Tuesday, April 30, 2019

My “Bucket Strategy” for Retirement Spending

I frequently get questions about the “bucket strategy” I’m using for spending my assets in retirement. I prefer not to use the term “bucket” because my strategy differs from bucket methods in important ways. In fact, my retirement spending more resembles single-portfolio strategies.

My decumulation approach involves holding 5 years’ worth of my annual spending in short-term fixed income and the rest in stocks (described in more detail in my post Cushioned Retirement Investing). Each year, I sell enough stock to replenish the fixed-income allocation.

My annual spending each year is calculated from my age and current portfolio value. As I get older, I spend a slightly higher percentage of my remaining portfolio (see the spreadsheet in my Cushioned Retirement Investing post for the exact percentages). If stocks perform well, my annual spending will rise, and if they perform poorly, my spending goes down.

Because my annual spending changes from year to year, I have to calculate how much stock to sell each year. I take my new annual spending, multiply by 5, and subtract the current value of my fixed-income investments. This is essentially a form of rebalancing that has me selling fewer stocks when they’re down and selling more when stocks are up. In rare cases when stocks crash, I might have more fixed income than 5 times my new annual spending, and I actually buy some stocks instead of selling.

Important Differences from Bucket Strategies

No active decision on which bucket to spend from

Many bucket strategies involve making an active decision about whether to spend from stocks or fixed income in a given year. This only makes sense if you believe you have the ability to time the market. I don’t. Most people (maybe all) who believe they can time the market are wrong.

No hard switches between spending from stocks and fixed income

It’s possible to devise a bucket strategy that is entirely rules-based. A simple example would be to spend for the year entirely from fixed income if stocks are more than 20% below their peak level. The idea would be to ride out stock market declines by spending from fixed income until stocks rebound. My strategy has no hard switches between spending from stocks and spending from fixed income.

Other differences from typical decumulation strategies

Predetermined spending changes based on portfolio size

Decumulation strategies often have retirees set a spending level and keep it fixed (possibly with inflation adjustment each year). If stocks perform poorly, these retirees then have to decide when to cut their spending. My strategy automatically adjusts spending level based on portfolio size. This has the advantage of guaranteeing I won’t run out of money. However, it becomes a disadvantage for any retiree who can’t or won’t spend less when stocks disappoint.

Fixed-income allocation adjusts automatically with age

Many decumulation strategies are vague about when to increase the allocation to fixed income investments in a retiree’s portfolio. My strategy uses a fixed rule to increase the percentage of fixed income each year.

No long-term bonds or corporate bonds

I get enough volatility from my heavy stock allocation. I prefer not to be open to shocks in bond markets. So, my portfolio holds no corporate bonds at all, and no government bonds of duration more than 5 years. In fact, I currently have only GICs and savings accounts.


My decumulation strategy is close to single-portfolio methods than it is to bucket strategies. It’s impossible to know whether my strategy will work out any better than anyone else’s. But I prefer to remove as much of my own decision-making as possible. Faced with a decision, it’s very easy to just do nothing. I have a spreadsheet that tells me what to do and when to do it.

Friday, April 26, 2019

Short Takes: Million Dollar Lattes edition

I didn’t write any posts since my last set of Short Takes, so I thought I’d start by weighing in on the furor Suze Orman stirred up when she said buying expensive coffee is “peeing $1 million down the drain.” In an effort to annoy everyone, I’m going to drive down the middle of the road.

Orman’s example using a 12% rate of return for 40 years is just plain silly. She also ignores the time value of money that makes $1 million 40 years from now much less valuable than $1 million today. But she’s not wrong that small amounts of money add up and can undermine your saving efforts.

There’s nothing wrong with buying coffee or other small things if you’re doing it thoughtfully, understanding their full cost over time. But that’s not how most people think. They just can’t imagine that such small amounts can make much difference. But they do.

Orman’s critics are right when they say that the big things in life, like houses and cars, matter the most. But they’re wrong when they say that little things can’t make a meaningful difference to your retirement.

There is no one answer to the latte question that applies to everyone. If you’ve got the money, and you want your coffee, go ahead. If you’re holding an expensive coffee and complaining that life is so expensive now and you’re not sure what you’re going to do, then the money wasted on coffee is a problem.

Here are some short takes and some weekend reading:

Robb Engen at Boomer and Echo explains why he isn’t paying off his mortgage any faster. My take on whether to pay off a mortgage faster comes down to a single question: if stocks drop 40% and you lose your job at the same time, will you be OK? I suspect Robb would hold out fine financially until he found another job. Too many people would be wiped out by that scenario.

Canadian Couch Potato answers several listener questions in his latest podcast.

Big Cajun Man is having some income tax hassles that illustrate how the extremely long delays at CRA complicate taxes even further.

Friday, April 12, 2019

Short Takes: Investment Fees, Downside Protection, and more

I wrote one post in the past two weeks:

Consumers Can’t Avoid Computer Bots

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand looks at the current landscape of investment fees. Costs aren’t dropping in all areas.

Dan Bortolotti answers a reader question about downside protection with stocks.

Big Cajun Man has some tax trouble and shows what can happen to this year’s taxes when a previous year is still in dispute.

The Blunt Bean Counter discusses the issues occupying his time this tax season.

Tuesday, April 2, 2019

Consumers Can’t Avoid Computer Bots

You may have heard some people complain that when they used online chat on some big business’s website, they were chatting with a computer bot instead of a real person. You might think this isn’t a problem for you because you don’t use chat features on websites. Think again.

The dream of big businesses is to run their customer interfaces with computers rather than employees. Most of the time I actually prefer to do things myself on a website, such as banking transactions, travel packages for my phone, and even some troubleshooting. However, there are times when we need to speak to a person to solve a problem.

After you’ve waded through phone menus, listened to music for several minutes, and finally get a person on the line, you may not really be getting human responses. Increasingly, call center employees just read computer responses off a screen. As these computer algorithms get more sophisticated, call center employees make fewer decisions on their own.

Even your local bank branch will have you interacting with computers. It’s common for bank tellers to try to upsell you on bank products. One time I happened to have a view of the teller’s computer screen when the upsell came. The exact language the teller used appeared on screen: “Hey, have you thought about opening a TFSA?” This is creepy, and it’s getting progressively more common.

With each passing year, customer-facing employees of big businesses have less discretion to make their own decisions. They can’t overrule computer decisions. For now, what they can control is what they enter into the computer. I remember pointing out a small dent in a stove being delivered to my house. The delivery person said “so you’re refusing delivery, right?” He had his finger hovering over a small touchscreen waiting for my answer. I wasn’t sure how to respond. “If you refuse delivery, they’ll send a new stove at no extra cost to you.” I was being helped to give the right response so a computer would decide to send me a new stove.

A few years ago, my bank upped the amount of cash I could withdraw per day from cash machines, but I had to do it in two transactions, and I was getting hit with two withdrawal charges of a dollar each. The branch manager reversed one of the charges, but told me she wouldn’t be able to do it again in the new year because much of her discretion was being taken away. Even branch managers have to do what computers tell them to do.

The next time you’re frustrated with an employee at a big business, remember that getting angry at the employee doesn’t help. Low-level employees have little discretion; company policies are set at headquarters and are transmitted throughout the business by computers. Be polite, stand your ground, and maybe the employee will poke the computer in such a way that you’ll get what you want.