is bucket one, shorter term high quality bonds are bucket two, and equities/riskier bonds are bucket three.

That said, I do have 'bucket one', 1-2 years of cash maintained separately from the rest of my portfolio and opportunistically refilled occasionally. The comfort of knowing it is there let's me maintain a more aggressive asset allocation in my actual,portfolio than I would otherwise be comfortable with.
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#8
As many note, most retirees are somewhat similar, with near term cash, long term growth, and mid term "something"  May be thought of as buckets; may be thought of as "balanced", the result is still similar.  That mid term "something" is bonds for many, but a lot of us don't like bonds at all in current environment, and are trying to meet the mid term objective in some innovative fashion.
 
Against your specific bucket plan, ten years seems really far out for the bucket 2-3 boundary.  I aim at ~5 years.  I consider a larger number to be more conservative, a smaller one to be more aggressive, and the balance to be what lets you sleep at night.  
 
My second point is a bit more esoteric --  Cash may serve multiple purposes --  an emergency fund distinct from the three buckets, "dry powder" that is "allocated" to stocks in bucket 3 but currently uninvested, half of a "barbell" strategy avoiding bonds in bucket 2, or maybe other.  The point is simply to know how much cash belongs to each bucket, and not to confute "cash" with "bucket 1"
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#9
Thinking aloud again, trying to put a finger on how everything eventually boils down to having a conscious asset allocation at a particular point in time:

There are many forms of conceptual and actual separation/partitioning of one's assets/portfolio. I think each term refers to a different way of slicing. My interpretation/mental-model of these are:

Asset-allocation refers to partitioning the portfolio into disjoint asset-classes.
"Pockets" refers to disjoint treatment of money (e.g., investment pocket vs. trading pocket vs. cash-saving pocket).
"Buckets" commonly refer to a way of partitioning where each partition can directly relate to a specific time-horizon, or a specific "financial goal. The buckets can sometimes be overlapping. Separation based on intended-usage (e.g., travel fund, education, etc.) can be thought of "financial goal based bucket". Also, buckets are associated more naturally with the consumption side, rather than accumulation side.


Asset allocation refers to the division of different asset classes at a specific point in time. Asset allocation can be for the entire portfolio, or for each sub-portfolio set aside for a specific "bucket".

When used for a specific time-horizon or a specific goal/usage, a bucket defines the allocation of investable assets specific to that bucket. A bucket can contain indirect assets too (e.g., human capital in terms of earning potential, an income stream such as SS, etc). Collectively, investable assets from all buckets define the overall portfolio asset allocation. Since the buckets themselves can be dynamic (the "education" bucket may not exist after a certain point in time, time-horizon changes as one nears retirement), the portfolio asset allocation also changes dynamically.
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