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Saturday, May 21, 2011

Why I "Skimmed The Cream" off my TSP

This week I rebalanced my TSP account. Please don't misconstrue this as a market timing decision. It really wasn't. I was just very satisfied with my returns, saw that my stock and cash allocations were out of balance, and logged in and readjusted.

I subscribe to Ray Lucia's "Buckets of Money" strategy. It is a balanced approach to investing that suggests that you calculate the sustainable distribution of an account and distribute this amount into three buckets.

The first is a spending bucket, and is conservative guaranteed income sources equal to about 8 years of distributions.

The second bucket is a more moderate savings bucket, equal to about 7 years of distributions.

The third bucket is the growth bucket, which I distribute between the C Fund (50%) and the S and I funds (25% each).

Since I am not yet retired I'm not spending the money out of the guaranteed income bucket, but am reinvesting into my growth bucket, using the value averaged approach to rebalancing the portfolio. If the growth bucket value plus the proceeds of that particular year's slice of income exceeds my target value for the year I retain the excess in the cash bucket. If it is less than the target value than I use more of the cash bucket to make up the difference, up to a personal limit of 20% of the first bucket. This allows me to buy low and sell high on a systematic basis.

In this particular example I had about $150,000 to distribute. The 4% distribution on this portfolio is $6,000.

My first bucket then is $6,000 x 8 years, or $48,000. This goes into the G Fund.

The second bucket is $6,000 x 7 years, or $42,000. I put this into the F Fund.

The remaining $60,000 is split as described above, $30,000 into the C Fund, and $15,000 each into I and S.

During the next year I will max out the contribution to the TSP, $16,500, putting all of that into the third bucket, split in the same proportion. I will also make quarterly shifts from the C-Fund into the third bucket, as if I was spending the income out of the first bucket, but only to the amount required to stay on pace to make a 8% return on the overall portfolio.

At the end of the year I expect to have about $43,000 in my first bucket, $43, 500 in my second bucket and $87000 in my third bucket, for a total portfolio value of $173,500 which provided an 8% return in my growth bucket, and an overall portfolio return of more than 4.5%.

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