InfoGraphic – The Bucket Strategy

In my most recent article, How To Build A Retirement Paycheck From Your Investments, I outlined a detailed approach to The Bucket Strategy which I’ll be using in my own retirement.  As a personal challenge, I decided to attempt to learn how to create an “InfoGraphic” on the topic, summarizing the steps I outlined in that article.

Attached below is the result of my “self-teaching” experiment, my first InfoGraphic.  I’ll attempt to weave these in as an alternative medium to enhance my writings on future topics.  I know some folks are better “visual” learners, and I like to continually challenge myself by tackling new areas.  InfoGraphic design?  I can now “check” that box.

I’ll file all of my InfoGraphics under the “category” of “InfoGraphic” on the right side of my website.  To view all of my infographics, simply select Infographic as a category, and all of the posts containing infographics should come up.  I hope you enjoy the new approach, and welcome your feedback.

 

bucket-strategy-infographic

11 comments

  1. Fritz, I laughed when I saw this blog. It is very similar to what our (my wife and I) plan has been since my early 20’s (so that is over 30 years now). I spent a lot of time in our local library pulling out microfilm & microfiche and looking up stocks, bonds, indexes, cost of living /govt info, real estate, etc information from ~ 1900 until (then) recent times in the wall street journal (this was pre internet – what took many weeks then now just takes a few minutes, but the Lotus 1-2-3 spreadsheet program was very helpful in doing the analysis) and then analyzed the results and concluded that the “only” investment strategy that made any sense was 100% stock (absolutely the best return over time); but… there was that pesky thing called recessions, depressions, stock market corrections etc. The timing of those events could really cripple your retirement, you just can’t predict it/them. I concluded that when you retired, if you had 4 (3 if you are risk tolerant / flexible in spending) years of anticipated cash, on hand, you would “never” have to sell at a loss. As long as the market was up that year, you sold a “years worth of cash” from your stocks and kept the cash balance at the 4 year level. If the market was down, you would stay put and let the cash creep down. After 2 years of down market, you might adjust your spending a bit to stretch the money (just in case). When the market gets back up to pre correction/recession levels, you start to build your cash back up to the 4 year level with selling “2 years of cash” for every year until your cash is replenished. This seemed to be a very simple strategy that provided maximum gain and stable retirement income. Essentially, save as much as you can and try to increase the amount each each year. Put it all into a diversified stock portfolio (say a Vanguard, low cost fund that covers the whole market) and then at the end of your working career, you save more to cash until you have 4 years worth of anticipated spending. I know it gets more complicated, with tax strategies, pretax/post tax investments, etc etc but in the end, if you start early, all you need to do is put your money in diversified stocks for 30 years and then switch to building cash until you retire! Your 3 bucket strategy is very similar, bucket 1 & a bit of 2 are my “cash” and bucket 3 is the stock (there are nice dividend paying stocks out there too, a diversified portfolio should have it all). I haven’t retired yet but we are now in the “cash building phase” to make sure on day 1 of retirement we have our “4 years worth” well in hand.

    1. “Lotus 1-2-3″….Oh, the memories! Remember when Lotus ruled the world! Haha. Great addition to the my article, I like the “sell a year’s worth whenever the market is up” methodology, and I like your conservative 4 year approach. You and I think alike, and it sounds like we’re on similar tracks! Thanks for you comments.

  2. My question is why only 2-3 yrs expenses in bucket #1. Is it the fear of tying up cash. Like that other “bucket guy” I have 7 years in bucket 1. 7 years in bucket 2. And even though I’m not retired yet I continue to add to bucket 3 and an emergency bucket. I was stressed about retirement and the 4% rule. But the buckets just help me with piece of mind. In actuality my buckets will be 3-4%. But buckets help me sleep better. Not sure I would sleep as well with 2-3 yrs in bucket 1.
    Also anyone’s suggestion on strategy for refilling buckets 1 and 2. Wait for one good year or take a chance and refill after a bunch of good years. Love the good stuff on your site. Thanks!

    1. Hey Tom – thanks for your question! 7 years is certainly acceptable. Most “experts” caution against too much in cash, since your portfolio needs to keep pace with inflation, and that’s hampered by too much of your money earning 0.000001% in savings accounts. I think the most important thing is to do what makes you comfortable, you’re the one who has to sleep with yourself! I’ll probably target the top end of my self imposed range on Bucket 1, ~3 years. As for refilling buckets, have a look at this excellent post by Mr. PIE – he built on my article about bucket strategy, and added some really good content about a refill strategy using the CAPE valuation method. Good stuff! http://www.planinvestescape.com/serving-up-the-pie-the-importance-of-the-right-withdrawal-strategy/

      1. Thanks for sharing this and I still have not perfected this yet since I just retired at 54 years old. I have 5 years in cash equivalent securities and the rest in equities. I think Ric Edelman suggests to replenish the conservative buckets by diverting profits from rebalancing the long term funds until the funds are where you need them.

        I found this blog the other day when I was listening to a podcast where Fritz was being interviewed and I recognized the voice from almost a year ago on the Retirement Answer Man. It was one of my favorite episodes and it is good to see Fritz is on track with his plan.

        I am new to this blog and found it by listening to a podcast where Fritz was being interviewed. I said to myself, I know that voice from some time Ago Fritz

  3. Your infographic is dynamite. Easy to get the whole picture quickly – I must be a visual learner. It’s concise, easy to understand, and makes you want to look into the details.
    I’ve always envisioned my retirement (not there quite yet) finances as a bucket situation, and I’m slowly developing my investments to mirror your system. I thought that some may only need a 1.5 to 2 years cash bucket if you are fortunate enough to have enough income (pension, SS, annuities) coming in to take care of most of the bills/daily needs. What do you think?

    Thanks for your blog – it’s refreshing with a bunch of information in an easy to digest format, and I got your link from Dana Anspauch’s website, “The Balance”.

  4. So don’t touch bucket 3 for 5-8 years? So this is if the market goes south, the bucket has time to recover, right? Well what if the market drops right around the 5-8 years, like 2008? Not touching bucket 3 for 5-8 years sounds like a good idea, until you are at year 4 and you are looking at touching that bucket in 1 year.

    Why not make withdrawals part of annual re-balancing of portfolio? If stock portion goes up more than bond portion, you sell more stock funds. If stocks are down and bonds are up, sell more bonds.

    1. Alan,

      Thanks for the question, if you had the question it’s likely that other readers did as well. To clarify, the intent is to sell ~1 year from bucket 2 and 3 every year during our annual re-balancing, and roll them into bucket 1 and 2 to refill the annual spending. The only time we wouldn’t sell from Bucket 3 is during a bear market, which having a perpetual balance in Buckets 1 and 2 would help to avoid. If 2008 would hit again, we’d have enough liquidity in buckets 1-2 to avoid selling for ~5+ years. Hope that helps to define the strategy.

  5. My financial adviser has recently advised to place retirement funds in two annuities for bucket one and current income. They are Pacific Index Dimensions® Limited Premium Fixed Indexed Annuity and American Equity Investment Life Insurance Company Choice 8.

    Does anyone have experience or advice with these, good or bad?

    Thank you

    1. Kevin, annuities are a complex discussion, and well beyond the scope of what I can cover in a comment. The risk is that CFP’s can sometimes recommend annuities that are higher cost, and too complex for their clients to fully understand. To be safe, I’d suggest you call Vanguard and ask to talk to someone there about their annuity offerings. If you can line up some quotes on annuities which are comparable to the ones your advisor is offering, you should be able to quickly tell if something is awry. Hope that helps, sorry I’m not able to offer more detailed advice.

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