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

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

Post by FlyingMoose » Sun Jun 23, 2019 8:13 am

The description of the prime strategy is very vague. It says when the total of the stocks reaches 120% to sell 20%. Does this mean to sell the 20% that’s above 100%, or 20% of the total to bring it to 96%? I’ve seen both interpretations...

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

Post by AlohaJoe » Sun Jun 23, 2019 8:20 am

FlyingMoose wrote:
Sun Jun 23, 2019 8:13 am
The description of the prime strategy is very vague. It says when the total of the stocks reaches 120% to sell 20%. Does this mean to sell the 20% that’s above 100%, or 20% of the total to bring it to 96%? I’ve seen both interpretations...
The book says "If stock assets are greater than 120% of their initial value after annually adjusting for inflation, sell 20% of stocks to buy additional bonds."

So just do what it says. "Sell 20% of stocks". It doesn't say "sell 20% of the stocks that are above 100%".

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

Post by Barsoom » Sun Jun 23, 2019 4:29 pm

AlohaJoe wrote:
Sun Jun 23, 2019 8:20 am
FlyingMoose wrote:
Sun Jun 23, 2019 8:13 am
The description of the prime strategy is very vague. It says when the total of the stocks reaches 120% to sell 20%. Does this mean to sell the 20% that’s above 100%, or 20% of the total to bring it to 96%? I’ve seen both interpretations...
The book says "If stock assets are greater than 120% of their initial value after annually adjusting for inflation, sell 20% of stocks to buy additional bonds."

So just do what it says. "Sell 20% of stocks". It doesn't say "sell 20% of the stocks that are above 100%".
Looking at the footnotes in the Prime Harvesting Worksheet tab in McClung's spreadsheet, there is this:
  • For Prime Harvesting, rebalance stock-bond ratio by selling 20% of stocks to buy additional bonds.
  • For Alternate-Prime Harvesting, sell enough stocks to bring bonds back to their initial target percentage.
-B

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

Post by Toons » Sun Jun 23, 2019 4:43 pm

It all sounds like too much "work'
for Me
:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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

Post by victw » Sun Jun 23, 2019 6:23 pm

SpaceCowboy wrote:
Sat Jun 22, 2019 12:55 am

+1
I calculate my withdrawal numbers every year by both McClung's EM and longinvest's VPW methods. Find them to be pretty close and both guide what I end up actually withdrawing.
Fortunately, Mr. Market has been kind since my retirement, and I haven't had to experience a lower annual withdrawal due to a significant drop in portfolio value. That will be the test of both variable withdrawal methods on a personal level as they will require some relative belt tightening.
SpaceCowboy - do you also plan on using the the harvesting method? And only take of equities when they are ahead by an inflation adjusted amount?
It will be nice to get some reports back as you follow the suggestions.

Vic

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

Post by workerbeeengineer » Sun Jun 23, 2019 7:14 pm

I second that! Would be great to hear from someone who is following the strategy.

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

Post by kramer » Sun Jun 23, 2019 11:39 pm

workerbeeengineer wrote:
Sun Jun 23, 2019 7:14 pm
I second that! Would be great to hear from someone who is following the strategy.
So far, it's been very simple (Prime Harvesting). My ETF portfolio was already worldwide diversified so I didn't change that. I started at 60/40 stocks/bonds (I was originally 65/35 before adopting the strategy, so I sold some holdings to reach 60/40). Since then, I have been living off of the bonds and reinvesting stock dividends into stocks each year. Not even near a harvesting because there hasn't been sufficient gains. So it's all quite simple.

I also have not been spending nearly the recommended/possible amount. I do wonder if that affects what my optimal strategy actually is ...

When a harvest is eventually required, I will have enough in the Roth IRA to sell stocks there, plus I will fill up the 0% cap gains bracket in taxable in the two taxable years coinciding with the harvest (in other words, selling some stocks in taxable for gain in December and then in January, reducing the amount of stocks I must sell in the Roth). It might take a couple of years or so to get the Roth IRA back to almost 100% stocks. In the meantime, I fill up to the top of the 12% bracket with IRA to Roth conversion each year.

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

Post by SpaceCowboy » Mon Jun 24, 2019 2:08 am

victw wrote:
Sun Jun 23, 2019 6:23 pm
SpaceCowboy wrote:
Sat Jun 22, 2019 12:55 am

+1
I calculate my withdrawal numbers every year by both McClung's EM and longinvest's VPW methods. Find them to be pretty close and both guide what I end up actually withdrawing.
Fortunately, Mr. Market has been kind since my retirement, and I haven't had to experience a lower annual withdrawal due to a significant drop in portfolio value. That will be the test of both variable withdrawal methods on a personal level as they will require some relative belt tightening.
SpaceCowboy - do you also plan on using the the harvesting method? And only take of equities when they are ahead by an inflation adjusted amount?
It will be nice to get some reports back as you follow the suggestions.

Vic
The answer is yes and no. I withdraw from equities in taxable to the extent that they throw off dividends or cap gains distributions. I sweep the cash generated into my bank account. I haven't had to sell equities to rebalance as suggested by Prime Harvesting. I do use the spreadsheet provided by McClung to track the rebalance threshold and historical suggested withdrawal amounts.
Also, I still occasionally get income, which means in some years I don't need to withdraw the suggested amount or all of it. So I may not be the best test case.

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

Post by laidback_and_relaxed » Tue Aug 20, 2019 7:36 am

How does Prime or Alternate Prime work when you run out of Bonds, as in a long period (number of years) where your equities doen't ever get to 20% over target (inflation adjusted)? What is the target for balancing back in to Bonds?

For example, start with $1M in equities and $200K in bonds (80/20, I know a bit agressive but simple math). Withdrawing 5% each year means taking out roughly $60K a year. In the 4th year, if the bonds haven't grown much and the equities haven't grown to over $1.2M adjusted for inflation, you'll need to sell bonds for annual expenses. What now is the target for rebalancing back into bonds?

Using the original $1.2M adjusted for inflation will get more difficult to reach, given you're drawing down on the equity position. Resetting the starting point each year after drawing down equities will also defer rebalancing back into bonds for even more years.

Maybe once you start drawing down equities in a low return extended business cycle to pay for expenses, you're in a situation of running out of money in much less than the expected 30 years or so. The spread sheet doesn't seem to accommodate this situation and the book doesn't articulate the process from what I'm reading.

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

Post by RadAudit » Tue Aug 20, 2019 7:57 am

laidback_and_relaxed wrote:
Tue Aug 20, 2019 7:36 am
How does Prime or Alternate Prime work when you run out of Bonds, as in a long period (number of years) where your equities doen't ever get to 20% over target (inflation adjusted)?
You're definitely in trouble. But you would then also have the most aggressive portfolio possible for rebuilding to where you could rebalance and, hopefully, then a miracle would occur and eventually you'd be OK.

BTW, when you retired, how many years' of residual living expenses did you have in bonds? I don't remember the book recommending going in to retirement with an AA of 80 / 20.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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

Post by AlohaJoe » Tue Aug 20, 2019 9:39 am

laidback_and_relaxed wrote:
Tue Aug 20, 2019 7:36 am
How does Prime or Alternate Prime work when you run out of Bonds, as in a long period (number of years) where your equities doen't ever get to 20% over target (inflation adjusted)? What is the target for balancing back in to Bonds?
What do you mean "how does it work"? I don't really understand your question. This is what step 2 says:

"Sell enough bond assets to fund the next withdrawal; if bonds are depleted, sell enough from stocks to cover the withdrawal."
What now is the target for rebalancing back into bonds?
The target doesn't change. Why would it?

Using the original $1.2M adjusted for inflation will get more difficult to reach, given you're drawing down on the equity position.
Yes, and?
The spread sheet doesn't seem to accommodate this situation and the book doesn't articulate the process from what I'm reading.
The spreadsheet accommodates the situation fine and the book articulates it as well. I guess I'm not understanding what you're not understanding.

Sometimes you end up with 100% stocks. The book is pretty clear about that. There's even an extended section talking about it.
Prime Harvesting can sometimes have a seemingly undesirable side effect: during long periods of low stock returns, bond levels can go below their preferred limits because they are continuing to fund withdrawals with no stock sells to replenish them. Bond levels do not strongly correlate to systemic-withdrawal risk, but when maintained within preferred limits, they do generally reduce exposure to speculative risk. However, Prime Harvesting has a strong counterbalance to these occasional low bond levels — these periods correspond to attractive stock valuations.
And there's a full section on "A Closer Look at Bond Levels".

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

Post by Leif » Tue Aug 20, 2019 3:23 pm

laidback_and_relaxed wrote:
Tue Aug 20, 2019 7:36 am
How does Prime or Alternate Prime work when you run out of Bonds, as in a long period (number of years) where your equities doen't ever get to 20% over target (inflation adjusted)? What is the target for balancing back in to Bonds?
If you are using Prime then you have given up a typical rebalance scenario (either thru rebalance bands or periodic buy/sell to your AA).

I would not be happy with a 100% stock portfolio at some point. To avoid that contingency I'm starting at 50/50. Also my stock sell point is 10% above the inflation adjusted stock value. He recommends 20%, but I recall he also said other values are certainly acceptable.

I don't fully recall, but I think he offers up some other suggestions. But he tells us they are suboptimal based on past results.
Last edited by Leif on Tue Aug 20, 2019 3:34 pm, edited 2 times in total.

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

Post by victw » Tue Aug 20, 2019 3:32 pm

laidback_and_relaxed wrote:
Tue Aug 20, 2019 7:36 am
How does Prime or Alternate Prime work when you run out of Bonds, as in a long period (number of years) where your equities doen't ever get to 20% over target (inflation adjusted)? What is the target for balancing back in to Bonds?
Leif's response is correct. The point is to NOT sell equities if they are below their beginning inflation adjusted value. So as long as you are selling above this value - you are probably ok.

I expect my stomach will get a little queasy if we went to 100% equities. But McClung's withdrawal method is what we expect to follow.
On the other hand it also seems strange to not buy into equities if the value declines.

Alas - I think this has been covered already in the discussion.

Vic

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

Post by heyyou » Tue Aug 20, 2019 11:13 pm

McClung starts retirement with near a 50/50 allocation, very slightly adjusted by current valuations (not ever an 80/20 allocation). He withdraws an amount based on each annual ending portfolio valuation tempered by your age (remaining longevity) and inflation from retirement day, so if the stock market has shrunk in value, your withdrawals have shrunk by a smaller percentage.

Bear markets start after a history of new highs, thus the valuation adjustment on the starting withdrawal percentage. The 50/50 start is for hopefully outlasting a down market for a dozen or more years (spending from bonds) after retirement day, before selling any equity shares at reduced prices. Yes, it is common for workers to start retirement at a market peak, but a bear market will not often last for more than a dozen years. The worst case had high inflation for no real returns for 16 years, but the inflation grew the nominal value of the stocks.

The book is heavily laden with information, so it requires careful study of the details.

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

Post by laidback_and_relaxed » Wed Aug 21, 2019 6:42 am

AlohaJoe wrote:
Tue Aug 20, 2019 9:39 am
laidback_and_relaxed wrote:
Tue Aug 20, 2019 7:36 am
How does Prime or Alternate Prime work when you run out of Bonds, as in a long period (number of years) where your equities doen't ever get to 20% over target (inflation adjusted)? What is the target for balancing back in to Bonds?
What do you mean "how does it work"? I don't really understand your question. This is what step 2 says:

"Sell enough bond assets to fund the next withdrawal; if bonds are depleted, sell enough from stocks to cover the withdrawal."
What now is the target for rebalancing back into bonds?
The target doesn't change. Why would it?

Using the original $1.2M adjusted for inflation will get more difficult to reach, given you're drawing down on the equity position.
Yes, and?
The spread sheet doesn't seem to accommodate this situation and the book doesn't articulate the process from what I'm reading.
The spreadsheet accommodates the situation fine and the book articulates it as well. I guess I'm not understanding what you're not understanding.

Sometimes you end up with 100% stocks. The book is pretty clear about that. There's even an extended section talking about it.
Prime Harvesting can sometimes have a seemingly undesirable side effect: during long periods of low stock returns, bond levels can go below their preferred limits because they are continuing to fund withdrawals with no stock sells to replenish them. Bond levels do not strongly correlate to systemic-withdrawal risk, but when maintained within preferred limits, they do generally reduce exposure to speculative risk. However, Prime Harvesting has a strong counterbalance to these occasional low bond levels — these periods correspond to attractive stock valuations.
And there's a full section on "A Closer Look at Bond Levels".
So with Prime and Alternate Prime there's a good chance someone who gets to a 100% equity situation stays in that situation until death or they run out of money. I was hoping there was an "in course correction" capability that would enable a rebalancing back into a bond allocation of some sort. I wonder if his analysis throws out these occourances (scenarios that went 100% equity AA after starting with less) when calculating "lowest bond average" for each of the scenarios? They're all less than the bond AA for the scenario, though not close to zero.

The book describes a bond floor, but mentions a "moderate but consistent loss of income" using this approach. I was looking for more of a singular event to do this.

FYI, the 80/20 AA was for illustration purposes only. Personally, I started at a 66.7/33.3 AA. I'm also thinking if I ever do get to a 100% equity AA, I'll be rethinking the use of Prime or Alternate Prime and rebalance back into bonds, invalidating the methods for future use.

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

Post by firebirdparts » Wed Aug 21, 2019 8:19 am

Ending up 100% equity may seem bad, but the reason you are at 100% equity is that a lengthy series of bad things have already happened to stocks. If there is an extended stock downturn then that is how you end up at 100% equity. I think that is a reasonable place to be. I mean if you retired in 1929 and by 1934 you're 100% equity, is that bad? I don' think so. I know the future may be different, but if it's a future with zero % bond yields then I think it's an even easier decision.

You can't defuse a bomb after it has already gone off. If it's two bombs, then I think you want seed potatoes at that point.
A fool and your money are soon partners

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

Post by AlohaJoe » Wed Aug 21, 2019 9:00 am

laidback_and_relaxed wrote:
Wed Aug 21, 2019 6:42 am
So with Prime and Alternate Prime there's a good chance someone who gets to a 100% equity situation stays in that situation until death or they run out of money.
Sure. Why do you think that is a problem or something that needs to be corrected? Now that you've described what you're looking for it seems less like "Prime Harvesting doesn't handle this" and more like "I want to Prime Harvesting to be something other than what it is". Which is totally fine. No one has to use Prime Harvesting.
I wonder if his analysis throws out these occourances (scenarios that went 100% equity AA after starting with less) when calculating "lowest bond average" for each of the scenarios? They're all less than the bond AA for the scenario, though not close to zero.
The lowest bond average would never be zero, since the number is the average bond percentage over an entire retirement, always starts out at 50% and it takes years to get to 0% in the cases where it happens. Here's the bond percentage in the worst case scenario, 1966:

Code: Select all

0.5151088255158667,
 0.43942918785200347,
 0.3936252852185137,
 0.3796734014321004,
 0.37734226439856,
 0.33330672999113364,
 0.2713717481561385,
 0.2724527142436144,
 0.2998276548897889,
 0.21199503362342753,
 0.1487630661845275,
 0.10398794680356938,
 0.04404794370854703,
 0.0,
You can see it takes 13 years to finally run out of bonds. Clearly the average is going be a bit higher than 0.
The book describes a bond floor, but mentions a "moderate but consistent loss of income" using this approach. I was looking for more of a singular event to do this.
Why do you prefer a singular event over a bond floor? It seems like you want a bond floor, so why not just adopt one in your own IPS?
I was hoping there was an "in course correction" capability that would enable a rebalancing back into a bond allocation of some sort.
Doing so is clearly going to make things worse -- since it will involve selling stocks when they're at the worst, locking in losses, and knee capping future growth. It should also be clear from the other things McClung wrote that he think the idea is not just bad but misguided, caring about the wrong kind of risk. But let's pursue the idea further...what would a one time course correction look like for you?

Here's one possibility. When you run out of bonds entirely, you rebalance the entire portfolio to 60/40. Already we can see there is room for argument about the right trigger. Is a retiree who wants this "one time course correction" really going to be happy having a portfolio that is 90/10 for decades at a stretch? So maybe we should trigger any time bonds drop below 20%? Is rebalancing back to 60/40 right? Maybe it should be 70/30? Or 40/60?

Anyway, let's see how a one time course correction works with these parameters, sticking with a 1966 retirement to see how the idea works when push comes to shove.

Image

So the first thing we notice is that our "one time course correction" is anything but "one time". It happens three times. The bond average has gone from 12% to 22%. So an increase. Enough to matter for someone worried about bond levels? I dunno.

What does this "one time correction" do to our withdrawals?

Image

Looks like our withdrawals aren't substantially affected at first (i.e. stocks haven't rebounded yet) but later on the difference is substantial. We take anywhere from a 10-15% cut in our withdrawals by doing a "one time correction"

Image

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

Post by victw » Thu Aug 22, 2019 6:23 pm

Excellent response AlohaJoe.

Vic

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

Post by lazyday » Fri Aug 23, 2019 1:31 pm

With a glidepath (p. 48)
stock percentages taper off slowly at the beginning of retirement and accelerate at the end
In Figure 43 on p. 85, the “Initial Stock Allocation” is 13%, so the initial bond allocation is 87%. The “Bond Average” allocation is 40%.

For glidepath, how can the average bond allocation be lower than the initial?

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

Post by AlohaJoe » Fri Aug 23, 2019 10:21 pm

lazyday wrote:
Fri Aug 23, 2019 1:31 pm
With a glidepath (p. 48)
stock percentages taper off slowly at the beginning of retirement and accelerate at the end
In Figure 43 on p. 85, the “Initial Stock Allocation” is 13%, so the initial bond allocation is 87%. The “Bond Average” allocation is 40%.

For glidepath, how can the average bond allocation be lower than the initial?
Good question! It does indeed make little sense. I'm pretty sure it is a typo or copy & paste error (maybe that's the starting stock percentage for a rising equity glidepath at age 45?) or something and should be 74%.

The "lowest bond average" is 26%. Since with a glidepath the lowest bonds are always the first year, we know the starting bond percentage is 26%. Which means the starting stock percentage has to be 74%.

We can double check this by noting that he says it is a glidepath for ages 45-74. He also tells us what his glidepath function is: log10(age - 100) - 1. We can plug that into a calculator to easily check starting stock percentage, lowest bond percentage, highest bond percentage, and average bond percentage. Everything matches his table except the starting stock percentage.

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

Post by lazyday » Sat Aug 24, 2019 11:02 am

AlohaJoe wrote:
Fri Aug 23, 2019 10:21 pm
We can plug that into a calculator to easily check starting stock percentage, lowest bond percentage, highest bond percentage, and average bond percentage. Everything matches his table except the starting stock percentage.
Thanks, AlohaJoe

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