AA strategy for buckets versus total portfolio (bonds, IRA, value fund)

[utvolfan]

After much reading and calculating , I have come to the conclusion that to minimize our taxes (trying to stay in 15%), we are going to have to withdrawal from "buckets" of money during retirement. I am trying to figure out if our AA should be for our total portfolio or if it should be different for each bucket, since the buckets will be needed at different times during our lives.

We will be retiring with pensions before age 59 1/2 so to fill in the gap with our spending versus pension income and also to make up for the difference in inflation (our pensions have a 1% benefit adjustment yearly so are not entirely COLA) we are looking at needing the following buckets (and obviously the buckets could be used at any age whenever necessary if they haven't already been depleted):

1. 457b and taxable money until we are 59 1/2 (no age requirement for access--can be used at separation of service but will be taxed)
2.Traditional IRA and 401k money from 59 1/2 to age 67 or 70, depending on when both of us are taking SS (we will bump up to the 25% tax bracket when both of us are taking SS--thinking one of us might start early at 62 while the other waits until 67 or 70--I need to make some projections with some of the calculators that are specific to SS options to definitely figure this)
3. Roth IRA money after age 67 or 70 when we are both drawing SS (so our taxable and deferred accounts aren't taxed at the higher rate)

So my question pertains to the AA for each of the buckets. Since the 457b money is going to be needed within the next 5 years, should the AA for this account be more conservative than for our Roths, which may not be accessed for 12-15+ years?

Overall my thinking is that we should have a cash emergency fund for the things that can't be handled in our monthly budget (a roof, $$$ car repair, etc), and then have our actual retirement portfolio be 30-40% stocks/ 60-70% bonds and cash (have access to stable value fund earning 2.65%) when we start retirement (then maybe increase equities 1% at a time up to 50% as we age). Now I am wondering if I should try to structure my buckets in a way that I might have the same AA, but the buckets I would be accessing first be more conservative?

So, any ideas or suggestions on how to structure your AA when you are using "buckets" of money to fund your retirement? Anyone know of specific reading that is informative on this topic that won't be over my head ?

[Cnynrat]

As a general matter, bucket strategies are designed around the notion that the AA for your near term buckets are different that for your longer term buckets. There are a few different specific approaches that have been recommended. I think they all are going to recommend that money that's needed in the next 5 years be put in fixed income. The variation comes in how many buckets (some use 2, some use 3), how the longer term buckets are allocated, and what strategy is recommended for replenishing the near term bucket as withdrawals are made.

Here's a link to a page that has some resources you might investigate.

There are an interesting series of videos linked on Wade Pfau's Retirement Research Blog (scroll down to June 30th) in which Micheal Kitces and Jonathon Guyton discuss various strategies for managing the withdrawal of your retirement portfolio. One of their conclusions that I found interesting is that the overall AA of a bucket strategy looks very similar to a traditional AA of a portfolio managed as one bucket. The advantage of the bucket strategy is that it helps the client (they are advisers, so they speak from that perspective) better understand the strategy and take more comfort from the fact that they have some funds for the near term in low risk investments.

Dave

[mathjak107]

lots of mixed studies on buckets and different results but i tend to go with kitces,and guyton . the results will be bery close as conventional pulling from the pie and maintaining your origonal allocations.

it just may feel better to your mind using the buckets.

the buckets may vary slightly in performance because there are different mechanics for refilling.

some spend down cash ,then move on to bonds all the while having the equities allocation growing higher and higher as you spend down.

in fact with a system like ray lucia's where you have 7 years cash and 7 years bonds if you wait until the very end to refill you can be 80 years old and 80 or 90% equities prior to refilling.

other methods have you refilling when ever markets are up so you are always bleeding off some equities and your allovcations do not rise as high but performance can be lower.

the big benefit in buckets is really in protecting you over the first 5 years which can be quite sensitive to a big hit early on.

after you get an up cycle cycle under under your belt you are usually good to go with no buckets.

the whole idea of a rising glide path as looked at jointly by pfau and kitces is to allow you to dollar cost average back in from lower levels of equities thereby protecting you better over the early years.

[ncole1]

Originally Posted by utvolfan

After much reading and calculating , I have come to the conclusion that to minimize our taxes (trying to stay in 15%), we are going to have to withdrawal from "buckets" of money during retirement. I am trying to figure out if our AA should be for our total portfolio or if it should be different for each bucket, since the buckets will be needed at different times during our lives.

We will be retiring with pensions before age 59 1/2 so to fill in the gap with our spending versus pension income and also to make up for the difference in inflation (our pensions have a 1% benefit adjustment yearly so are not entirely COLA) we are looking at needing the following buckets (and obviously the buckets could be used at any age whenever necessary if they haven't already been depleted):

1. 457b and taxable money until we are 59 1/2 (no age requirement for access--can be used at separation of service but will be taxed)
2.Traditional IRA and 401k money from 59 1/2 to age 67 or 70, depending on when both of us are taking SS (we will bump up to the 25% tax bracket when both of us are taking SS--thinking one of us might start early at 62 while the other waits until 67 or 70--I need to make some projections with some of the calculators that are specific to SS options to definitely figure this)
3. Roth IRA money after age 67 or 70 when we are both drawing SS (so our taxable and deferred accounts aren't taxed at the higher rate)

So my question pertains to the AA for each of the buckets. Since the 457b money is going to be needed within the next 5 years, should the AA for this account be more conservative than for our Roths, which may not be accessed for 12-15+ years?

Overall my thinking is that we should have a cash emergency fund for the things that can't be handled in our monthly budget (a roof, $$$ car repair, etc), and then have our actual retirement portfolio be 30-40% stocks/ 60-70% bonds and cash (have access to stable value fund earning 2.65%) when we start retirement (then maybe increase equities 1% at a time up to 50% as we age). Now I am wondering if I should try to structure my buckets in a way that I might have the same AA, but the buckets I would be accessing first be more conservative?

So, any ideas or suggestions on how to structure your AA when you are using "buckets" of money to fund your retirement? Anyone know of specific reading that is informative on this topic that won't be over my head ?

I think it's good to have 2-5 years' living expenses (net of any other retirement income sources) in cash, money markets, and short term bonds. Most of the rest should go into diversified stock, but a little in long-term Treasury bonds. You start out with ~5 years expenses in fixed income and can draw from the near term "bucket". In a normal market you can then gradually move the longer-term accounts from stocks to short-term bonds so that you continue to have 5 years' expenses in cash (even if the latter accounts are untouchable until age 59 1/2). If the stock prices crash, you simply halt the re-allocation for up to 3 years and continue to live on the cash. (optionally, you also can at this time move some money from long term bonds into stocks.) This means you are very unlikely to actually be forced to sell stock at a loss, all the while maintaining a minimum of 2 years' expenses in cash/short term fixed income. If your cash gets depleted, then you wait for stock prices to rally again and then sell some to get back to 5 years of cash. If you completely deplete your long term bonds, you can do the same for them - wait for stock to rally and then "refill".

[mathjak107]

Interesting study showed another twist. Spending down cash and bonds first over the first 10 years or so and letting stocks grow and all dividends were reinvested to compound beat every combination they could come up with.

No buckets were refilled,eventually just social security and equities ran with the ball. Equities were sold off in good and bad times and still exceeded 30 years even under the worst scenerios.