Bucket Approach to Financial Planning | The DoubleBucket Method

Overview of the DoubleBucket™ Method

Do-it-yourself Financial Planning Made Easy

Are you considering hiring a financial planner but are concerned the value will fall short of the costs? If you are comfortable trading funds on-line, The DoubleBucket™ Method may be an option. The DoubleBucket Method focuses on two critical areas that are difficult to resolve for any retiree: 1) Asset Allocation, and 2) a Withdrawal Method. It determines how your assets should be allocated and at what rate money can be withdrawn. As you go through retirement your asset allocations will become more conservative and your withdrawal rate should increase to counter inflation. We say "should" because it does depend on market performance. During gyrations in the market your withdrawal rate may go up and down from year to year. However, it will never run-out of money and over the course of a 30 year (or longer) retirement span, it will have a better average withdrawal rate in comparison to most other strategies (like the 4% Rule).

The overall philosophy of the Double Bucket Method is 2-fold:

Do Investment Planning based on your current situation
Use history to determine asset allocation, instead of analysis

In regards to #1, too many plans remain etched in stone based on an initial plan. Emotion (or maybe stubbornness?) sometimes creeps in when you've devised a plan or purchased a plan from an advisor. The tendency is to hold on too long. The DoubleBucket Method, on the other hand, automatically readjusts each year based on the current situation. That means your income may fluctuate as markets go up and down, but we feel that's a much better alternative than potentially running out of income − and with good diversification the fluctuation will be muted.

In regards to the 2nd bullet, we believe that it's simply better to use past performance to calculate future decisions as opposed to market analysis. Certainly there are times where market analysis could prove beneficial, but that entails a level of risk that we feel is not necessary. Most of the time, historical rates are a good predictor of future results. With the DoubleBucket Method, you may have to tighten your belt in down times but you are guaranteed to not run out of money. On the plus side, during good market conditions you will have much more money to spend during the active years of retirement. If you study the historical analysis at the bottom of the annuity calculator we feel that the reward far outweighs the risk.

One thing to note about this web-site is that it only focuses on the financial & investment side of retirement planning. There is much more to be considered about such as taxes, estate planning, social security and insurance (life, medical, long-term care, etc.). All of that is very important and a financial planner who is a fiduciary can certainly help with those decisions. Paying a financial planner (and/or a lawyer and/or a CPA) for help in those areas usually involves a one time fee and is typically a prudent investment. However, in regards to active management of your assets, the value of a financial planner can be debated. The fees associated for active management usually involve a percentage of assets, with 1% being the ball-park figure. Some advisors may charge less, but not uncommonly some charge more. If you have a million dollars in your account, the fees would be $10,000/yr at 1%. Amortize that over a 30 year retirement span and you're looking at $300,000 (probably more if your account balance increases). If your advisor comes up with a plan that returns more than 1% of your personal plan, then they are worth the money. However, it's our opinion that by using Index Funds and/or ETFs along with the DoubleBucket Method you can come out ahead by doing it yourself.

If you Google "bucket investment strategies", you'll find quite a bit of information on a Bucket approach to retirement planning. When we first researched this topic, it seemed to make sense on the investment side but not on the withdrawal side. It seemed more logical to invest with buckets, but withdraw based on asset allocation. Thus, the term "DoubleBucket" was coined based on Time Buckets & Asset Buckets. You simply put money into time buckets based on when you need the money, but withdraw money from the asset buckets that are over their allocation. As your time horizon shortens your overall asset allocation will become more conservative.

By convention, we use 5 different time-frame buckets, as follows:

Immediate (usually cash, for the 1st 1 or 2 years)
5-year
10-year
15-year
20-year+

This division is just a convention. The buckets could be longer or shorter, but these seem to work well. Note that when we say "5 year" or "10 year", that is money you will need 5 or 10 years from today. The 5, 10, & 15 year buckets are all 5 years in length. The 20 year plus bucket is for the remainder of the span. For example, if the immediate/cash bucket was 2 years in length the 5 year bucket would be for years 3-7, the 10-year for years 8-12, the 15-year for years 13-17, and the 20-year+ bucket would be for years 18 through the end.

To use the DoubleBucket Method, all you have to do is specify the "best" allocations for each time bucket and our software will average it out using time-value-of-money and compute an overall asset-allocation table for each year of retirement. In addition, we provide what we call the DoubleBucket Income Factor (DBIF) which can be used as a divisor to determine your yearly withdrawal rate (e.g., if the DBIF is 20 and you have $1 million , your withdrawal for the 1st year will be $50,000). We put all this information into a table that we call the DoubleBucket Variable Annuity (DBVA) Table. Variable is the key word here meaning that your yearly withdrawals can fluctuate, but over time will be on an upward trend. Another key note is that your savings will always drain down to zero at the end. You might think this is a show-stopper, but it is an easy thing to manage (for detailed information, see our research paper). Why does it drain down to zero? Basically for 2 reasons: 1) it allows for withdrawals at a higher rate and 2) it makes the system deterministic . What if it drains down to zero before you die? That answer is simple. Just pick an age that you can't outlive. The longer your span the less you can withdraw, but it's surprising in that it doesn't change things by a huge amount. Experiment with this when generating the DBVA and we think it will make sense. A good example is if you are currently 65 and there is a reasonable chance you'll live to 95, picking a 30 year span would leave you empty if you happened to live longer than 95. Instead, you might want to pick a 35 or 40 year span. Chances are you won't live that long, but that gives you a cushion if you do and something for your heirs if you don't.

So, how do you determine the "best" allocations for the time-frame buckets? Well, we've done some research and have come up with what we consider to be the "best". This is a good starting point to understand the system. If you come up with something you consider "better" you can certainly plug that in. If you start with our suggestions, all you have to do is input the length of your retirement and it will calculate everything else. If you'd like to do some research on what the "best" allocations might be, we have a diversification calculator where you can analyze any asset mix you like and see how it's performed over the course of time. Our philosophy is to use history to predict future performance as opposed to analysis. We look at all past spans going back in time, and use the worst case as a baseline for going forward. Certainly it's possible that a future span will be worse than all previous spans, but even if that is the case we would hope it wouldn't be too much lower.

Our suggestion is to start with the DoubleBucket Variable Annuity and get familiar with that. Then, if you want to do some research to derive your own time-bucket allocations, go to the Diversification Analysis calculator. If you'd like to read more about how the DoubleBucket™ Method was developed please see our research paper.

Enjoy!