Bucket vs ???

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StanFrancisco
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Joined: Fri Mar 27, 2015 8:54 pm

Bucket vs ???

Post by StanFrancisco »

As I read about the bucket strategy for retirement, I understand the objection that if you simply replenish your cash bucket from your IT and LT investments, what you're really doing is spending down your IT and LT investments. But, is that still right if you rebalance among cash, IT and LT buckets? Arithmetic was never my strong suit, but I think rebalancing solves the problem. Yes, you're taking some out of IT and some out of LT, for your current expenses, but at the end of the day your AA remains the same. What am I missing?
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David Jay
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Location: Michigan

Re: Bucket vs ???

Post by David Jay »

Buckets are mostly a mental exercise. I would ask: What do understand to be the purpose of your cash bucket?

If one wants to always hold a bucket with a certain amount of cash for peace of mind, it just adds steps to constantly spend-and-replenish. Without any math, here is a simple block diagram:

Image

Now if one says they want a dynamic cash bucket and they will withdraw from the cash bucket "when the market is down" and re-fill the bucket "when the market recovers", then one needs to develop a compete set of rules to manage that: What is "down", what is "recovered", what is the replenish frequency, what is the replenish rate, what will one do if the cash bucket is depleted, etc.

And math. :wink:
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
nigel_ht
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Joined: Tue Jan 01, 2019 9:14 am

Re: Bucket vs ???

Post by nigel_ht »

StanFrancisco wrote: Tue Jul 27, 2021 10:49 pm As I read about the bucket strategy for retirement, I understand the objection that if you simply replenish your cash bucket from your IT and LT investments, what you're really doing is spending down your IT and LT investments. But, is that still right if you rebalance among cash, IT and LT buckets? Arithmetic was never my strong suit, but I think rebalancing solves the problem. Yes, you're taking some out of IT and some out of LT, for your current expenses, but at the end of the day your AA remains the same. What am I missing?
Not much.

A cash bucket is a smoothing mechanism. It's unlikely that you're going to sell stocks to buy a burger so there's always a cash bucket of some size for immediate spending.

Some people like small buckets and call anything larger "mental accounting" and cast superior looks your way.

Other folks like larger buckets of cash to cushion against SORR but there is an Estrada 2018 paper that says it doesn't work. Unfortunately it's behind a paywall so my suspicion is most folks haven't read it...even those that link to it.

Now ERN ran the numbers and for the US it worked okay...but cost is you need 27.5X vs 25X. To make 4% work (ie no failures in 1929 or 1966) you would have needed a cash bucket is $115K.

https://earlyretirementnow.com/2018/05/ ... nt-page-1/

Now the Estrada abstract says global market so the results will differ from any US market analysis.

I elected to use a glide path instead but probably with a reasonable amount of cash...because I can.

https://earlyretirementnow.com/2017/09/ ... lidepaths/

Here's a recent discussion

viewtopic.php?t=330319&start=200

Any way you slice it SORR sucks. A cash bucket, extra savings, bond tent, etc pretty much just lessens the impact. Done incorrectly they can make a bad problem a little worse in some cases.

It all hinges on luck. If the market recovers before you exhaust your mitigation mechanism (cash or whatever) you make it better. If it doesn't then doing nothing might end up better...although the major criticisms of cash bucket tend to have an assumption that you wouldn't rebalance and end up with an outsized equity allocation while still in a free fall. And yes, that would suck more.
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Lee_WSP
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Location: Arizona

Re: Bucket vs ???

Post by Lee_WSP »

When you are in retirement, you are presumably no longer adding to the accounts. Therefore it is just a matter of rebalancing between all the accounts to maintain your desired asset allocation.

During your working years, they are different accounts, managing different accounts is what an entire industry does, and I no longer agree with the "mental accounting" derisiveness on these boards.
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