Harold Evensky's Mastermind: Conquer Retirement Withdrawals with the Two-Bucket Strategy!

In this episode of "The Retirement Guide" with George Jameson, CFP®, MBA of Capital Wealth Group, listeners are treated to an in-depth exploration of the time-tested and straightforward Two-Bucket Strategy for retirement planning. Host George Jameson simplifies the complex world of retirement income by introducing the original two-bucket system developed by financial guru Harold Evensky in 1985. With a focus on simplicity and effectiveness, this strategy aims to protect retirees from market panics and ensure a steady stream of income without the need for complicated withdrawal plans.

 Welcome to "The Retirement Guide" Podcast! I'm your host George Jameson, owner of Capital Wealth Group, a Fee Only Advisory firm. Whether you’re nearing retirement or already retired, Join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

Thank you for tuning in to this episode of The Retirement Guide. If you enjoyed this episode, please subscribe & leave a review. If you'd like a free 30-minute retirement review, visit our website at www.capitalwealthplan.com to schedule.

This is for education only.It is not tax, legal, or investment advice. Before  acting on any information consult your tax, legal, or investment advisor.

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Transcript

                                                                Harold Evensky's Mastermind: 

                         Conquer Retirement Withdrawals with the Two-Bucket Strategy!

 Welcome to "The Retirement Guide" Podcast! I'm your host George Jameson, owner of Capital Wealth Group, a Fee Only Advisory firm. Whether you’re nearing retirement or already retired, Join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

So, let’s get started. Today we are talking about the one and only Retirement Bucket Strategy that works.  Forget complex retirement withdrawal strategies! The confusing world of retirement income doesn't have to leave you in a spin. Today, we're simplifying things with the two-bucket strategy.

You might have heard of three-bucket or even a four-bucket...but please forget those! The original two-bucket system, developed by retired financial guru Harold Evensky, is all you need. Developed in 1985, and it's a timeless classic used by top advisors like me even today!

We'll explore its advantages, see how it stacks up against the other Bucket Strategies, and discover why sometimes, less is truly more when it comes to managing your retirement nest egg.

So, buckle up and prepare to master the art of retirement withdrawals with the one and only two-bucket strategy! Most bucket strategies are intricate sales pitches, they sound great, but are really confusing and costly to implement. But Evensky, known as the "father of the bucket strategy," designed his approach to be an inexpensive behavioral insurance policy. It's not about getting rich; it's about protecting you from panic, selling during those inevitable market declines and selling high and buying low. 

Remember the 2008 crash? Yeah, not fun. But with the two-bucket system, if the market has another major decline, you don't have to touch your stocks to generate income or sell out of fear. No selling stocks at a loss to pay for your electricity bill. In addition, you would most likely be buying stocks at discount prices. 

The genius lies in two simple buckets. Bucket #1, your "cash lifeline," it holds 1-2 years of essential expenses after accounting for guaranteed income like Social Security, pensions, income annuity or rental income. This covers your bills for 1 year, or even 2 years for extra caution. You can receive monthly payouts and replenish it either annually or quarterly.

Bucket #2 is your investment portfolio. This is where you invest in stocks and bonds. You will customize your mix, which for retirees is usually somewhere between 30/70 and 70/30 stocks to bonds. However, most retirees seem to have an asset allocation between 40/60 and 60/40. But everyone is unique. It's all about your comfort zone.

Now, let's take a concrete example. Imagine Sue, a 70-year-old investor with a million-dollar portfolio and a 50/50 stock to bond split in Bucket 2. Suddenly, the market crashes, shrinking her stock portion by $120,000. No worries, Sue! Her bonds haven't budged. But she does need $35,000 to top off her Bucket #1 for living expenses for the next year.

Here's the beauty: Sue doesn't sell stocks to fill Bucket #1. Instead, she simply rebalances Bucket #2. It's like a financial game of Jenga! She might sell some bonds or even buy some more stocks at their bargain-basement prices. Remember, when stocks are down, you want to buy, not sell, and run for the hills.

Note: If you are worried about another extremely rare event like 2022 when bonds and stocks were both down double digits, don’t worry, your bond portfolio can consist of 3 different maturity ranges. 1-3 Years for short-term, 3-5 for Intermediate Term, and 5-10 Years for longer term as an example. You could also even have some in the very short-term Treasuries or a Money Market fund as part of your overall Bond mix in Bucket 2.  

Replenishing Bucket 1: The Power of Rebalancing

Now let's talk about the secret sauce of the two-bucket strategy: replenishing Bucket 1. Remember, this isn't a one-year pit stop; it's a steady stream of fuel for your retirement engine. So, once that year is up and Bucket 1 is drained, it's time to tap into Bucket 2 through... rebalancing!

Let's say your target allocation in Bucket 2 is 60% stocks and 40% bonds, Fast forward a year, and things have shifted. Your stocks have dropped, around 20%, leaving you with only 54% stock allocation. Meanwhile, your bonds have held steady increasing your overall bond allocation to 46%, On top of that, you need to top up Bucket 1 with $35,000 for your next year's expenses.

This is where the two-bucket strategy shines. You don't panic and sell stocks at their low point just to fill up Bucket 1. Instead, you cleverly use this rebalancing opportunity to your advantage. You see, you have two goals: 1) get that $35,000 to your living expenses bucket, and 2) bring your Bucket 2 allocation back to its ideal balance.

So, you grab your financial spatula and start rearranging. You would sell some bonds, the assets that have outperformed their target allocation, to rebalance and free up some cash. That gives you two things: money for Bucket 1 and a chance to buy more stocks on sale! Remember, when the market throws a tantrum, that's when you scoop up bargains.

Now, let's flip the script. Imagine a scenario where stocks have been on a tear, pushing your stock allocation to 65%, while bonds languish at 35%. You still need $35,000 for Bucket 1. This time, you sell your stocks to get back to your original allocation of 60/40. trim back those overgrown stockholdings. By selling some stocks at their high point, you get the cash for Bucket 1 and nudge your portfolio back towards its target allocation.

See the beauty? The two-bucket strategy plays the market, not against it. It uses rebalancing as a tool to buy low and sell high, all while ensuring you have the cash you need to live comfortably. This is where it separates itself from other bucket strategies. They simply replenish buckets based on time, regardless of market conditions. That means you might be forced to sell stocks at a loss during a downturn, the exact opposite of what you want to do!

So, ditch the cookie-cutter bucket plans and embrace the flexibility of the two-bucket approach. It's simple, adaptable, and keeps you calm and collected, even when the financial markets are all over the place. Remember, a well-balanced portfolio is a happy portfolio, and the two-bucket strategy is the perfect recipe for achieving that balance.

That's the key difference between this two-bucket system and its complicated cousins. No selling low, no buying high. Just calm, calculated moves designed to make your money work for you in the long run.

Now A Detailed Rebalancing & Withdrawal Process

Consider this very simple hypothetical example: Sue, a 70-year-old investor with a $1,000,000 portfolio and a target allocation of 60% stocks, 35% bonds, and 5% Money Market. But after a 20% market downturn, the stock portion of her portfolio is down $120,000: The bond and cash portion remain the same for simplicity.

 
 |   | Starting portfolio  | Starting portfolio %  | Portfolio After Stock Drop 20%  | Portfolio % After Stocks Drop  | Stocks | $600,000 | 60% | $480,000 | 54%
 | Bonds | $350,000 | 35% | $350,000 | 40%
 | Money Market | $50,000 | 5% | $50,000 | 6%
 | Total | $1,000,000 |   | $880,000 | 

As you are thinking, she now has too many assets in Bonds and MM and not enough in Stocks. In addition, she needs to withdraw $35,000 from her investment portfolio to supplement her Social Security to pay for her yearly expenses. To figure out what to sell to meet her cash need, she should do the following: 

1. Simply subtract her cash need from her current portfolio balance:

Her current portfolio balance:       $880,000 – $35000 = $845,000 (New Portfolio Balance) 

But what should she sell to generate the $35,000? All she needs to do is rebalance back to her target allocation based on her new portfolio balance of $845,000.

2. Calculate the target dollar amounts for stocks, bonds, and cash investments based on her updated portfolio balance and target allocation percentages. In this scenario, our hypothetical investor likely needs to acquire more stocks, preferably at lower prices. This strategy could play to her advantage if the market experiences a turnaround.

3. Calculate the new portfolio target balance: 

New Portfolio Target Balance: 

$845,000 x 60% Stocks = $507,000

$845,000 x 35% Bonds = $295,750

$845,000 x 5% Cash Eq. = $42,250

Current Balance:

 |   | Target Amount | Target Allocation | Current Amount | Changes Needed | Stocks | $507,000 | 60% | $480,000 | +$27,000
 | Bonds | $295,750 | 35% | $350,000 | -$54,250
 | Cash investments | $42,250 | 5% | $50,000 | -$7,750
 | Total | $845,000 | 100% | $880,000 | $35,000 W/D

                                                                                                                  $845,000

4. Now simply subtract the Target Amount by the Current Amount to determine how much to buy and sell to rebalance and end up with the $35,000 in cash.  

The example is hypothetical and provided for illustrative purposes only.

That wraps up today’s episode. Hope everyone has a happy holiday and New Year! 

Thank you for tuning in to this episode of The Retirement Guide. If you enjoyed this episode, please subscribe and leave a 5 star review to help others discover the show.

For questions, ideas, or to discuss your retirement plan, reach out to me, George Jameson, at Capital Wealth Group. Visit our website, at capitalwealthplan.com to learn more.

Thank you for listening and stay tuned for more insightful retirement planning in future episodes.

Disclaimer

The information discussed in this podcast is for general explanations and education only. It is not tax, legal, or investment advice. Before considering acting on any information heard here, first consult with your tax, legal, or investment advisor. Thank you and have a great day. 

Learn more about Capital Wealth Groupand George Jameson, CFP®, MBA, a Financial Advisor based in Columbia, SC, CLICK HERE!

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