Maximize the 3-Bucket Strategy | Smart Refilling
Vložit
- čas přidán 7. 08. 2024
- 00:00 3-Bucket Overview
01:11 How to Replenish Buckets
02:05 Postitive Market
05:07 Negative Market
07:11 Market Summary
08:18 Spending Habits
09:01 Safe Withdrawal
Link to 3-Bucket Strategy • Maximize Your Retireme...
Some of my favorite books: amzn.to/3KF3tlr
Camera & equipment I use: amzn.to/3Z20lof
Disclaimer: Please note that this video is made for entertainment purposes only and not to be taken as financial advice. Always make sure to do your own research.
Join the family & subscribe to my channel here: / erintalksmoney
Thanks for watching, I appreciate you!
#3bucket #retirement
Retiring in 8 months. These 2 videos on buckets are the best presented breakdown of this method that I've seen. Great job!
Search for Rob Bergers thoughts on the bucket strategy on CZcams. I found his approach very insightful. Cheers!
Great two part series Erin. Yours is probably one of the clearest explanations I've heard on this topic. Especially on how to refill your buckets.
Glad it was helpful!
Erin, so many videos I watch about finances seem to be trying to befuddle and convince the viewer that they need to have an advisor. I really appreciate that your videos are clear and not like those others! Thank you!
I plan on using the barbell withdrawal method. First debt and mortgage free. Next, keep two years expenses in cash in a high yield savings account. Next in my 401k 3 to 4 years expenses in safe investments (bonds, T-bills, cash like instruments). Keep the balance in the stock market, mostly index funds and mutual funds. On years, the market is up. I take my yearly expenses out of the stock market. On years, the market is down, I take it out of my safe investments. On years, the market and bonds are down. I take it out of my cash. when the market is up, I refill my safe investments 3 or 4 years expenses. The biggest thing to remember is that when you hit multiple years of down markets, you’re going to need to cut your expenses. When you hit multiple years of great returns, you’ll be able to take extra money for expenses. This is my retirement strategy, good or bad! Subject to change minute by minute.
Cool in theory, but overcomplicating a little, 4% rule is based on 50/50 stock bond portfolio, could just do that and would involve less thought
Depending on how much money you have it could be better to have less stress
Susie Orman is mainly in bonds the last I heard, like nearly 100% bonds, but she also doesn’t practice what she preaches, she says she already won basically and doesn’t want any risk
paying off a mortgage though can cost you big due to lost time of compounding.
Then you have inflation making your mortgage cheaper and cheaper every year to carry the note (inflation adjusted dollars).
Say your mortgage is $1,500 per month. Example - the inflation adjusted purchasing power of $1,500 in 2000 was $1,168 by 2010, meaning you would have a large benefit by carrying that note as every year the payment was, inflation adjusted, less and less. That $1,500 per month note in 2000 would, in 2024, be the purchasing power of $807.53.
By the end of a 30 year note your $1,500 mortgage would, inflation adjusted, be about half or less in equivelant purchasing power to the very first mortgage payment you had. Imagine cutting your home cost in half just by letting inflation continually discounting it every year.
Well, and you are also not tying up money in an asset that is not liquid. If the area you live in went sour and you couldn't sell or selling times were long and the market undesirable....could be a big ouch!
Inflation can be your friend with debt.
seems like a good plan but when being implemented you are always going to second guess yourself. what is an up or a down market? 10% gyrations are normal a couple of times in a year or is it 20%, 25% or bigger?
@@mjs28si agree. tying up a big chunk of your net worth in an illiquid asset vs keeping it invested is going to cost you in the growth of your spendable networth during your accumulation years. in retirement, as you inflation adjust your draw, the mortgage payment becomes a smaller percentage. having a smaller percentage of your monthly expenses commited to mortgage is a plus though and i would feel differently if my mortgage rate wasn't low. i am close to 3 yrs in retirement and still have more than 3 yrs left in my mortgage.
I thought the whole point of a method like this is that you wouldn't have to decrease your spending in down years? Feels bad
You never have to decrease your withdrawal with the 4% safe withdrawal method and that has withstood the great recession, the great depression, and the hyperinflation of the the 1970's. It hasn't failed once historically and if we have a situation that's worse than the great depression, we'll have much bigger worries than the stock market.
To that end, with the 4% you're also more likely to end your retirement with 3x your initial amount that you are to finish with less than your (inflation adjusted) starting amount. Let that sink in
Good video. This is a pretty simple strategy and it makes sense. When the market is up, withdrawal from stocks and when it's down, withdrawal from cash and income. I would also keep investing in stocks when the market is down to capture returns when it rises. I agree with your idea of a flexible withdrawal rate.
Such a great explanation of the 3-bucket strategy! I love it but I plan on doing just a 2-bucket strategy with 3 years of expenses in cash and the rest in long-term stock investments. I'm very good at stomaching volatility and being flexible.
Thank you, Erin. My original plan had a cash bucket and a growth bucket. After your previous video I've created an income bucket. The original plan also included making regular withdrawals each year from the cash bucket to support my pension and (what's left of) my Social Security. I'd not thought about up and down markets. Based on the ideas presented today, I'll apply the up & down market strategies when I retire. Based on your past videos, I suspect your financial sense comes from individual learning and experience. I just want to point out to everyone how fortunate we are. Erin gives great, free financial advice all the time from which we can benefit. I believe she does it for fun and profit (CZcams revenue). Which means we benefit and she benefits. Erin is a fantastic example of how and why capitalism works so well😁
Thanks for watching and all the kind words! 😊
Wow. this is the most comprehensive explanation of the 3 bucket rule I have yet seen. Honestly, recently I have watched because there could be something I could use in her videos. But most of it has been related to saving for retirement. I am essentially retired so a lot of that is not relevant to my particular situation.
These last two videos have been really good with regards to how to use the 3 bucket approach. I have heard of that approach and some information on how to set it up but there is very little on how to actually use the 3 bucket rule.
I am going to watch these again for sure. Maybe even a third time as well. Great job!
Thanks so much Brian!
It’s called “continuous financial education” - great example of the need to tailor financial strategies to your specific situation. Great comment Bryan - I agree
Thank you for sharing your bucket withdrawal strategy. Always wondered WHICH BUCKET AND WHEN. Now it's less of a mystery.
Joe Kuhn, a other CZcamsr, is an early retiree using the 3 bucket strategy. Real life example of the 3 bucket strategy. He provides great information on his channel.
Nice!
Excellent material. Thanks Erin
Excellent video, thank you!
Thank you Erin, great overview, I plan to use this approach when I retire later this year.
This was awesome! Thank you🤗
You are so welcome! Thanks for watching Wendy! 😊
Excellent presentation & explanation! Key - flexibility! Especially spending which we can control!
Thanks, Erin, for another informative video.
You are so welcome!
We actually saved too much compared to our low expenses, so no matter the markets performance for that year making sure to maximize the 22/24% Federal tax bracket for withdrawal is one major goal.
Thanks for info! This is the first time I've heard of the three buckets.
Glad it was helpful!
Soooo easy to understand and very thorough compared to other videos on the subject. Please keep rocking. Thank you!
Erin, thanks for this 2-parter, it's reassuring to hear someone that comes out and says what I've been thinking. Right now we've got 2+ years of cash, 3 different solid income streams (pension, SS, and an annuity) that actually cover our current budget; everything else is in stock funds; no bonds. I've just not been comfortable with dealing with debt instruments, although if you pushed me I don't think I could explain why. Again, thanks from a very soon to be retiree!
Basic barbell method for us. 10% cash or cash equivalents in a HYSA and short term treasury index funds (which would be 2-3 years of expenses). The other 90% in the market mixed between dividend growth index funds and pure growth index funds with a quality tilt, lowering volatility overall vs the market. I like DGRW, QGRW and JQUA for that purpose currently.
5% annual withdrawal rate (if I need that much), selling stocks or using cash monthly, as necessary, to keep the 90/10 allocation in balance.
We also have a rental real estate portfolio with solid cash flow and are already FI in our 40s. Taking SS at 62 will most likely be the plan for at least one of us, which will further reduce the amount we need to pull from our portfolio.
We will also have our mortgage paid off by the time we fully retire (not semi-retire) and will keep mortgages on our rental properties to at least 50% in perpetuity for the tax benefits.
Refilling the 3 buckets is a tricky subject but I think you gave a clear and reasonable general plan for how to do it. I liked your thoughts on withdrawal frequency as well. Another excellent video!
Thanks Brandon!
Excellent overview of the 3 bucket approach. I don't use it however, for two main reasons. It doesn't address asset allocation (how much of the portfolio is in the "Income" bucket, for instance. 40%? 70%? ) and it makes withdrawal decisions far too complicated. I like setting an allocation I am comfortable with, withdraw and rebalance as necessary. Much easier. But - your overview of the three buckets was among the best I've seen.
Thanks for both the videos because I've struggled with exactly how to implement the approach. My questions are more how much does the market have to be up before I'd refill buckets 1 and 2? How much does the market have to be up before I'd "over fill" buckets 1 and 2? Do I have a max that I want in each bucket? The market could be considered up as soon as it sets a new high but if you think about a multi year decline, it wouldn't really be setting a new high on an inflation adjusted basis. We tend to be biased to these short lived downturns. It's also interesting that some would consider this nothing more than market timing but I'd argue believing that the market will set a new high is totally different than hoping it will go down so I can get a better entry point.
I learned something new today. Thank you very much Erin! I'm new to the channel
Thanks for watching! 😊
No buckets-many issues with that strategy (see Rob Berger videos on flaws with the bucket strategy). Simple: figure out your asset allocation and include 3-5 years of cash as part of your fixed income. Example for a 60/40 portfolio: 60 equities/32 Bonds/8% cash. Don't go over 10% in cash or you will drag down performance. Put this all into New Retirement Software and stress test with different scenarios. "Money Doesn't Grow on Fees".
I will review Ron Berger's video again. Thanks!
I went with the reverse glide path strategy with going high in safe money at first and then increase stock allocation.
This series was really well done! A couple more thoughts to consider adding to it:
1. Deciding about the allocation between buckets (and how does the cash bucket factor into your market allocation), should you go textbook by age or Bengen's sweet spot: 60-65% to start retirement and how does that change the bucket sizes. Can bucket sizes change/be affected by the expected rates of return or should you only look at allocation percentage?
2. How/when/if do you decide to refill the Growth bucket from the Income bucket. How much flexibility do you allow for them to be outside of their original allocation or can you use this as a way to change your allocation to be more conservative over time.
I am happy to see there was no talk of any sub-par in this video ;)
I haven't started withdrawing from my retirement fuds yet but Nov I'll be 59 1/2 so I will start then, maybe.
Perhaps a part 3 could be how this method would have performed compared to other methods using historical data.
How much better is the 3-bucket strategy than a 60/40 split rebalanced annually. Or how much better is it than a 100% stock portfolio.
Interesting! I love the suggestion!
Great video! I’m going to primarily rely on my military pension to cover monthly expenses and leave my 401k and Roth IRA alone and invested aggressively since I don’t rely on them for income.
Another excellent video. I don’t blame you for avoiding a deep-dive into tax harvesting.
There are plenty of tax-based YT channels that explore tax harvesting, as well as how different categories of income (earned income, SS, qualified dividends, capital gains, etc) affect your tax bill.
Investments and tax-management are critical to maximizing your retirement assets.
Thanks again for what you do, Erin!
I do actually have a full video on tax loss harvesting 😊
Nice! I will check that out.
Excellent series of videos. How does the 4% rule apply in this strategy?
Great video and love the bucket strategy. My question is always how to replenish the GROWTH bucket optimally? Or is the concept to just whittle that bucket down and hope that you had enough money in the GROWTH bucket to last until end of life?
It’s an up year in 2024 with the markets at all time highs. Thanks for suggesting selling some stocks to replenish my cash budget. I’m also going to take the withdrawal from a qualified account to reduce future taxes.
Thanks for this video. Just getting into Roth Ira. I have a 457b that I basically max out and the Roth seemed great to max. I’m throwing max into my HYSA right now though and if the interest rate of 4-5% drops, I may take half or more than throw it into a taxable brokerage. How bad do you get taxed in a brokerage account? Thanks
I love Rob Bergers thoughts about the bucket strategy. Highly recommend looking him up on CZcams. Not a fan of bucket strategy, and his reasons why make a lot of sense to me.
Drop a link to his video - I’d love to check it out!
@@ErinTalksMoney sure thing! czcams.com/video/fNP62fSLg1U/video.htmlsi=mF-dC3H8220ioGt4
That’s awesome to ask for potentially contrary information. Kudos to you. And to the person who mentioned it and provided it. I’m listening to both! Thanks
Hey Erin, I just watched your video and I must say that it was really informative and well-made.
I was wondering if I could help you edit your videos and repurpose your long videos into highly engaging shorts? I can also make high CTR thumbnails for your channel
Very clear video. I have a question- in a down market do you wait for the growth bucket to get back to the high before dipping in or can you withdraw if it merely goes up compared to previous year. For example if the market crashes by 30% and then gradually increases over time taking 3 years to get back to the previous high , do you wait for that period to elapse for full growth. And then do you factor missed inflationary growth since your withdrawal 3 years on will be higher.
Great question.
I thought you explained rebalancing the buckets really well and using a really good approach. After watching your video, I just saw another video which discussed the book "Die with Zero" and I know you have mentioned before as well. At 6:38 you talked about the goal of preserving our principal and trying to never touch anything but the gains. Ugh, I can't help but think that way, also (by nature), but at the same time, I am really trying to come up with a strategy that will have me spend down over time but I have NO IDEA at what rate I should do that. I always have that worry that if you spend too much during my healthiest youngest years of retirement, that I will end up scraping by or running out of money during my later years. What do you think the best strategy to spend down (but not too fast) might be?
That might be a good thought provoking video subject to 🤔
I had this same problem when I retired recently. Here's what I decided to do. I set a trajectory for my portfolio value that decreases every year, say by 2.5%. I figured I could spent that ~2.5% plus growth, say ~7% (nominal) on average, making about 9.5% withdrawal rate, on average. But I will track my actual portfolio value and adjust as necessary. If my portfolio gets much below the target trajectory I will reduce my withdrawals. If it grows too much I will increase withdrawals. I keep a comfortable cash reserve (bucket 1) outside the portfolio to reduce the impact of fluctuating withdrawals on our lifestyle. I have also identified discretionary expenses we could cut or delay in a pinch (travel, cars, charity, etc.). Also, knowing that I can absorb fluctuating withdrawals, It lets me invest a little more aggressively (more bucket 3, less bucket 2).
Question
I'm 47 and have a Roth 401k thru work with $420,000 investing 15%
Should I max this to $23k/yr before opening a Roth IRA or a taxable brokerage account? If I open a Roth IRA, I'm starting over to get that 100k to get the compounding rolling. Doesn't it make more sense to keep adding to the $420,000?
If you are really going to treat the cash bucket as an emergency fund with the intent of not touching it except during down markets I would be inclined to fatten up my income bucket to the point the income covers my normal expenses and then keep my cash bucket at 6-12 months.
That is what I am planning on doing.
Asset location and tax planning can have a dramatic effect on all of this, especially if qualified dividends continue to be treated as capital gains.
Also, market recovery can take a lot longer than a year or two. From the end of 1999 to the end of 2009 the s&p 500 was essentially flat. This also happened during the 1930s.
So rare, but not unheard of.
I plan on my income bucket being a mix of bonds, high yield stocks and dividend growth stocks. If I can get near a 5% yield with a 5% growth rate I think that should work out nicely.
Also selling options to supplement the income side.
Dividend growth stocks just aren't really a thing. The reason they even pay out dividends is because there is limited growth available so putting that money into the business has diminishing returns and it's better to just give that money to share holders..
They are equities so you still have the risk of them lowering their dividends in a down market as well as going under...
The 'income' bucket isn't really supposed to be equities, it's more so bond / t-bill ladder strategy, or annuities and pensions.
Even the cash bucket can be in a HYSA and earn 4%+ so not sure why to take on more risk when a bear market can last 5 years.
The reason to take on more risk is 10 years from now those cash investments get crushed by inflation. A portfolio of good equities will continue to increase payments over time.
I have owned a few stocks now that have slashed dividend payments. But the vast majority are continuing to increase payments over time.
If the labeling is an issue then fine, I have a small cash bucket, a small income bucket and a large and growing growth bucket.
Is it volatile? Definitely. Is it risky? Maybe. But I like the fact that the risk is obvious. As I get closer to retirement I may alter this somewhat. But solid equities will always be the core of my nest egg.
Nearly all of our funds are in a 403B account. My wife and I have three 403B accounts. I will need to take out RMD's each year from that account. How will this effect the buckets if I have to with drawl from the growth bucket.
You guys "nearly have all" of your eggs in one financial instrument basket? Not good...if I were you I'd allocate some of your holdings into physical Gold and Silver...just in case things go left. Good luck!
What company are you with? I hope not AXA/Equitable. Join 403bwise to learn how to get out of high fee ripoff 403b vendors. Most of them are ripoffs. You really have to step lively when enrolling in a 403b.
Joe kuhn
Keeping a large cash position just so that you can use it instead of selling stocks when the market is down sounds like an attempt at market timing to me. And market timing doesn't work.
Just leave the money invested in whatever ratio of stocks and bonds you find appropriate and sell and withdraw it as needed rebalancing when appropriate to maintain your ideal ratio of stocks and bonds. On average, this will have more money invested and therefore will outperform having a 3 year emergency fund thst sits unused except when you identify that the market is going down.
You are saying that what she is saying is wrong while basically repeating what she said...
Cash right now is actually valuable, you can get 4%+ in a HYSA which is almost comparable to bonds without having to wait for maturity or the risk of interest rates going up again.
If HYSA weren't as good, then you'd just do a ladder strategy with bonds or T-bills.
She's basically just saying to rebalance your portfolio in an up market and then use cash in a down market (same thing as rebalancing, common 3-bucket strategy).
This strategy is a feel good strategy, but actually does worse performance-wise than simple rebalancing and is harder to define the rules. Remember you should buy low and sell high, but this is only followed here in an up market.
You beat me to it Bill. You can divide your portfolio into a mix of stocks, bonds, and cash and periodically rebalance. When viewed this way, the so-called "bucket strategy" is just a greatly-complicated implementation of the standard Bogleheads buy & hold & rebalance approach.
My other concern about the bucket approach as typically portrayed is it results in a stock allocation that may be much higher than most people can stomach. I prefer to build a portfolio top-down, prioritizing the balance between equities and fixed-income first and foremost.
Don't forget to do roth conversions in a down market to benefit from a lower tax burden for the same assets and get down your 401k depending on how much you have in there.