Christine Benz is director of personal finance for Morningstar and senior columnist for Morningstar.com. She is a frequent speaker at AAII Investor Conferences and Local Chapter meetings.


Discussion

David Pearce from British Columbia, Canada posted 10 months ago:

The Bucket Approach to funding during
retirement is an effective strategy.


James Merchant from MA posted 10 months ago:

I would like to see the ETF substitutes for the Mutual Funds that you use. I prefer using ETF's because they are easier to trade, and their fees tend to be less.


J Johnston from WA posted 10 months ago:

A good approach. I agree it needs more ETFs as substitutes for mutual funds. It also needs more discussion on how to keep an effective asset allocation mix while funding the plan. It needs more discussion of sources of funding from IRAs and Brokerage accounts, as well.


Vincent Rossi from Florida posted 10 months ago:

Yes, ETF equivalents of the mutual funds named in the article would be much preferred due to the reasons enumerated by James Merchant above.


J Morlock from NJ posted 10 months ago:

This is a timely article for me. I would love to see a chart showing the year by year returns for each of the asset classes these funds are in, along with the year by year portfolio returns, and the maximum percentage drawdown, the # of months to drawdown and the # of months to recover.


CNS from MA posted 10 months ago:

This is a valuable article for my wife and myself as we enter retirement. We have retirement money in both tax-sheltered and taxable accounts and in the tax-sheltered accounts, there is both tax-deferred (RMDs required)and ROTH (tax-free)IRA funds. While I assume the taxable accounts would be used to fund Bucket 1, is there a rule-of-thumb on where the ROTH IRA money should be placed---I assume Bucket 3 where this tax-free money has a long time to grow without being subject to RMD withdrawals, but I'm not sure. Thanks for any insights you may be able to provide.


CNS from MA posted 10 months ago:

This is a valuable article for my wife and myself as we enter retirement. We have retirement money in both tax-sheltered and taxable accounts and in the tax-sheltered accounts, there is both tax-deferred (RMDs required)and ROTH (tax-free)IRA funds. While I assume the taxable accounts would be used to fund Bucket 1, is there a rule-of-thumb on where the ROTH IRA money should be placed---I assume Bucket 3 where this tax-free money has a long time to grow without being subject to RMD withdrawals, but I'm not sure. Thanks for any insights you may be able to provide.


Wendy from MN posted 10 months ago:

Great article as my husband and I are planning for our retirement. We also have IRAs and Roth IRAs. I would put the Roth in the longer term bucket and use non-IRA and regular IRA to fund bucket 1, 2 and 3 (our Roth is smaller). I would also like to consider using ETFs unless there's a reason not to...


Wendy from MN posted 10 months ago:

One more wish - it would be great if we run this 3-bucket scenario for past 25 years (an assumed retiree's lifespan) to see how this strategy would have worked.


Charles Rotblut from IL posted 10 months ago:

Here is what Christine said about CNS' question regarding Roth IRAs and the bucket strategy:

The reader is right that Roth assets, because they have the most tax benefits, should generally be last in the distribution queue. Meanwhile, taxable assets should generally go first, because their year-to-year tax costs are the highest. But the name of the game is to stay flexible and try to maintain tax diversification—exposure to taxable, traditional IRA, and Roth accounts—throughout retirement. If you’ve hit a year when you expect to be in a higher tax bracket than is normal for you due to forces beyond your control—for example, you’re taking RMDs and your IRA is way up in value—it may be worthwhile to draw any additional income you need from your Roth account to help keep your total tax bill down.


Russell from OR posted 10 months ago:

No discussion of the buckets strategy is complete without referencing the two or three books on the subject written by Ray Lucia. His folksy narrative is a great introduction to the subject, accompanied by citing supporting academic research. But I have never encountered such a succinct overview of Bucket Maintenance strategies as presented in Christine Benz's article. Nice work.


E Brackbill from CT posted 10 months ago:

Evidently she has looked at ETFs:

A Sample ETF Retirement Portfolio in 3 Buckets, Christine Benz, Morningstar.com, September 6, 2012

http://news.morningstar.com/articlenet/article.aspx?id=566768

Requires free membership to view.


Vaidy Bala from AB posted 10 months ago:

As a retired Canadian, I find the withdrawal requirements vary year to year. Currently I must withdraw 7.4% per year from my tax sheltered account. How this bucket strategy would work, I am not clear. It finally amounts to having income to maintain oneself. This withdrawal increases each year until all sheltered taxable money is withdrawn, taxes paid.
Anyone has comments?


Stewart Caesar from NJ posted 10 months ago:

I have been using an approach similar to this with my clients for the past 8 years. It has worked wonderfully and has helped even in the market downturn.


James Warns from VA posted 10 months ago:

Benz recognized Harold Evensky as the originator of the bucketing strategy. She might have mentioned that more recently Evensky, on the strength of PhD level research conducted by himself, John Salter and Shaun Pfeiffer and published in the Journal of Financial Planning, has suggested adding a "standby reverse mortgage" as an additional cash equivalent 'bucket'.

The basic thrust of the strategy is to mitigate the negative effect on the investment portfolio of sequence of return risk in down markets by providing an alternative source of cash replenishment. The opportunity cost of holding a portion of the investment portfolio in low-yielding cash equivalents is also lessened. It's worth a look.

Full disclosure: I am a reverse mortgage consultant.


James Kim from FL posted 10 months ago:

I would like to see ETF version of bucket strategy.


Stephen Thomas from FL posted 10 months ago:

I would like a clearer or more detailed explanation of how to use the buckets. Apparently living expenses are taken from bucket 1 , but when should bucket one be replenished if one is reinvesting all dividends and interest? Should it be after one year, and should bucket one always have two years worth of living expenses? If so should bucket 2 always have 7 years worth of living expenses? I'm not sure if the article is saying spend down bucket 1 and then shift assets from bucket 2 to bucket 1', while shifting assets from bucket 3 to bucket 2. Or is is saying do this yearly when rebalancing?


Gary Jaffe from CA posted 10 months ago:

Buckets are attractive since they provide a disciplined solution for generating cash for living expenses. But Bucket 2 in Christine's portfolio offers an abysmally low yield -- necessitating over-reliance on Bucket 3 for future growth so we don't outlive our money.

Christine argues that foregoing buckets and using the "income only" approach doesn't work because of the variability of interest rates and the current low yield environment.

I beg to differ. I am living on a 7% income return from a preferred stock portfolio (funds and individual securities). These junk-like yields are generated from an investment grade portfolio of preferred stocks with very long maturities (the securities insurance companies use to build pension plans and GICs). In fact, preferred stocks have actually outperformed the S&P 500 over the past 20 years (total return) with less risk! I am living off my monthly dividend income without touching my principal. My yield will be less variable than short-intermediate term bonds due to the lengthy maturities and call provisions in my portfolio. And I'm maintaining a diversified investment grade portfolio which will continue to grow in the future. Much easier than going through the gyrations of building and rebalancing 3 buckets.


Charles Rotblut from IL posted 10 months ago:

In regards to an ETF version, seek out funds with similar characteristics in terms of bond duration and stocks. I asked Christine to include the mutual funds to provide a more tangible example, but it's the allocation concept that is what really matters. The assets can be interchanged among mutual funds, ETFs and individual securities once you understand the logic behind the bucket strategy.

-Charles


Charles Rotblut from IL posted 10 months ago:

Stephen,

Here is Christine's response:
Investors have quite a bit of latitude to design a bucket strategy that fits with whatever investment program they're already using. Income-oriented investors might have their income and dividend distributions sent right into their bucket 1 (cash account); if additional funds are needed to re-fill bucket 1 once it's empty, they can use rebalancing proceeds from buckets 2 or 3. If someone is using a strategic, buy, hold and rebalance program, they could reinvest income, dividends, and capital gains distributions, then re-fill bucket 1 using rebalancing proceeds from whatever has appreciated most. An investor doesn't have to be mechanistic about moving assets from bucket 3 to 2 and 2 to 1. Instead, refilling bucket 1 while keeping the longer-term assets more or less in line with the target asset allocation is the overarching principle.


Jim from MI posted 9 months ago:

The bucket strategy has attractions as a way of thinking about your portfolio, organizing withdrawals, and possibly in helping to keep "on strategy" in tough times. But you may also wish to consider critiques of the bucket strategy, in particular whether it actually reduces risk compared to asset allocation and rebalancing.

Try googling
bucket strategy investing

Among others, the bogleheads "buckets of money" entry is at least sobering.

In addition you'll see in the bogleheads entry that the SEC took an extremely dim view of Lucia's research documentation fpr the strategy, particularly in the use of REITS, as presented in his seminars (though that in itself is hardly a definitive statement about the ultimate merits of the strategy).


Charles Rotblut from IL posted 9 months ago:

In regards to Ray Lucia, he was penalized by the Securities and Exchange Commission because he misrepresented the performance figures he used to attract new clients. Lucia claimed he conducted backtests of his strategy, when in reality he had no proof he did any such analysis.

The penalty levied against Lucia had nothing to do with separating a portfolio into different buckets, but rather because he was using fake return data to attract clients.

-Charles


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