[Book: Living off Your Money, by M. McClung (Prime Harvesting)]

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Fri Jul 22, 2016 10:20 am

heyyou wrote:MSWR is based on surviving the single worst period, then posters pick that same period to show that it is not a good period for McClung's suggestions. It is not a good period for any retirement. One of McClung's points is that his methods are an improvement over MSWR, allowing the retiree to spend more from the same amount of assets, with more assurance that it will survive a similar worst period, as does VPW.
I'm afraid that you missed the point. Of course, the 1965/66 cycles go to the ground whatever harvesting technique you use when using constant-withdrawal at 4%. Now pay close attention to what actually happens (check the chart in this post). We start from a highly valued stock market (CAPE around 24). The algorithm makes you sell bonds and the stock part of the portfolio strongly increases, while the stock part of the portfolio can't reach the 120% threshold. Rather luckily, in 1972, the threshold is reached, but the AA remains very high when the oil crisis strikes. As a retiree, I would feel pretty bad about the algorithm at that point. And then as the inflation ravages the US, the AA increases again and stays stuck to to 100%, as the portfolio spirals to the ground. Nobody would follow such recommendation, there is no way.

Now granted, the trajectory of the regular fixed-AA portfolio at 60-40 isn't pretty either, although it does manage the pre-crisis and crisis itself a tiny bit better (and with MUCH LESS regrets). In addition, even if Prime Harvesting delays the portfolio failure a tad for the 1965 cycle, it does not in 1966 (with the set of historical return numbers I used). And how can that help selecting a higher withdrawal rate to start with? One needs a variable withdrawal method to manage those situations, this is clear.

So this all tells me the following:
- the calibration of the entire algorithm on the 120% threshold of the initial (stocks) portfolio is not a very good idea (memory effect)
- one should focus FIRST on selecting a sensible variable method, and THEN ponder about the best harvesting method, instead of the reverse way around
- and then the entire MSWR reasoning is pretty much a moot point.

Am I making sense?

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Raybo » Fri Jul 22, 2016 10:51 am

Nobody would follow such recommendation, there is no way.
You are assuming that it is easy to stick with a pre-set AA when the market is cratering. Or, that people will reduce their lifestyles when their VPW formulas call them to do so. Why is it so hard to assume that people can't stick with 100% equities if that is what the plan calls for, but safe to assume that people will gladly rebalance into a market crash? In reality, neither is very likely.

In my view, if 1965 is a retiree's future, there is nothing anyone can do to assure a safe and well-funded retirement except work longer, die earlier, go live in a cheaper place, or some combination of all three.

Should the decisions someone makes about retirement be based on the worst case in the last 90 years?

As a way to contextualize the 100% equities issue, in how many of the actual 30-year retirements since the start of the dataset would retirees using Prime Harvesting been 100% equities? Is this something that all retirees will face if they use Prime Harvesting?
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Fri Jul 22, 2016 11:32 am

Raybo wrote:
Siamond wrote:Nobody would follow such recommendation, there is no way.
You are assuming that it is easy to stick with a pre-set AA when the market is cratering. Or, that people will reduce their lifestyles when their VPW formulas call them to do so. Why is it so hard to assume that people can't stick with 100% equities if that is what the plan calls for, but safe to assume that people will gladly rebalance into a market crash? In reality, neither is very likely.
Not assuming anything... Not disagreeing with your concerns... I'm just observing that a plan making you load up on equities at the very exact wrong time, then you fall off a cliff, and the plan asks for 100% equities again while your portfolio goes down in flames is very unlikely to be followed after the cliff drop. I don't disagree with the challenges of other approaches, although they definitely seem more manageable, from a behavioral standpoint.

(I would actually be interested to model what happens to retirees who normally rebalance, and yet do not rebalance in years when stocks drops a lot, while making other reasonable assumptions about the AA and withdrawal model - your concern is very understandable, it would be worth studying this a bit more - send me feedback by PM if interested)
Raybo wrote:In my view, if 1965 is a retiree's future, there is nothing anyone can do to assure a safe and well-funded retirement except work longer, die earlier, go live in a cheaper place, or some combination of all three.
Well, yes, and a variable withdrawal plan would trigger you to do 1) and/or 3) and other variations to reduce your withdrawals. No choice, I agree. I'd rather have a (withdrawal) plan in place for such situations though.
Raybo wrote:Should the decisions someone makes about retirement be based on the worst case in the last 90 years?
I wouldn't *gate* the decisions by a single data point in history (one of the reasons for which I don't like the SWR reasonings). It seems to me that one needs a plan that would have worked in *ANY* of the past situations, not only the worst one, but also the bad cycles, the so-so cycles and *also* benefit from upsides in the rosy cycles. Now if this plan calls for some dire decisions (e.g. move to a cheaper place you don't like) for the worst cycle, I actually would think it is kind of ok, as this is low-probability and I'd rather optimize for the more likely scenarios while staying conservative. Again, this all calls for a variable plan (and I know McClung agrees with that).
Raybo wrote:As a way to contextualize the 100% equities issue, in how many of the actual 30-year retirements since the start of the dataset would retirees using Prime Harvesting been 100% equities? Is this something that all retirees will face if they use Prime Harvesting?
I need to run (fishing trip), I'll look that up for you when I come back (Monday). I suspect it is a pretty common outcome of the algorithm, but maybe I am mistaken, we'll see. Again, all I was trying to do what to show that the PH algorithm can make decisions on your behalf that can be quite unfortunate, and this is a direct consequence of the over-reliance on the initial (stock) portfolio value.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Kevin M » Fri Jul 22, 2016 3:05 pm

heyyou wrote:McClung repeatedly suggested the use of real, guaranteed income to cover all or most of a retiree's necessary expenses.
This would be consistent with the LMP/RP paradigm, with the guaranteed income being the LMP, and the McClung portfolio being the RP.
AlohaJoe wrote:This was not my interpretation of the book, nor of my private conversations with the author.
Oh well, so much for that idea.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Kevin M » Fri Jul 22, 2016 3:11 pm

Raybo wrote: Should the decisions someone makes about retirement be based on the worst case in the last 90 years?
I'd say that for those of us heavily influenced by Bill Bernstein's more recent thinking, the decisions we make about retirement financial planning should be based on even worse than the worst case in the last 90 years.

Even with the Swedroe paradigm of ability/willingness/need to take risk, which was my operating risk paradigm before learning about the LMP/RP paradigm (and I think the two paradigms are consistent), having very low ability to take risk due to fully or almost-fully depleted human capital leads toward taking very little risk in retirement. Even if need to take risk is high, low ability to take risk trumps it. This could well involved taking less risk than would have worked in the worst case in the last 90 years.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by LadyGeek » Fri Jul 22, 2016 3:26 pm

Kevin M wrote:...Even with the Swedroe paradigm of ability/willingness/need to take risk, which was my operating risk paradigm before learning about the LMP/RP paradigm (and I think the two paradigms are consistent), having very low ability to take risk due to fully or almost-fully depleted human capital leads toward taking very little risk in retirement. Even if need to take risk is high, low ability to take risk trumps it. This could well involved taking less risk than would have worked in the worst case in the last 90 years.
Can someone please clarify "LMP/RP"?

- LMP is Liability Matching Portfolio, which is in the wiki: Matching strategy

Can a "Matching strategy" also be called a "Liability Matching Portfolio"? I'd like to add the definition in the wiki article, as it's not mentioned.

- RP is Risk Portfolio, but I don't know how that fits in the context of the discussion.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Fri Jul 22, 2016 8:03 pm

Raybo wrote:As a way to contextualize the 100% equities issue, in how many of the actual 30-year retirements since the start of the dataset would retirees using Prime Harvesting been 100% equities? Is this something that all retirees will face if they use Prime Harvesting?
I wrote about it in (scroll down towards the bottom) https://medium.com/@justusjp/prime-harv ... .900808x1z

Things can change but the overall take away is that a large percentage of portfolios will see 100% stocks at some point. Maybe just for a single year. Maybe for longer.

Obviously, the exact number varies depend on the starting assumptions. Are you starting with a 70/30 split? 50/50? A 30-year retirement? A 40-year retirement? Are you using constant withdrawals or some kind of variable withdrawal strategy?

60/40, 30-year, constant withdrawals = 44/144 (i.e. 44 out of 144 cycles since 1871 saw stocks go to 100% for at least one year)
60/40, 30-year, VPW = 69/144
50/50, 30-year, VPW = 52/144
50/50, 40-year, VPW = 111/144

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Kevin M » Fri Jul 22, 2016 8:29 pm

LadyGeek wrote:
Kevin M wrote:...Even with the Swedroe paradigm of ability/willingness/need to take risk, which was my operating risk paradigm before learning about the LMP/RP paradigm (and I think the two paradigms are consistent), having very low ability to take risk due to fully or almost-fully depleted human capital leads toward taking very little risk in retirement. Even if need to take risk is high, low ability to take risk trumps it. This could well involved taking less risk than would have worked in the worst case in the last 90 years.
Can someone please clarify "LMP/RP"?

- LMP is Liability Matching Portfolio, which is in the wiki: Matching strategy

Can a "Matching strategy" also be called a "Liability Matching Portfolio"? I'd like to add the definition in the wiki article, as it's not mentioned.

- RP is Risk Portfolio, but I don't know how that fits in the context of the discussion.
RP is whatever you have in excess of the LMP. So you can take as much or as little risk as you want with the RP, but the LMP should be in safe assets.

It came up in this discussion by heyyou saying that "McClung repeatedly suggested the use of real, guaranteed income to cover all or most of a retiree's necessary expenses". Having real, guaranteed income to cover residual expenses in retirement is pretty much the description of a classic LMP. If that were the case, then it would be fine to consider a McClung portfolio as the RP, and going to 100% stocks would be OK for the RP.

The point I'm making is that with the LMP/RP paradigm there's no way you'd go to 100% stocks, or even close to that, with the LMP, since the LMP by definition must be in safe assets. So the McClung approach, which apparently allows for up to 100% stocks with no safe assets to cover residual expenses in retirement, is diametrically opposed to an LMP approach, unless you restrict the McClung portfolio to the RP part of an LMP/RP portfolio.

Clear?

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by LadyGeek » Fri Jul 22, 2016 9:24 pm

Yes, it's more clear. I read the posts on this page again, which now make more sense. At a high level, I missed this very important point on the book's target audience (Page 3 of the free download), which I think is getting lost among the backtesting discussions.
The common investing scenario is a retiree drawing annual income from a combination of retirement accounts (e.g., 401Ks, IRAs), taxable brokerage accounts, and perhaps other investments like annuities or individual bonds. Additional income may come from a pension, Social Security, or other sources; however, to apply this book’s guidance a significant portion of income must stem from market assets directly controlled.
Take a look at the wiki article Matching strategy discussion on the difference between hedging, insuring, and diversification. What's discussed in the book is diversification, which leaves a lot of risk on the table when you don't have fixed income.

In this context, I can see that "LMP" is indeed diametrically opposed to the book. "Risk Portfolio" is for the equity side. I hope this perspective is not lost in the noise. (If I'm wrong, please let me know.)

==============
Would it be correct to update the wiki article introductory sentence to include LMP?

From:
The process of matching strategies allows an investor planning for retirement to meet specific financial targets with near certainty.
To:
The process of matching strategies (also known as a liability matching portfolio (LMP)) allows an investor planning for retirement to meet specific financial targets with near certainty.
===========
NMJack wrote:
heyyou wrote:McClung repeatedly suggested the use of real, guaranteed income to cover all or most of a retiree's necessary expenses.
This comment reminded me of the old Steve Martin routine regarding "how to be a millionaire, and never pay taxes." Any other old people remember that one? I think the album was titled "comedy is not pretty."
Here you go: SNL Transcripts: Steve Martin: 01/21/78 (last paragraph) What do you mean old?? :D
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Sat Jul 23, 2016 12:34 am

Kevin M wrote:
Raybo wrote: Should the decisions someone makes about retirement be based on the worst case in the last 90 years?
I'd say that for those of us heavily influenced by Bill Bernstein's more recent thinking, the decisions we make about retirement financial planning should be based on even worse than the worst case in the last 90 years.
Then you should enjoy McClung's book because his recommendations aren't based on the worst case in the last 90 years of US history. :wink:

- He shows how Prime Harvesting compares to Annual Rebalancing against the UK data
- He shows how Prime Harvesting compares to Annual Rebalancing against the Japan data
- He shows how they compare against 5,000 simulated markets via bootstrapping
- He shows how they compare against 1,000 "simple-block" bootstrapped simulations
- He constructs a Baseline Market that has worse returns than the US has ever seen, which includes a 20-year period where stocks return 0.1% real and bonds return -1.1% real and a 30-year period where stocks return 3.5% real and bonds return 0.6% real.
- He constructs a Failure-Market that is even worse than that where stocks return, on average, 3% over 83-years and bonds return 0.5% over 83-years. A scenario in which the traditional recommendations (annual rebalancing, 4% SWR, etc) fail 52% of the time.

I expect regardless of whether you ultimately agree with McClung's suggestions (for instance, siamond does not agree with much of McClung), it is easy to respect his effort because it goes far beyond the usual snakeoil seen in the financial press.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Kevin M » Sat Jul 23, 2016 3:02 pm

LadyGeek wrote: Would it be correct to update the wiki article introductory sentence to include LMP?

From:
The process of matching strategies allows an investor planning for retirement to meet specific financial targets with near certainty.
To:
The process of matching strategies (also known as a liability matching portfolio (LMP)) allows an investor planning for retirement to meet specific financial targets with near certainty.
===========
I don't believe your references for that Wiki article actually use the term LMP. My reference for this is Bill Bernstein's "The Ages of the Investor: A Critical Look at Lifecycle Investing". He introduces the LMP and RP terms on page 24 of the Kindle edition I have. Bill's reference is an article published in Financial Analyst's Journal. Here is a reprint of the article with minor changes (what I found first): Don’t kill the golden goose: Why DB retirement plans can and should be saved, and how to do so.

I'm reading that article now. The authors don't actually use the term LMP (see next reply)--they call it a hedging portfolio or liability-hedging portfolio. They use the term risky-asset portfolio for the RP. As the title implies, the target audience of the article is sponsors of defined benefit plans, but the ideas still are relevant to individual investors. Bill has done the work of adapting the ideas to the management of retirement portfolios for individual investors.

Bill's focus is on a subset of the matching strategies in the Wiki article--he just focuses on retirement portfolios (matching the residual living expense liabilities of retirees), not things like college education. So if you want to add Bill's book as a reference, then perhaps mentioning LMP in the section on "Matching strategies for retirement planning" would make sense.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Kevin M » Sat Jul 23, 2016 3:29 pm

Correction. I see that the article linked in previous reply actually does use the term liability-matching portfolio, which they present as one example of a liability-hedging portfolio. Their presentation is quite a bit more complex than the simplified version that Bill discusses in his books. They look at multiple duration dimensions related to the risk of unexpected inflation and the risk related to changes in real interest rates, and their example LMP consists of both TIPS and nominal bonds to hedge both of these risks (as I understand it so far).

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by LadyGeek » Sun Jul 24, 2016 4:27 pm

^^^ Thanks, I'll hold off on any changes until I'm more familiar with the material. Alternatively, any wiki editor is welcome to update the page.

Discussed in another thread, Larry Swedroe has provided an opinion of this book. Asked here: Subject: Declining or Rising equity allocation in retirement?
Leif wrote:Larry,

How about a variable equity allocation in retirement? I would be interested on your take of the book "Living Off Your Own Money" in an upcoming article. If you have already done a review could you provide a link?
Living Off Your Own Money wrote:I am grateful to my expert reviewers, who generously gave their time: Harold Evensky of Evensky & Katz, Steve Evanson of Evanson Asset Management, Joseph Tomlinson of Tomlinson Financial Planning, and Larry Swedroe of Buckingham Asset Management.
Answered in this post: Subject: Declining or Rising equity allocation in retirement?
larryswedroe wrote:Leif, FWIW, I was asked to review the book but could NOT recommend it. The first part of the book I thought was fine,but had major problems with the rest of the book which included all those tables.
IMO there is only one right way to deal with this issue and that is to have a Plan and it should include Plan Bs (actions you will take if the left tail risks show up) and adapt the plan whenever ANY of the assumptions you made change. The assumptions are your ability to take risk (which changes as time passes), your willingness to take risk (likely decreases as time passes based on my experience), and need to take risk (which changes whenever market returns vary significantly from the assumption of returns in your plan. Anything else is IMO foolish or slavish adherence to a plan for sake of simplicity and ignoring reality.
Everyone is trying to give people simple solutions, which are good idea, but can turn into very bad idea if make it too simple. Just ask yourself if in anything else in life you don't alter a plan if the assumptions have changed?
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by cfs » Sun Jul 24, 2016 5:25 pm

All I can say is . . . Wow!

This is what I saw on Amazon on 7/24/16 at 1522 Pacific time:

Hardcover version: $59.95
2 Used from $74.29
11 New from $59.95.

All I can say is wow, thanks but no thanks.

Thanks for reading.
~ Member of the Active Retired Force since 2014 ~

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Fri Jul 29, 2016 3:14 pm

siamond wrote:
Raybo wrote:Why is it so hard to assume that people can't stick with 100% equities if that is what the plan calls for, but safe to assume that people will gladly rebalance into a market crash? In reality, neither is very likely.
Not assuming anything... Not disagreeing with your concerns... [...]

(I would actually be interested to model what happens to retirees who normally rebalance, and yet do not rebalance in years when stocks drops a lot, while making other reasonable assumptions about the AA and withdrawal model - your concern is very understandable, it would be worth studying this a bit more - send me feedback by PM if interested)
I developed a simple no-rebalancing-in-case-of-crash model today, as I was curious to investigate it. I was going to open a separate thread (to avoid sidetracking from the book), but it doesn't seem to be not worth it. Here is the model.
- I used a 60/40 Asset Allocation, with domestic/international equities in equal parts - I also tried more or less aggressive AAs
- Withdrawals come from bonds first, then rebalance UNLESS the equities from last year (or last 2 years) dropped by more than 20%
- A year after NOT rebalancing, the formula only rebalances if stocks are at least up by 5% (assuming that the worse is over)
- I either used a constant-withdrawal (CDW) at 5% (hence some portfolio failures), or VPW with a grace period of 10 years
- 40 years retirement period, testing cycles starting from 1926 to recent years

And the outcome is... Assuming I didn't mess it up... A big nothing!
- With VPW, the no-rebalancing-in-case-of-crash model is tenuously better, but this is nearly impossible to see on a graph. The tenuous improvement is due to the fact that the average AA is oh-so-slightly more aggressive (by not selling stocks when the market drops). But it is VERY tenuous.
- With CDW, the no-rebalancing-in-case-of-crash model is slightly better, essentially a consequence of the average-AA being a tad more aggressive, notably for the failure scenarios driving the portfolio to the ground, but nobody in their right mind would keep going with constant withdrawals in such case...

Bottomline: if this helps your behavior to NOT rebalance during a crash, that is fine. And if it helps your behavior to stick to your rebalancing plan, whether the market tanks or not, that is fine too. No biggie.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Fri Jul 29, 2016 3:34 pm

siamond wrote:
AlohaJoe wrote:
siamond wrote:Let's give it a try with VPW now. I used the regular VPW with one small twist
Interesting, I've never tried to combine VPW with Prime Harvesting because of the complications. How did you solve them? VPW requires you to set your asset allocation (since it takes expected returns into account). And Prime Harvesting changes your asset allocation every year. So you have to recalculate the VPW table every single year.
[...] Hm, you actually made me realize I made a dubious choice though. I kept the expected-rate constant (based on the initial AA), I didn't recompute it every year based on the new AA. That's interesting... Ok, well, it's late now, but tomorrow, maybe I'll try to do it while taking in account the new AA every year.
AlohaJoe wrote:The net result is what when you combine Prime Harvesting and VPW they ironically work against each other. Prime Harvesting increases your stock percentage during bad markets (since you are selling bonds and not replenishing them). And VPW sees your increasing stock percentage and tells you take an even bigger percent every year. For a retiree in the year 2000 using VPW with Annual Rebalancing will tell you to take 6.0% in the year 2010. But with Prime Harvesting it will tell you take to 6.4%.

I reckon that's almost completely the opposite of what most people would be doing, though.
Yeah, well, this isn't what I modeled, as I just realized. But maybe I should have! :oops: I need to think a bit more about it though.
I mulled over your (excellent) comment, and I would tend to think that the way I did my VPW + Prime Harvesting test was actually ok.

VPW (and the underlying PMT logic) is just not intended to deal with an AA which varies wildly on annual basis. VPW starts by an initial AA, from which it derives a rough estimate of the expected rate-of-return over the retirement period (based on conservative historical numbers), and this is what structures the % of the portfolio that will be withdrawn every year over the entire period. Now if one uses a 'creative' harvesting method that can occasionally (or often!) put the AA out of balance, well, the average AA over the entire retirement period should not change much IF the harvesting method is well designed. Surprisingly enough (and this wasn't intuitive to me!), Prime Harvesting does not seem to derail that much from the initial AA on average, as my tests illustrated.

Between those considerations, and your 2nd observation ("the net result is..."), I just don't see the point of trying to tweak VPW to dynamically recompute the expected-returns based on the current AA that Prime-Harvesting leads to. And I continue to not be overly impressed by Prime Harvesting! :wink:

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Sinbad » Sat Jul 30, 2016 7:37 am

This is what McClung writes in introducing his book:

"This book consolidates exactly what you need to know to invest well in retirement. It provides an updated set of
best practices. There is no ambiguity or incomplete answers. All recommendations are supported with proper evidence
to understand not only what works but why, including side-by-side comparisons of alternatives. Today’s retirees can do
appreciably better than previous generations by applying these updated practices — this means more income with less risk.
What kind of numbers are we talking about? It’s impossible to provide guarantees, but I’ll estimate adhering to
this book’s recommendations will increase your retirement income by 15% to 50%, depending on previous practices.
Of course it also depends on what is happening in the markets, but the recommendations are generally most valuable
during poor to moderate markets…when it matters most."

The author is not an amateur. The book is well-endorsed by major figures like Harold Evensky and Jim Otar (see the web site). It is very well-reviewed by siamond, who is nobody's fool, here at the forum.

It is EXTREMELY surprising to me that people don't think a book like this that does what McClung describes is not worth $60. I just ordered my copy.

What was it Ben Franklin said about penny wise and pound foolish?

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by technovelist » Sat Jul 30, 2016 8:58 am

Sinbad wrote:This is what McClung writes in introducing his book:

"This book consolidates exactly what you need to know to invest well in retirement. It provides an updated set of
best practices. There is no ambiguity or incomplete answers. All recommendations are supported with proper evidence
to understand not only what works but why, including side-by-side comparisons of alternatives. Today’s retirees can do
appreciably better than previous generations by applying these updated practices — this means more income with less risk.
What kind of numbers are we talking about? It’s impossible to provide guarantees, but I’ll estimate adhering to
this book’s recommendations will increase your retirement income by 15% to 50%, depending on previous practices.
Of course it also depends on what is happening in the markets, but the recommendations are generally most valuable
during poor to moderate markets…when it matters most."

The author is not an amateur. The book is well-endorsed by major figures like Harold Evensky and Jim Otar (see the web site). It is very well-reviewed by siamond, who is nobody's fool, here at the forum.

It is EXTREMELY surprising to me that people don't think a book like this that does what McClung describes is not worth $60. I just ordered my copy.

What was it Ben Franklin said about penny wise and pound foolish?
I'm pretty sure that those who think the book will do what it claims would agree that it is worth $60.

The question is whether it does indeed do that.
In theory, theory and practice are identical. In practice, they often differ.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by jjface » Sat Jul 30, 2016 9:25 am

Sinbad wrote:This is what McClung writes in introducing his book:

"This book consolidates exactly what you need to know to invest well in retirement. It provides an updated set of
best practices. There is no ambiguity or incomplete answers. All recommendations are supported with proper evidence
to understand not only what works but why, including side-by-side comparisons of alternatives. Today’s retirees can do
appreciably better than previous generations by applying these updated practices — this means more income with less risk.
What kind of numbers are we talking about? It’s impossible to provide guarantees, but I’ll estimate adhering to
this book’s recommendations will increase your retirement income by 15% to 50%, depending on previous practices.
Of course it also depends on what is happening in the markets, but the recommendations are generally most valuable
during poor to moderate markets…when it matters most."

The author is not an amateur. The book is well-endorsed by major figures like Harold Evensky and Jim Otar (see the web site). It is very well-reviewed by siamond, who is nobody's fool, here at the forum.

It is EXTREMELY surprising to me that people don't think a book like this that does what McClung describes is not worth $60. I just ordered my copy.

What was it Ben Franklin said about penny wise and pound foolish?
Whilst I appreciate the book, you have to realize that this isn't an instruction manual for retirement. For one the future is uncertain and we may see events unfold that have not been covered in the past. Although a lot of tests have been applied (more than I would know how to do) it still does not mean that they will apply in all situations or that is a proven fact that his method is best. As with all studies and even science experiments the devil is in the details. His evidence is there to support what he is saying based on a set of circumstances he has chosen and criteria for success that he selected. They may be reasonable assumptions but not definitive ones. As some have mentioned there are flaws and concerns in the analysis that need to be taken into consideration. But that should be the case for all methods. If you can follow the method and are okay with things like holding 100% equities in retirement then chances are you will come out ahead but I wouldn't bet on it. Retirement planning is not an exact science.

Whether it is worth $60 is debatable and based on personal preferences - but I will say it is certainly a valuable addition to the knowledge on the subject. At least based on the 3 chapters I read.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Tycoon » Sat Jul 30, 2016 9:33 am

Six pages and still going. Damn I like this site. :beer
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Re: New Book: Living off Your Money (Michael McClung)

Post by Lieutenant.Columbo » Sat Jul 30, 2016 9:58 am

TravelGeek wrote: So I loaded the 100+ page PDF on my iPad for tomorrow's airplane ride (inflight entertainment) and also submitted the book as a suggestion to my local library.
did you end up reading it?

what did you think?
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by longinvest » Sat Jul 30, 2016 10:01 am

siamond wrote: VPW (and the underlying PMT logic) is just not intended to deal with an AA which varies wildly on annual basis. VPW starts by an initial AA, from which it derives a rough estimate of the expected rate-of-return over the retirement period (based on conservative historical numbers), and this is what structures the % of the portfolio that will be withdrawn every year over the entire period. Now if one uses a 'creative' harvesting method that can occasionally (or often!) put the AA out of balance, well, the average AA over the entire retirement period should not change much IF the harvesting method is well designed. Surprisingly enough (and this wasn't intuitive to me!), Prime Harvesting does not seem to derail that much from the initial AA on average, as my tests illustrated.

Between those considerations, and your 2nd observation ("the net result is..."), I just don't see the point of trying to tweak VPW to dynamically recompute the expected-returns based on the current AA that Prime-Harvesting leads to. And I continue to not be overly impressed by Prime Harvesting! :wink:
I mostly agree with Siamond's desciption of VPW above.

While I am not a fan of tweaks to VPW, I won't say anything if one wants to apply mild short-term smoothing to its withdrawals (no long-term memory). For instance, I think that Siamond is a fan of short-term VPW withdrawal smoothing to allow for a higher stock allocation during retirement. (Personally, I prefer using bonds to lower volatility, but here's not the place for this debate). On the other hand, I think that it would be a mistake to let the market decide of an investor's asset allocation (AA). I think that the only sensible Bogleheads approach is to stick to a strategic AA, selected based on the investor's own circumstances without taking into account any kind of market valuation. It's fine to select a fixed AA, or an AA with a preset glide (like "age in bonds" or "age - 10" in bonds"). It is my opinion that dynamic/tactical AA does not meet our "Never try to time the market" principle.
Last edited by longinvest on Sat Jul 30, 2016 12:04 pm, edited 2 times in total.
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Re: New Book: Living off Your Money (Michael McClung)

Post by Lieutenant.Columbo » Sat Jul 30, 2016 10:05 am

AlohaJoe wrote:It focuses not on the accumulation phase but on the decumulation phase
1. do You have a single best recommended reading about the Accumulation Phase?

2. does McClung's book say anything regarding how to prepare/modify one's finances/portfolio in preparation for retirement as retirement approaches?
or it purely about what to do On and After retirement day?

thank you
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by dbr » Sat Jul 30, 2016 10:49 am

In general I would be very circumspect of the predictive ability of any analysis of investment behavior. That said, I think McClung and VPW both make novel contributions to the problem that are worth considering.

If I am mistaken please correct me, but my understanding is that VPW is about manipulating the rate of withdrawal, a time honored effort, and McClung is about manipulating the asset allocation, a new contribution.

I am not so sure studies in general of the withdrawal problem are very easy to translate into actual plans even though both of the above appear to be offered as attempts to make a plan.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by longinvest » Sat Jul 30, 2016 11:08 am

dbr wrote:If I am mistaken please correct me, but my understanding is that VPW is about manipulating the rate of withdrawal, a time honored effort, and McClung is about manipulating the asset allocation, a new contribution.
My point, above, was exactly that I think that manipulating asset allocation (AA), based on letting the market influence it, is contrary to our philosophy. I'll add that there is nothing new to the concept of dynamic/tactical AA. There might be something new in the particular approach proposed, but it still falls outside the realm of strategic asset allocation, promoted by our philosophy,

As for VPW, while it proposes a set withdrawal rates increasing with a retiree's age, these rates are set once and for all for each specific AA. The withdrawal rates do not vary based on market conditions.

Let me clarify that I do not agree with those who say that VPW uses an estimate of future returns between retirement and death. This is not true, and I have written this repeatedly on the VPW thread. VPW does need an internal rate. This rate DOES NOT NEED TO BE EXACT OR PRECISE; it only needs to be on the ballpark of plausible possibilities. VPW will automatically adjust withdrawals if this rate proves to be too low or too high, without needing to change the internal rate.

So, let me repeat this: it is misleading to claim that VPW uses an "expected return estimate", implying that this estimate would vary based on the guru of the day's estimates, or market conditions. No! No! And No! VPW uses a preset (almost hidden) fixed internal rate (actually one for stocks, one for bonds) which is possibly too high or too low, but in the ballpark of possibilities. This rate is not influenced by current "return expectations" or market conditions.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Lieutenant.Columbo » Sat Jul 30, 2016 11:18 am

longinvest wrote:VPW uses a preset (almost hidden) fixed internal rate (actually one for stocks, one for bonds) which is possibly too high or too low, but in the ballpark of possibilities. This rate is not influenced by current "return expectations".
1. how is PVW Variable if uses a preset fixed rate?

2. I cannot tell if you favor PVW over McClung's AA manipulation or vice versa or neither one

thank you

(I am new to these concepts)
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by longinvest » Sat Jul 30, 2016 11:25 am

JLMA wrote: 1. how is PVW Variable if uses a preset fixed rate?

2. I cannot tell if you favor PVW over McClung's AA manipulation or vice versa or neither one

thank you

(I am new to these concepts)
JLMA,

Here's are two sources of information about the Variable Percentage Withdrawal (VPW) method: Further discussion of VPW should continue on linked thread, above.

My objective, in my previous post, was not to derail this thread, but to correct misconceptions about VPW.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by dbr » Sat Jul 30, 2016 11:26 am

longinvest wrote:
dbr wrote:If I am mistaken please correct me, but my understanding is that VPW is about manipulating the rate of withdrawal, a time honored effort, and McClung is about manipulating the asset allocation, a new contribution.
My point, above, was exactly that I think that manipulating asset allocation (AA), based on letting the market influence it, is contrary to our philosophy. I'll add that there is nothing new to the concept of dynamic/tactical AA. There might be something new in the particular approach proposed, but it still falls outside the realm of strategic asset allocation, promoted by our philosophy,

I hesitate to reply not having actually read McClung's book, but I also have gotten the idea the strategy is a form of tactical asset allocation. I may be corrected if wrong.

As for VPW, while it proposes a set withdrawal rates increasing with a retiree's age, these rates are set once and for all for each specific AA. The withdrawal rates do not vary based on market conditions.

I have to look more carefully at VPW but isn't the withdrawal affected by the state of the portfolio as produced by market returns? In any case the V for variable surely refers to manipulating the amount withdrawn as one goes, as distinct from a plan where the real withdrawal amount for each year is fixed at the beginning of the plan? Anyway the point in agreement with you is that one does not change the AA as one goes.

Let me clarify that I do not agree with those who say that VPW uses an estimate of future returns between retirement and death. This is not true, and I have written this repeatedly on the VPW thread. VPW does need an internal rate. This rate DOES NOT NEED TO BE EXACT OR PRECISE; it only needs to be on the ballpark of plausible possibilities. VPW will automatically adjust withdrawals if this rate proves to be too low or too high, without needing to change the internal rate.

Meaning VPW adjusts the withdrawal if actual returns are different from the assumed internal rate. That would have been my understanding. I don't know anything about estimating future returns.

So, let me repeat this: it is misleading to claim that VPW uses an "expected return estimate", implying that this estimate would vary based on the guru of the day's estimates, or market conditions. No! No! And No! VPW uses a preset (almost hidden) fixed internal rate (actually one for stocks, one for bonds) which is possibly too high or too low, but in the ballpark of possibilities. This rate is not influenced by current "return expectations".

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by longinvest » Sat Jul 30, 2016 11:55 am

dbr wrote:
longinvest wrote: As for VPW, while it proposes a set withdrawal rates increasing with a retiree's age, these rates are set once and for all for each specific AA. The withdrawal rates do not vary based on market conditions.

I have to look more carefully at VPW but isn't the withdrawal affected by the state of the portfolio as produced by market returns? In any case the V for variable surely refers to manipulating the amount withdrawn as one goes, as distinct from a plan where the real withdrawal amount for each year is fixed at the beginning of the plan? Anyway the point in agreement with you is that one does not change the AA as one goes.

Let me clarify that I do not agree with those who say that VPW uses an estimate of future returns between retirement and death. This is not true, and I have written this repeatedly on the VPW thread. VPW does need an internal rate. This rate DOES NOT NEED TO BE EXACT OR PRECISE; it only needs to be on the ballpark of plausible possibilities. VPW will automatically adjust withdrawals if this rate proves to be too low or too high, without needing to change the internal rate.

Meaning VPW adjusts the withdrawal if actual returns are different from the assumed internal rate. That would have been my understanding. I don't know anything about estimating future returns.
dbr,

I don't want to derail this thread. Let me just say that when a withdrawal rate is applied to a current portfolio balance (instead of a historical portfolio balance on the day of retirement), it yields a higher withdrawal amount for a higher portfolio balance, and a lower withdrawal amount for a lower portfolio balance. So, from year to year, withdrawal amounts will vary up and down (with portfolio balance), even though withdrawal rates are preset and increase with age.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by dbr » Sat Jul 30, 2016 12:30 pm

longinvest wrote: dbr,

I don't want to derail this thread. Let me just say that when a withdrawal rate is applied to a current portfolio balance (instead of a historical portfolio balance on the day of retirement), it yields a higher withdrawal amount for a higher portfolio balance, and a lower withdrawal amount for a lower portfolio balance. So, from year to year, withdrawal amounts will vary up and down (with portfolio balance), even though withdrawal rates are preset and increase with age.

I don't think it is derailing a thread to consider the range of strategies that exist to manage portfolios and withdrawal in retirement. Our current conversation is about being explicit about what is actually being proposed. That is necessary because different models of the outcome depend on exactly what rules the model is imposing. So, it is true that one model in your comment above is to take a fixed (real) withdrawal amount every year and a different model is to take a fixed percentage of the current portfolio every year. One can compute what range of differences that might make. What one can't accept is confusion of someone talking of the one and somewhere else someone else talking of the other and then wondering why the outcome is different.

So my post that you responded to was just a clarification of what different approaches are actually taking as their rules. Your comments are similar clarifications of exactly what is and is not being done in the models.
Last edited by dbr on Sat Jul 30, 2016 12:31 pm, edited 1 time in total.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Leif » Sat Jul 30, 2016 12:31 pm

longinvest wrote: On the other hand, I think that it would be a mistake to let the market decide of an investor's asset allocation (AA). I think that the only sensible Bogleheads approach is to stick to a strategic AA, selected based on the investor's own circumstances without taking into account any kind of market valuation. It's fine to select a fixed AA, or an AA with a preset glide (like "age in bonds" or "age - 10" in bonds"). It is my opinion that dynamic/tactical AA does not meet our "Never try to time the market" principle.
Which has the higher risk? Keeping a target AA and buy/sell to meet that goal? Or allowing AA to fluctuate where equity AA is high when valuations are low and vise versa by taking withdrawals from cash/bonds and only selling stocks high?

Is fighting the market to keep a target AA better? Or is it better to flow with the market? And which is really market timing?

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by dbr » Sat Jul 30, 2016 12:34 pm

Leif wrote:
longinvest wrote: On the other hand, I think that it would be a mistake to let the market decide of an investor's asset allocation (AA). I think that the only sensible Bogleheads approach is to stick to a strategic AA, selected based on the investor's own circumstances without taking into account any kind of market valuation. It's fine to select a fixed AA, or an AA with a preset glide (like "age in bonds" or "age - 10" in bonds"). It is my opinion that dynamic/tactical AA does not meet our "Never try to time the market" principle.
Which has the higher risk? Keeping a target AA and buy/sell to meet that goal? Or allowing AA to fluctuate where equity AA is high when valuations are low and vise versa by taking withdrawals from cash/bonds and only selling stocks high?

Is fighting the market to keep a target AA better? Or is it better to flow with the market? And which is really market timing?
I guess McClung is trying to document that the risk measured by SWR or some related indices is reduced in certain schemes that he proposes. It is sometimes neglected that risk can mean a lot of things and that one of them is the risk of running out of money in retirement withdrawal. How that risk relates to the variability of investment returns of the portfolio is complicated even without McClung writing a whole book about it.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Lieutenant.Columbo » Sat Jul 30, 2016 12:53 pm

Leif wrote:Which has the higher risk? Keeping a target AA and buy/sell to meet that goal? Or allowing AA to fluctuate where equity AA is high when valuations are low and vise versa by taking withdrawals from cash/bonds and only selling stocks high?

Is fighting the market to keep a target AA better? Or is it better to flow with the market? And which is really market timing?
Still in the accumulation phase, so not ver familiar yet with the VPW vs modifying AA approaches to withdrawal.

Therefore, I can't tell if your questions are rhetorical or real questions your posing.

I definitely don't have an answer, but I should would like to know your and others' take on them.

Thank you
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Sat Jul 30, 2016 1:24 pm

dbr wrote:In general I would be very circumspect of the predictive ability of any analysis of investment behavior. That said, I think McClung and VPW both make novel contributions to the problem that are worth considering.

If I am mistaken please correct me, but my understanding is that VPW is about manipulating the rate of withdrawal, a time honored effort, and McClung is about manipulating the asset allocation, a new contribution.
JLMA wrote:1. how is VPW Variable if uses a preset fixed rate?

2. I cannot tell if you favor VPW over McClung's AA manipulation or vice versa or neither one
Hm, let me clarify something for those of you who didn't read the book, we are speaking of two complementary things:
- McClung's Prime Harvesting is a harvesting method, honing on which asset(s) to sell when withdrawing money at some point for the year to come
- VPW is a withdrawal method, focused on telling how much money you should withdraw for the year to come

McClung's book has a lengthy chapter on withdrawal methods, which we didn't discuss much in this thread (yet), aside from some posts from AlohaJoe. McClung ended up recommending two similar methods, EM and ECM, which actually behave in a somewhat similar manner as VPW (manipulating the rate of withdrawal, as a function of the # of years left in the assumed retirement period), although details differ.

So pitting Prime Harvesting against VPW doesn't make sense. Actually my posts earlier was about combining them, and pondering if this is better than just using a rebalancing technique to harvest.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by dbr » Sat Jul 30, 2016 1:33 pm

siamond wrote:
dbr wrote:In general I would be very circumspect of the predictive ability of any analysis of investment behavior. That said, I think McClung and VPW both make novel contributions to the problem that are worth considering.

If I am mistaken please correct me, but my understanding is that VPW is about manipulating the rate of withdrawal, a time honored effort, and McClung is about manipulating the asset allocation, a new contribution.
JLMA wrote:1. how is VPW Variable if uses a preset fixed rate?

2. I cannot tell if you favor VPW over McClung's AA manipulation or vice versa or neither one
Hm, let me clarify something for those of you who didn't read the book, we are speaking of two complementary things:
- McClung's Prime Harvesting is a harvesting method, honing on which asset(s) to sell when withdrawing money at some point for the year to come
- VPW is a withdrawal method, focused on telling how much money you should withdraw

McClung's book has a lengthy chapter on withdrawal methods, which we didn't discuss much in this thread (yet), aside from some posts from AlohaJoe. McClung ended up recommending two similar methods, EM and ECM, which actually behave in a somewhat similar manner as VPW (manipulating the rate of withdrawal, as a function of the # of years left in the assumed retirement period), although details differ.

So pitting Prime Harvesting against VPW doesn't make sense. Actually my posts earlier was about combining them, and pondering if this is better than just using a rebalancing technique to harvest.
Thank you. Your comment is exactly what I was suggesting. I can appreciate McClung may be a little more comprehensive concerning approaches than I had assumed.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by longinvest » Sat Jul 30, 2016 2:09 pm

siamond wrote:So pitting Prime Harvesting against VPW doesn't make sense. Actually my posts earlier was about combining them, and pondering if this is better than just using a rebalancing technique to harvest.
And I expressed my opinion that Prime Harvesting was a form of dynamic/tactical asset allocation (AA); that I think that one is better to stick with a good old traditional Bogleheads AA (strategic AA), and just rebalance, like one did during accumulation.

Age, size of portfolio, and other personal circumstances are parameters that can (and should) be used to set a Bogleheads AA; my opinion is that market conditions/valuations are not a parameter that should enter into the equation.

Just think about it. If, on the day when I chose my AA (years ago), market conditions and valuations "should" have been taken into account, shouldn't they be taken into account again today to re-set my AA? And tomorrow again? And the day after that? There wouldn't be any logic to sticking to a fixed (or sliding) AA, as recommended by Bogleheads, if it had been chosen based on market conditions on some random day 1, 3, or 10 years ago (the day the AA was initially chosen).

Changing AA based on market pronostications (valuations) is a form of market timing; it means that one thinks that he knows more than the market (which has priced all bonds and all stocks such that both sellers and buyers thought that the prices were fair, expressing their opinion by making transactions). It has been proven, again and again, throughout history, that even the best active fund managers, with all the knowledge of their best traders, big computers, and teams of statisticians and mathematicians, are not able to reliably time the market. Why would a simple investor, like myself, think that he is able to valuate a market, or to select the right person/author/analyst who publishes market valuations? Nah! A good old Bogleheads AA (fixed or sliding) does the job for helping us to reach our financial objectives.

I see no reason, whatsoever, to abandon traditional AA/rebalancing in retirement. It is good enough for both accumulation and retirement. One only needs to use a sensible withdrawal method. In other words, never use the brain-dead SWR method which leaves most retirees die as the richest people in the graveyard, while bankrupting most of the rest! Actually, McClung seems to agree, too, that flexible withdrawals are best, from what I have read on this thread (I have not read the book).

Age, size of portfolio, and other personal circumstances, can (and should) be taken into account to set (and change, if necessary) one's AA, though. Someone with a bigger portfolio might not be able to sustain a loss equivalent to 15 or 20 years of savings. That's much different from a beginning investor who could lose 100% of his first $500 investment, made three weeks ago, and learn a good lesson in the process. It's not the time, anymore, to learn these lessons with a $1,000,000 portfolio.

:wink:
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Re: New Book: Living off Your Money (Michael McClung)

Post by TravelGeek » Sat Jul 30, 2016 3:08 pm

JLMA wrote:
TravelGeek wrote: So I loaded the 100+ page PDF on my iPad for tomorrow's airplane ride (inflight entertainment) and also submitted the book as a suggestion to my local library.
did you end up reading it?

what did you think?
Thanks for the reminder:

No, I didn't read it. The reason was that the font was too small on my iPad, and iBooks (etc) can't resize the font (I could zoom in, but then I only see part of the page). It anyone knows of an app that can do that, I'd be all ears as this isn't the only PDF with tiny fonts.

I know the author at one point said that that he probably wouldn't create a proper Kindle ebook. I don't know if that changed since then; I haven't had time to keep up with thread, but the thread is on my todo list, too, because I think I might just order the dead tree version. (sadly, my library rejected my book suggestion because of not enough reviews).

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Sat Jul 30, 2016 3:47 pm

longinvest wrote:
siamond wrote:So pitting Prime Harvesting against VPW doesn't make sense. Actually my posts earlier was about combining them, and pondering if this is better than just using a rebalancing technique to harvest.
And I expressed my opinion that Prime Harvesting was a form of dynamic/tactical asset allocation (AA); that I think that one is better to stick with a good old traditional Bogleheads AA (strategic AA), and just rebalance, like one did during accumulation. [...]

I see no reason, whatsoever, to abandon traditional AA/rebalancing in retirement. It is good enough for both accumulation and retirement. One only needs to use a sensible withdrawal method.
I don't disagree with you. I'm just trying to bring facts (instead of opinions!) to the table for the discussion to make progress, with respecting the terminology & concepts used by the author of the book. Annual rebalancing could be viewed as an extreme form of TAA, and withdrawing while rebalancing is a form of harvesting. I actually implemented Prime Harvesting by tweaking my past (dynamic) TAA & rebalancing experiments... :wink:

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Re: New Book: Living off Your Money (Michael McClung)

Post by dbr » Sat Jul 30, 2016 3:51 pm

TravelGeek wrote:
No, I didn't read it. The reason was that the font was too small on my iPad, and iBooks (etc) can't resize the font (I could zoom in, but then I only see part of the page). It anyone knows of an app that can do that, I'd be all ears as this isn't the only PDF with tiny fonts.

I know the author at one point said that that he probably wouldn't create a proper Kindle ebook. I don't know if that changed since then; I haven't had time to keep up with thread, but the thread is on my todo list, too, because I think I might just order the dead tree version. (sadly, my library rejected my book suggestion because of not enough reviews).
An aside. The school where I work with kids issued iPads to everyone last year. We were able to do some amazing things but there were quite a few times everybody bailed to iMacs in the library or complained that they should have proper laptops. Even seven year old's won't tolerate having the wool pulled over their eyes.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Sat Jul 30, 2016 10:07 pm

siamond wrote:McClung's book has a lengthy chapter on withdrawal methods, which we didn't discuss much in this thread (yet), aside from some posts from AlohaJoe.
Indeed, I would have thought that McClung's HREFF and Harvesting Ratio would be far more controversial but they haven't even come up yet :)

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Sat Jul 30, 2016 11:23 pm

longinvest wrote:VPW will automatically adjust withdrawals if this rate proves to be too low or too high, without needing to change the internal rate.
I don't understand this. Let me try to write out my understanding and you can help me fill in where I'm misunderstanding.

VPW uses 5.0% for equity returns and 1.8% for bond returns. As far as I can tell, that's from the 2016 Credit Suisse Global Yearbook and is the global return since 1900. The same data source, in 2002, gave the corresponding numbers as 5.8% and 1.8%, so clearly things can change quite a bit in 16 years. In 2009 they gave the numbers as 5.2% and 1.8%. The authors also provide numbers for "since 1966" (off the top of my head, I'm not sure why Dimson, Marsh, and Staunton pick that date; but it at least provides an alternative data point): 5.0% and 4.2%. For someone who follows Bogle and doesn't believe in International investing then DMS's numbers for the US are 6.4% and 2.0% (since 1900) or 5.3% and 3.3% (since 1966). Bogle (in Occam's Razor Redux) says the past 25 years for the US have been 9.6% for equities and 7.5% for bonds; though few here are brave enough to use numbers like that in a current retirement spreadsheet :happy .

I've created a spreadsheet that puts each of those DMS numbers into VPW to override the default and then look what an actual retiree in 2006 would have received in income from VPW.

Image

Every year for a decade, VPW-Default provided less income. To start with, it provided 15% less income (approximately equivalent to a luxury vacation to Europe for 2). By the end of the 10-year span, it was still providing 5% less income. It doesn't look like the adjustment happens in the first decade?

I suppose one could argue that if we stretch the comparison out past 10 years then VPW-Default will eventually catch up. Of course, after 10 years you have a 42% chance of being dead, so that's probably a small consolation prize for those unlucky souls 8-)

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by longinvest » Sun Jul 31, 2016 12:14 am

AlohaJoe wrote:
longinvest wrote:VPW will automatically adjust withdrawals if this rate proves to be too low or too high, without needing to change the internal rate.
I don't understand this. Let me try to write out my understanding and you can help me fill in where I'm misunderstanding.

VPW uses 5.0% for equity returns and 1.8% for bond returns. As far as I can tell, that's from the 2016 Credit Suisse Global Yearbook and is the global return since 1900. The same data source, in 2002, gave the corresponding numbers as 5.8% and 1.8%, so clearly things can change quite a bit in 16 years. In 2009 they gave the numbers as 5.2% and 1.8%. The authors also provide numbers for "since 1966" (off the top of my head, I'm not sure why Dimson, Marsh, and Staunton pick that date; but it at least provides an alternative data point): 5.0% and 4.2%. For someone who follows Bogle and doesn't believe in International investing then DMS's numbers for the US are 6.4% and 2.0% (since 1900) or 5.3% and 3.3% (since 1966). Bogle (in Occam's Razor Redux) says the past 25 years for the US have been 9.6% for equities and 7.5% for bonds; though few here are brave enough to use numbers like that in a current retirement spreadsheet :happy .

I've created a spreadsheet that puts each of those DMS numbers into VPW to override the default and then look what an actual retiree in 2006 would have received in income from VPW.

Image

Every year for a decade, VPW-Default provided less income. To start with, it provided 15% less income (approximately equivalent to a luxury vacation to Europe for 2). By the end of the 10-year span, it was still providing 5% less income. It doesn't look like the adjustment happens in the first decade?

I suppose one could argue that if we stretch the comparison out past 10 years then VPW-Default will eventually catch up. Of course, after 10 years you have a 42% chance of being dead, so that's probably a small consolation prize for those unlucky souls 8-)
AlohaJoe,

Thanks for the nice illustration. As far as I can see, the difference in total withdrawals was less than 10% over 10 years (out of a planned retirement of up to 35 years) between the highest and lowest internal rates. Just compare this with the year-to-year differences in withdrawals, like in 2009, when withdrawals dropped by more than 20% in a single year after disastrous market returns. The difference in withdrawals, due to the selected internal rate is smaller than market impact.

By the 10th year, we have the lowest giving us 61k and the highest giving us 64k. Do you think that anyone could have made a more precise prediction, so as to choose the best internal rate for the entire retirement path, including post-2016 years?

VPW did exactly the job that it was supposed to do; provide reasonable withdrawals and protect the portfolio against premature depletion. In the best case, it provided withdrawals which averaged to 5.8% of the initial portfolio and, in the worst case, withdrawals which averaged to 5.3% of the initial portfolio. I would have been quite happy in either case. That would have been much more pleasant than using a 3.2% or a 2.5% SWR (for fear of premature depletion) or even than a 4% SWR over the same period*. :wink:

* It is interesting that the lowest VPW 2009 withdrawal amount across the internal rates illustrated in the example, in inflation-adjusted dollars, was $40,596 ($43,366 in nominal dollars), which is bigger than an inflation-adjusted 4% of the initial $1,000,000 portfolio of 2006.

The difference in withdrawals went down from 7k to 3k in less than 10 years (9 years, to be exact). Isn't that a good enough self-correcting method? What were you expecting? Immediate complete correction? I'm sorry, but I don't think that this could be achieved without predicting future returns.

Anyway, thanks again for the illustration. I'll let readers decide for themselves if VPW's automatic withdrawal adjustment, across different internal rates, is good enough or not for them. I know that it's good enough for me.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Leif » Sun Jul 31, 2016 10:30 am

JLMA wrote:
Leif wrote:Which has the higher risk? Keeping a target AA and buy/sell to meet that goal? Or allowing AA to fluctuate where equity AA is high when valuations are low and vise versa by taking withdrawals from cash/bonds and only selling stocks high?

Is fighting the market to keep a target AA better? Or is it better to flow with the market? And which is really market timing?
I definitely don't have an answer, but I should would like to know your and others' take on them.

Thank you
To me market timing is an anticipation of market movement and taking some action to based on that anticipation.

I think keeping to a set allocation target is not market timing.
Also, I think letting your AA float with the market is not market timing.

Neither is trying to anticipate the market.

My personal belief is that buying/selling to maintain a target AA is good in the accumulation phase (pre-retirement). You will probably be accumulating shares at a low price (if the market recovers), as long as you have the stomach to hold on. Primary goal - Accumulation.

I also believe not buying equities in a down market (AA floats) is good in retirement when you probably are more concerned with portfolio safety. That also takes stomach since your equity % could climb high, as shown by McClung. Primary goal - Safety.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Sun Jul 31, 2016 11:33 am

Leif wrote:My personal belief is that buying/selling to maintain a target AA is good in the accumulation phase (pre-retirement). You will probably be accumulating shares at a low price (if the market recovers), as long as you have the stomach to hold on. Primary goal - Accumulation.

I also believe not buying equities in a down market (AA floats) is good in retirement when you probably are more concerned with portfolio safety. That also takes stomach since your equity % could climb high, as shown by McClung. Primary goal - Safety.
I've been intrigued by this line of thinking of not rebalancing in a down market during retirement. As I tried to explain, Prime Harvesting doesn't quite convince me, but I don't want to dismiss the core concern based on one single not-so-satisfying approach.

As you've probably see in this post, I've tried to model a harvesting method solely focusing on this concern, while only activating such technique in times of crisis. It seems to be that this should address the concern, while sticking to a well-proven fixed AA approach the rest of the time, and not adding any lasting memory effect. Which should make it much more natural to use in conjunction with one's favorite withdrawal method. Since then, I tried a variant with a lower 'crisis' threshold (equities dropping by 10% or more), and the effect on key stats is essentially the same.

Now I am not quite sure that I defined the algorithm in a way that is a reasonable match for people who'd like to use such an approach? Any feedback? (just remember, I need to keep the Excel formulas reasonably simple!)

-----
To illustrate the effect of the algorithm, I used a retirement period of 50 years and starting in 1970 (to see all recent crisis), and showed the AA changes, whether one uses a constant-withdrawal at 4% or VPW. The 'crisis' threshold is defined at an equity loss of 10%. Of course, starting in 1966, the CDW (portfolio) trajectory would have spiraled to the ground... Note how the adjustments are milder with VPW, because it reduces the withdrawals, hence selling less bonds.

Image

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by longinvest » Sun Jul 31, 2016 12:28 pm

Leif wrote:I also believe not buying equities in a down market (AA floats) is good in retirement when you probably are more concerned with portfolio safety. That also takes stomach since your equity % could climb high, as shown by McClung. Primary goal - Safety.
I disagree.

I think that someone who develops a fear of buying equities, when equities get cheaper, had allocated too high a portion of her portfolio to equities and lost too much when equities got cheaper. That person should have held more bonds to start with; she would have lost less and would be happy to take advantage of the depressed prices of equities.

The only arguments I get against this is "But, had equities gone up, I would have not made as much money!". My answer is that it is a mistake to let greed guide us into selecting a high allocation to equities, specially during retirement; it is "risking money that we need for more money that we don't need"*.

* I think that I read this approximate quote in the post of another Bogleheads member, but I am unable to locate it.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Leif » Sun Jul 31, 2016 5:14 pm

longinvest wrote: I think that someone who develops a fear of buying equities, when equities get cheaper, had allocated too high a portion of her portfolio to equities and lost too much when equities got cheaper. That person should have held more bonds to start with; she would have lost less and would be happy to take advantage of the depressed prices of equities.
I disagree.

I heard this argument a few times. For me it is not fear of buying equities (I just bought EM at the beginning of the year). It is a fear, in retirement, of buying equities low and equities staying low (or lower) over an extended period (Japan). For me it is an issue of safety in retirement. I don't want to sell "sleeping well" for the possibility of perhaps "eating better" in the future. I will not have work income to live on in retirement. If a Japan happens at least I'll have my FI assets since I didn't use them to buy equities on the way down.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by longinvest » Sun Jul 31, 2016 5:40 pm

Leif wrote:
longinvest wrote: I think that someone who develops a fear of buying equities, when equities get cheaper, had allocated too high a portion of her portfolio to equities and lost too much when equities got cheaper. That person should have held more bonds to start with; she would have lost less and would be happy to take advantage of the depressed prices of equities.
I disagree.

I heard this argument a few times. For me it is not fear of buying equities (I just bought EM at the beginning of the year). It is a fear, in retirement, of buying equities low and equities staying low (or lower) over an extended period (Japan). For me it is an issue of safety in retirement. I don't want to sell "sleeping well" for the possibility of perhaps "eating better" in the future. I will not have work income to live on in retirement. If a Japan happens at least I'll have my FI assets since I didn't use them to buy equities on the way down.
Leif,

OK. Asset allocation and Investment Policy is personal.

I am a mathematically inclined person. I've played with the numbers, before choosing my AA, and I plan to rebalance (even in retirement).

If anyone is interested, I've developed a little online "AA stress-test" that I made available in this post: viewtopic.php?f=10&t=196282#p2996577. (To play with it and change the values, it can be downloaded to a computer, or one simply needs to make a copy of it into his Google account; the original can't be modified).
Last edited by longinvest on Sun Jul 31, 2016 6:29 pm, edited 4 times in total.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Sun Jul 31, 2016 5:52 pm

Longinvest, you're trying to put things in numbers, but I don't think this is what it is about... It is about what makes multiple posters on this thread more comfortable while managing a crisis... And if this isn't harmful (as appears to be the case with my little test), then why push back? Better explore ways to do something like that (while avoiding pitfalls with algorithms with strong memory effects and their unfortunate side-effects). There is more than one road to happy retirement...

Personally, I plan to keep rebalancing, but I'm happy to explore other avenues, and help people do so.

Leif, any feedback about my question? Does my model reasonably emulate what you would do? It isn't so clear to me when you'd resume rebalancing, actually.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by MIretired » Sun Jul 31, 2016 7:03 pm

longinvest or siamond: what I keep running into is there is no mention of a guaranteed needed income floor. I don't know how you could use any WD scheme which assumably is maximizing something (WR, longevity, consistency, safety) and need to take an essential income floor from it. A person might be better off with two virtual portfolios. A virtually guaranteed one, +/-, and an RP. But you all are suggesting and studying these schemes for the entire portfolio.
Either my suggestion, or have a higher safe bottom in the design which all but guarantees meeting a needed income floor.

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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by dbr » Sun Jul 31, 2016 7:19 pm

MIpreRetirey wrote:longinvest or siamond: what I keep running into is there is no mention of a guaranteed needed income floor. I don't know how you could use any WD scheme which assumably is maximizing something (WR, longevity, consistency, safety) and need to take an essential income floor from it. A person might be better off with two virtual portfolios. A virtually guaranteed one, +/-, and an RP. But you all are suggesting and studying these schemes for the entire portfolio.
Either my suggestion, or have a higher safe bottom in the design which all but guarantees meeting a needed income floor.
The best, maybe the only credible, income floor is not some kind of portfolio but, . . . wait for it . . . income. In other words it is very helpful to have SS, pensions, or immediate fixed annuities in place. I haven't read the book, but did one of the earlier threads describe McClung assuming the investor might and/or should have such sources of income?

In any case a liability matching portfolio doesn't need to have a harvesting plan figured out because liability matching is a harvesting plan.

For the life of me I can't figure out how having a "safe floor portfolio" and a risk portfolio is different from having a balanced portfolio of stocks and bonds, which almost anyone would have anyway. The only real effect I can see is that when you do that you have to save way more money than you would have if you relied on some sort of SWR scheme. But I admit I have not paid much attention to the whole issue and could have a misunderstanding.
Last edited by dbr on Sun Jul 31, 2016 7:23 pm, edited 1 time in total.

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