You will be able to write rules that decide when to move money between buckets.
Buckets only work if money moves between them at the right times. Move too eagerly and you sell shares after every dip. Move too lazily and the cash bucket runs dry in the middle of a bear market, leaving you to sell at the worst moment anyway. The answer is a short set of rules, written while markets are calm, that tell you what to move, when, and what to do to your spending if things go badly.
This lesson writes Jasmine's rules. Lesson 4.4, Write your withdrawal and refill rules, then puts yours on one page.
The basic refill rule follows from the purpose of each bucket. Cash pays your spending. The middle bucket refills cash. The growth bucket refills the middle. The question each year is which bucket pays for the refill.
After a good year for shares, refill from growth. Sell enough shares to bring the cash bucket back to its target and top up the middle bucket too. You are selling after prices have risen, which is what you want.
After a bad year for shares, refill cash from the middle bucket and leave the shares alone. The middle bucket shrinks for a while, and the shares get time to recover.
You need a definition of a good year and a bad year that doesn't require judgment. Jasmine uses her growth bucket's value at her January review. If it is higher than at her previous review, after adding back anything she took out, the year was good. If it is lower, the year was bad.
A fall can last more than one year. From the 2000 peak, many share markets took years to recover, and investors who held through had several bad Januaries in a row. So the second rule sets the longest stretch you'll go without selling shares.
Jasmine's two safe buckets together hold about seven years of withdrawals. She decides she will go up to four years without selling growth, using cash and then the middle bucket. That leaves about three years in the middle bucket as a reserve she won't run below. If a fall lasts longer than four years, she will start selling shares in small amounts each year rather than waiting until the middle bucket is empty.
The exact number is less important than writing one down. Without it, people tend either to sell in a panic in year one or to hold on until the safe money is gone and then sell everything at once.
The third set of rules decides when spending changes. It connects to the guardrails in lesson 4.1, Fixed amount, fixed percentage or guardrails.
A good cut rule says three things: the trigger, the cut, and when you go back to normal. It should name the spending that goes, so nothing is decided under stress.
Jasmine's triggers are her guardrails. If her withdrawal rate rises above about 3.7%, she cuts 10% of flexible spending that year, and again the following year if the rate is still above the band. She has also listed what the cuts mean in practice. The first 10% comes from travel, which she would shorten from two trips a year to one. A second cut comes from eating out and gifts. Her essentials and her mother's allowance are never cut by these rules.
She also has a simpler rule for any year when her growth bucket has fallen: she skips that year's inflation increase on flexible spending. That one rule, applied in every bad year, does much of the work by itself.
The return rule says when spending goes back up: when her withdrawal rate falls back below the upper guardrail, she restores the most recent cut first. Raises above her starting level only come if her rate falls below the lower guardrail.
Markets move every day, and news about them moves faster. Rules that are checked every day stop being rules, because each dip becomes a reason to act.
So set one review date a year. Jasmine's is the first week of January. At the review she checks the value of each bucket, works out her withdrawal rate, applies her guardrails, refills according to her rules and resizes the buckets for the coming years. Then she leaves it alone until next January, unless a large one-off event, such as a health crisis or an inheritance, forces an earlier look.
Between reviews, she lives off the cash bucket. Her monthly spending is paid from a single account. What markets do in March doesn't reach her grocery money.
Suppose her growth bucket of about S$772,000 falls 25% in her first year after stopping work, to about S$579,000. At her January review the year is clearly bad. She doesn't sell shares. She moves two years of withdrawals from the middle bucket into cash, skips the inflation increase on her flexible spending, and checks her guardrails.
Suppose the next year is flat. Still bad by her definition, so she refills cash from the middle bucket again. She is now two years into her four-year limit.
In the third year shares rise strongly and her growth bucket passes its starting value. That is a good year. She sells enough shares to refill cash and bring the middle bucket back up, and restores the skipped inflation increase.
She never sold a share at the bottom. Her spending dipped a little for two years and came back.
Now think about your own: what you'd call a bad year, how long you could live off safe money, and the one market fall that would make you cut spending.
Write your refill rule and the market fall that would trigger a spending cut.
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