Evensky and the Bucket Approach to retirement planning

Okay, so it's not the latest - this video is from back in March:
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(I hope it's available to non-subscribers)
But it's a short video, worth watching, I think. Harold Evensky
is one of the big names in financial planning - lots of
publications, editor of several books, etc.
A bit from the transcript:
Evensky: The fact of the matter, it really makes sense for anyone. I
think we believe that the risk of investing in the market is the
short-term volatility of the market. So we developed back in the
early '80s I think we call our five-year mantra; "five years, five
years, five years," simply means we don't believe anyone should
invest money that they are going to need in the next five years. Too
much risk...
Stocks or bonds, too much risk that they will need at the wrong
time. So, we carve out for any lump sum, someone says, "Gee, I want
to buy a second home three years from now," we will carve that out of
the investment portfolio and put it in short-term bonds or cash. When
it comes to retirement income, someone says, "Gee I got a million
dollars, I need $50,000 year out." And trying to figure it out,
carving five years' [worth] of cash flow is, there is too much
opportunity cost, all that money sitting in cash, so we experimented
and came up with two years. So I said, "OK, put two years in cash,
take the other, the $900,000 and invest it in a total return
Anyway, I thought this might be an interesting thing to discuss,
particularly given some of our mif-p folks who are, afaik,
already retired and have cash buckets that they use.
It isn't entirely clear, however, how to manage *replenishing*
that two-year bucket of cash during retirement. If the markets
are down and the rest of the portfolio has tanked, do you spend
down that two year bucket, simply rebalance and treat the cash
bucket as part of your regular asset allocation, opportunisticly
take profits from other parts of the portfolio and shove it in
there? It's a messy business and of course, the details on
how any individual handles it are likely to vary a lot.
It also says nothing about other possible dimensions, especially
for a retirement plan, such as putting a chunk of the retirement
portfolio into an immediate annuity (or keeping such a thing as
a backup plan if the portfolio gets hit so hard that it looks
like it won't recover well enough to keep funding the cash bucket
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I agree with the five year rule. For a 5% withdrawal rate, you need 25% of your retirement fund in cash or near cash.
Reply to
I have seen this explained in other forums, and it usually looks like this:
Bucket 1Êsh Bucket 2= income producing investments which in any given year can usually generate one year's expenses Bucket 3=growth, traditional equity based investing trying to grow Bucket 3 while Bucket 2 might be losing money.
A big variable is how much cash does one start with- for example if the biggest risk when starting retirement is a down market, then add cash (like 8 years cash to start) and give the other 2 buckets 3 "free" years to grow before tapping them and moving money from bucket 2 to 1.
Bucket 2 to Bucket 1 is supposed to be annual as I have read it on other places. Bucket 3 to Bucket 2 depends on market performance (sell high, do not sell low).
Reply to
And it does not pay attention to real estate and home ownership, which usually comprises a very significant portion of one's net worth. That should be considered in deciding on the portions in the various buckets. Some of us also maintain second homes and/or invest in rental property. While that option may not be suitable for everybody, it is pursued by quite a few investors and should be taken into consideration in making generalizations about financial planning that are supposed to apply to all investors or all retirees.
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