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

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Leif
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Re: Prime Harvesting anyone?

Post by Leif » Mon Jun 06, 2016 11:39 am

I'm interested in the Prime Harvesting. The features I like:

1. You never sell stocks when they are down (multi-year, starting at retirement).
2. You sell stocks when they are an inflation adjusted 120% above their value at retirement. The 20% allows for some help from momentum. See the link When do YOU rebalance
3. You never buy stocks. Although it worked OK in 2008-2009 (and I did some rebalancing from bonds to stocks) what if the market is down for an extended period (a la Japan)?
4. Prime Harvesting backtests well (has a low failure rate) in the US market.
5. Prime Harvesting backtests well out of sample (UK and Japan).
6. When stocks are flat (inflation adjusted) you are taking withdrawals from bonds. This increases your % stock allocation. However, over time the expected return for stocks has increased. So your % stocks has increased at the time that stocks expected return has also increased.

What has me concerned:
1. Can have sizable changes in asset allocation. It looks like that is the price you pay to get a lower failure rate/higher SWR.
Page 87 wrote:Although it’s tidier and more comforting to have a fixed stock-bond ratio, it comes at a cost. The data indicates,
allowing income-harvesting strategies to float the ratio produces a substantial income premium. If the stock returns
are up, the bond percentage will typically rise as stock gains are locked in; if the stock returns are down, the bond
percentage will typically reduce to insulate stocks. However, the average is still dependent on the initial rate. A higher
initial withdrawal rate results in a higher stock average; likewise a lower initial rate results in a lower stock average.
I'll quote myself from the book thread
I must say that even though I still frequently read new personal finance books, and read many posts here, it is really rare that I come away with anything that changes the way I invest. The last time that happened was reading a book from Dr. Bernstein where he does not recommend using bond ETFs since buy/sell spreads can significantly increase when the market is volatile. That is exactly the time you may want to sell for expenses in retirement. That lead me to reduce, and eventually eliminate, the Vanguard ST TIPS fund via ETF (and invest instead via mutual fund).

I've read many posts here on alternative withdrawal strategies during retirement. I was thinking of a fixed asset allocation (50/50) where I would maintain this allocation in retirement by taking withdrawals from either stocks or bonds to rebalance. I also was thinking (not fully decided) that I would not sell bonds to invest in stocks to rebalance. This was difficult for me during 2008-9 (I rebalanced a couple of times then stopped by selling bonds buying equities), so I can only guess how difficult it would be in retirement. I'm always keeping Japan in mind. No one is guaranteeing a quick market rebound to a deep bear market.

Reading chapter 3 in Living off Your Money did open my eyes to alternate ideas. I like the plan suggested since it is relatively simple to implement, and has done very well when compare with other withdrawal methods not only in the US, but in Japan and other places. The revelation to me is instead of a fixed allocation it is suggested to let the asset allocation float, but never buy additional equities once in retirement (allowing for reinvesting Cap Gains and Dividends). For equities you only sell when they are up using a one sided rebalance percentage. And by "up" I don't mean up this year. Up means up compared to the inflation adjusted stock balance at the time of retirement. So up covers multiple years, which I think makes more sense. Also, this method reduces the Japan issue, IMO, by not continuously catching the falling knife as it drops.
Last edited by Leif on Tue Jun 07, 2016 9:57 am, edited 2 times in total.

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Re: Prime Harvesting anyone?

Post by MIretired » Mon Jun 06, 2016 12:18 pm

Note 1: After becoming retired I'm surprised by how much the preservation of capital takes over. Having reasonably enough, I almost only care about keeping up with inflation. All of the conversations about getting reasonable returns going on years prior has become just the pot of money acquired up 'til retirement.

Note 2: I've heard at least once from other posters on threads that they only rebalance out of 'up' equities, and not into down equities, I think it is especially near/in retirement. So not that different than 'Prime Harvesting.'

And if you're conservative(preservation-minded), you would start with a higher allocation to bonds, and Prime Harvesting would better handle 1966-1982.

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Re: Prime Harvesting anyone?

Post by buckeye7983 » Tue Jun 07, 2016 9:52 am

Thanks to everyone for their responses! There does not seem to be consensus.

I am currently in accumulation phase. I have always been comfortable with "active" rebalancing (i.e.- selling fixed income to buy stocks), including in the 2000-2002 bear market and during the 2008-2009 financial crisis. Having ongoing earned income helped me keep a strong stomach and heart.

I am not so sure that I will have the fortitude to actively rebalance when I am in the decumulation phase and have exhausted my human capital. This is why I find "income harvesting" strategies that do not (potentially) require selling fixed income to buy equities worth consideration. "Japan-like" scenario is another source of concern.

Are there other decumulation strategies which do not require selling fixed income to purchase equities that current (or soon to be) retirees are using that they find preferable to "prime harvesting"? How did you choose your strategy?

Thanks again!

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

Post by sixtyforty » Tue Jun 07, 2016 12:55 pm

siamond wrote: The primary data set being used was primarily Shiller, SBBI/Ibbotson and... our own Simba spreadsheet (was cool to see that). For out-of-sample testing, the author used UK returns from Global Financial Data, and Japanese returns (probably same source, not sure). All well-known sources of data.
I haven't read the whole book yet, but If he came up with the strategies on US data, then tested out-of-sample with UK and Japan and left the strategies alone, that's true out-of-sample testing. On the other hand, if he came up with the strategies on US data, tested on UK and Japan, then went back and tweaked the strategies a bit and retested on US, then UK and Japan, IMO that's not true out-of-sample testing. He just increased his data sample for for backtesting.
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Re: New Book: Living off Your Money (Michael McClung)

Post by siamond » Tue Jun 07, 2016 2:48 pm

sixtyforty wrote:
siamond wrote: The primary data set being used was primarily Shiller, SBBI/Ibbotson and... our own Simba spreadsheet (was cool to see that). For out-of-sample testing, the author used UK returns from Global Financial Data, and Japanese returns (probably same source, not sure). All well-known sources of data.
I haven't read the whole book yet, but If he came up with the strategies on US data, then tested out-of-sample with UK and Japan and left the strategies alone, that's true out-of-sample testing. On the other hand, if he came up with the strategies on US data, tested on UK and Japan, then went back and tweaked the strategies a bit and retested on US, then UK and Japan, IMO that's not true out-of-sample testing. He just increased his data sample for for backtesting.
Yes, agreed. As far as I understand, this is the former (true out-of-sample). The author has a strong engineering profile, and appears very sensitive to points like that. This is partly why I wrote my 1st post, getting this strong sense of intellectual honesty from the author after reading the book, which... ahem... is not often the case with financial books. But I can't speak for him, of course, and I am not 100% sure. Personally, when I have more time on my hands, I'll redo some of the math with my own criteria and my own data sets, as solid peer reviews are very much needed for this kind of stuff.

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

Post by NMJack » Tue Jun 07, 2016 4:32 pm

(It looks like there are two active threads on this topic - moderator?)

I've read the free first three chapters and agree with many that this appears to be an excellent reference book. As I stated in the other thread, I am disappointed that a rising equity glide path strategy was mentioned but not given the same analysis as the others. My main concern with the heavy reliance on back testing is the current prevalence of ZIRP throughout the developed world economies. If that continues for years or decades, it may present a scenario not found, or at least not found to the same extent, in the back testing data. The obvious effect would be rapid depletion of bond balances, leading to an (unintentional?) equity allocation much higher than otherwise desired. By not buying into down markets, the growth in the equity balance may not be able to provide for a successful 30 - 40 year retirement.

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

Post by LadyGeek » Tue Jun 07, 2016 6:50 pm

NMJack wrote:(It looks like there are two active threads on this topic - moderator?)
If you are referring to Prime Harvesting anyone?, that thread is focused on the merits (or not) of the main investing strategy.

This discussion is about the book. I think it might be confusing if they were merged.
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Re: New Book: Living off Your Money (Michael McClung)

Post by AlohaJoe » Wed Jun 08, 2016 6:16 am

NMJack wrote:My main concern with the heavy reliance on back testing is the current prevalence of ZIRP throughout the developed world economies. If that continues for years or decades, it may present a scenario not found, or at least not found to the same extent, in the back testing data. The obvious effect would be rapid depletion of bond balances, leading to an (unintentional?) equity allocation much higher than otherwise desired. By not buying into down markets, the growth in the equity balance may not be able to provide for a successful 30 - 40 year retirement.
You don't need to look at possible future ZIRP worlds to see a 100% stock portfolio. This is what a 1910-retiree would see[1]

Image

Over a 40-year retirement they only "harvest stocks" 7-times. The stock ratio climbs up over the first ~15 years of retirement. It briefly hits 100% stocks around the 15-year mark (i.e. the retiree is now 80 years old). Eventually things drop down back to around 50% stocks and then at the end of retirement it climbs back up to 100% again from around age 97+. Income starts out at $48,000 and drops down to $27,000 due to the variable withdrawal strategy.

What do things look like if you swap in status quo rebalancing instead?

Image

The stock percentage (the blue line) stays unchanged, which is hardly a surprise since that's exactly what annual rebalancing achieves. The annual income fluctuates just as much. That "low point" around Year 10 is still there.

It is a bit hard to see the difference between Prime Harvesting and Rebalancing with the two charts, so let's combine them to show annual income.

Image

Now it is easier to see that Prime Harvesting does a tiny bit worse in that 10-year dip but otherwise is dominant over rebalancing. In some cases offering $30,000 a year in additional income.

So it is hard to see that being 100% stocks did the retiree any damage.

1966 is a well-known bad year to retire.

Image

And we can see that we sell all of our bonds and end up at 100% stocks for most of a 20-year stretch.

But if we compare incomes from Prime Harvesting versus annual rebalancing:

Image

They do similarly during the worst of it but Prime Harvesting recovers at the end. (Admittedly the retiree is 96 years old but hey! They've got $81,000 a year to spend now....)

I think you are asking good questions and it is exactly this kind of digging that the author's strategy need to be subjected to. Even though things work for the retirees when I imagine myself as an 80-year old who has seen their stock/bond ratio creep up over the past 15-years until it sits at 100% stocks......it is one thing to say I'd be okay with that in theory but in practice, would I really?

It seems like a "sleep well at night" ratio is needed to provide some more colour. Maybe some combination of "high stock ratio + low portfolio balance = not sleeping well"?

[1]: Date was chosen at random. A 50/50 portfolio using Schiller's return data. Using Prime Harvesting from the book and EM variable withdrawals from the book. A 40-year retirement.
[2]: Charts based on my own implementation of Prime Harvesting, Rebalance harvesting, and EM variable withdrawals. It is entirely possible I've made mistakes, since I'm only human. The code is at https://github.com/hoostus/prime-harves ... ting.ipynb

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

Post by coachz » Wed Jun 08, 2016 6:37 am

Maximizing money at the end of life is hardly compelling to me. Plus I'm male and likely not going to make it there either. :annoyed

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

Post by AlohaJoe » Wed Jun 08, 2016 7:02 am

coachz wrote:Maximizing money at the end of life is hardly compelling to me. Plus I'm male and likely not going to make it there either. :annoyed
It isn't trying to maximise money at the end of life...it just happened that way for that one retiree because of the market returns. A 1940-retiree sees something different:

Image

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Re: Prime Harvesting anyone?

Post by dcabler » Wed Jun 08, 2016 9:21 am

There is also a discussion on this topic on the morningstar forums as well as early-retirement.com
But no consensus in either of those forums either and for all of the usual reasons we come to expect on any forum. :D
And we can also add that if there was one right way, then we'd all be doing it. 8-)

At any rate, this one still intrigues me as a starting point. I've looked at so many methods over the years and they all have their pros and cons and really depend on one's situation. If you have a solid floor of income that cover your basic spending needs, then the numerous variable withdrawal methods might be something to look at. Others want something fixed, indexed to inflation (either their personal inflation rate or CPI) because they have no pension and SS won't be enough to nearly cover their spending. And naturally there is everything in between. What's interesting is that you can apply prime harvesting to any of these withdrawal methods and the author covers some of these in later chapters in the book.

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Re: Prime Harvesting anyone?

Post by coachz » Wed Jun 08, 2016 9:36 am

Ah, the old "covered in later chapters" trick. :beer

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Re: Prime Harvesting anyone?

Post by dcabler » Wed Jun 08, 2016 9:45 am

Yup - that's how the publishing company gets its $50 (pdf version)! At least it's not the "left as an exercise to the reader" trick. I have more than enough spreadsheets floating around my lap top that I can't remember why I have most of them or what I was exploring. :P

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

Post by Kevin M » Wed Jun 08, 2016 1:35 pm

AlohaJoe, appreciate your contributions!

I've only read the first three (free) chapters. Based only on chapter 3, I think the author has made an excellent contribution to this topic.

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Re: Prime Harvesting anyone?

Post by One Ping » Wed Jun 08, 2016 5:35 pm

dcabler wrote:I have more than enough spreadsheets floating around my lap top that I can't remember why I have most of them or what I was exploring. :P
I thought I was the only one who had that problem! :oops:

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

Post by NMJack » Wed Jun 08, 2016 6:41 pm

I've ran some numbers of my own. If the market tanks within the first five years of retirement, and it never reached the magic "+20%" cash in point, things don't look that great. Sure, things can get better, but who wants to spend those golden years worrying about "when?" I would rather cash in those profits via traditional rebalancing, and be able to buy stocks when they go on sale. Sure, this might be a worse case scenario, but that's the one we're all worried about, right?

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

Post by Leif » Wed Jun 08, 2016 7:10 pm

Worst case in my mind is that you buy the stocks "on sale" and they stay "on sale" for 20 years. I would rather keep my LMP (safe) assets for living expenses instead of spending them on stocks on sale (after I am retired).

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

Post by LadyGeek » Wed Jun 08, 2016 7:26 pm

^^^ Some acronym help:

LMP == Liability Matching Portfolio, a.k.a. Matching strategy
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Re: New Book: Living off Your Money (Michael McClung)

Post by Kevin M » Wed Jun 08, 2016 7:52 pm

I also like the LMP approach, but if you can afford to do this, then your withdrawal rate probably is lower than the maximum safe withdrawal rates that appear in the book and in other studies, or you are planning on a shorter expected lifetime. At least that's the case for my situation (the former, not the latter).

I have more in safe assets than I need for an LMP, so essentially my RP (Risk Portfolio) currently is not that risky. This gives me the flexibility to rebalance into stocks if stocks decline enough to justify doing so, and possibly even to increase my allocation to stocks as I get older without losing sleep. So although I think the book does a good job of evaluating withdrawal (harvesting) strategies based on historical returns, I don't feel motivated to adopt one of the strategies that seems optimal in terms of maximizing safe withdrawal rate.

I think the author kind of tries to address this point of view in one of the comments toward the end of chapter 3:
Some retirees might conclude, annual rebalancing is good enough because they plan on taking a lower than
necessary withdrawal rate. After all, annual rebalancing had a 100% success rate for 4% annual withdrawals
using the default portfolio with the SBBI data. There’s a problem with this thinking though — the potential
effects of speculative risk are unknown, in theory stressing any withdrawal rate. It’s always safer to have an
efficient income-harvesting strategy
But to me it's this "speculative risk" (that does not show up in the historical returns) that is exactly the reason to prefer an LMP approach to an approach that might end up putting you 100% into stocks when the speculative risk shows up.

Otar's zones come to mind. If you are in the green zone, you can afford an LMP approach, and really don't have to worry about income harvesting strategies and maximum withdrawal rates. These topics are more relevant for those in the gray zone.

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

Post by AlohaJoe » Wed Jun 08, 2016 8:32 pm

NMJack wrote:I've ran some numbers of my own. If the market tanks within the first five years of retirement, and it never reached the magic "+20%" cash in point, things don't look that great. Sure, things can get better, but who wants to spend those golden years worrying about "when?" I would rather cash in those profits via traditional rebalancing, and be able to buy stocks when they go on sale. Sure, this might be a worse case scenario, but that's the one we're all worried about, right?
Could you share more details on this scenario? I tried to replicate some "worst case scenarios" and can't find any examples where Prime Harvesting does noticeably worse than Rebalancing or leaves a retiree wondering "when?". In general, questions of "when?" tend to be driven by your withdrawal strategy, not your harvesting strategy, but maybe I'm just not able to find the right combination of market returns to replicate what you found. Here's what I did....

I compared every year from 1871 to 2015 to compare the income generated by Prime Harvesting and by Rebalancing. (Above 0 means Prime Harvesting generated more lifetime income, below the line means Rebalancing did.)

n.b. These are based on a 50/50 portfolio. If I switch to 60/40 then things look even better from Prime Harvesting, based on a cursory check.

Image

We can see that Rebalancing does better in some cases. Then I zoomed in on the years when Rebalancing beat Prime Harvesting the most. Rebalancing's best relative sequence was for a 1949-retiree:

Image

When I look at the details, the "win" seems less impressive. Incomes are identical for the first 20 years of retirement, Prime Harvesting makes a $10,000 cut in the early 1970s, and then Rebalancing earns a few thousand a year more for the last 20 years of retirement. If that's the worst case scenario, it is a risk I'm willing to take.

1884 is the second best sequence for Rebalancing and exhibits similar behaviour:

Image

When things are going their best Prime Harvesting appears to sometimes pull back sooner and faster than Rebalacing. This suggests that Prime Harvesting is more conservative than Rebalancing in the worst scenarios.

In both of these cases, most of the Rebalancing out-performance seems to come in the last 20-years of retirement. Someone upthread commented that many of us won't live that long. So what do things look like if I only look at Rebalancing outperformance in the first 20 years of retirement?

Now 1954 is the best sequence for Rebalancing.

Image

Again, Rebalancing appears to be more aggressive than Prime Harvesting, though both are giving you more money every year than you started with until that drop at the very end.

1995 is the second best 20-year sequence for Rebalancing.

Image

Here the differences are even smaller, though they do occur in a down market. Rebalancing will give you about $3,000 a year in income more.

That's all based on actual market data. But how do Rebalancing and Prime Harvesting work in the NIRPageddon that we all fear?

This assumes stocks return 0% real and bonds return -2% real:

Image

Prime Harvesting outperforms Rebalancing at every point on the chart.

What if we simply have a ZIRPocalypse instead of NIRPageddon?

This assumes stocks return 2% and bonds return 0% real:

Image

Prime Harvesting appears to outperform Rebalancing at every point on the chart.

Of interest, with just 2% real stock returns, you still eventually hit the "stock harvesting trigger" after a few years (it looks like it is around Year 8 or so)

Image

After all of this, I'm even more convinced that Prime Harvesting is pretty decent. The "worst cases" seem like something I can comfortably live with.
Last edited by AlohaJoe on Wed Jun 08, 2016 11:19 pm, edited 1 time in total.

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

Post by LadyGeek » Wed Jun 08, 2016 9:24 pm

AlohaJoe wrote:...[2]: Charts based on my own implementation of Prime Harvesting, Rebalance harvesting, and EM variable withdrawals. It is entirely possible I've made mistakes, since I'm only human. The code is at https://github.com/hoostus/prime-harves ... ting.ipynb
Going through your python code, the historical returns (1871_returns.csv) are from Simba's backtesting spreadsheet.

The Simba data is in "Data_All!BX169:CA313". There's a considerable amount of underlying work to get those numbers (see the links in "Data_sources"), but I'm not questioning that aspect.

What I'd like to know is why your values appear to differ from the Simba backtesting spreadsheet by approx. 0.15 or so. For example:

1871: Stocks = 15.12 in 1871_returns.csv, but Stocks = 15.32 in the Simba spreadsheet.

Also, you appear to be using the TBill rates. Should it instead be IT Bonds, as this is long-term performance? (If I'm wrong, please explain why.)
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Re: New Book: Living off Your Money (Michael McClung)

Post by AlohaJoe » Wed Jun 08, 2016 9:36 pm

LadyGeek wrote:What I'd like to know is why your values appear to differ from the Simba backtesting spreadsheet by approx. 0.15 or so. For example:

1871: Stocks = 15.12 in 1871_returns.csv, but Stocks = 15.32 in the Simba spreadsheet.
Interesting! I'll have to investigate. I'm not sure what could have gone wrong there since I just took the Simba spreadsheet, chopped out some columns, and exported it to CSV. Maybe I had an old version of the spreadsheet? I know that SBBI and CRSP often update historical information.....

Nice catch! :sharebeer
Also, you appear to be using the TBill rates. Should it instead be IT Bonds, as this is long-term performance? (If I'm wrong, please explain why.)
That's just a mistake on my part. I was doing some other testing with TBills and apparently forgot to switch it back. I obviously need to find a better way to switch between different data sets that is less error-prone.

Another win for sharing code + data, free reviewers :)

edit: re-running all of the above with IT Bonds vs TBills make no appreciable difference in the comparison of the two strategies but I'm too lazy to repost all the images.
Last edited by AlohaJoe on Wed Jun 08, 2016 10:24 pm, edited 1 time in total.

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

Post by Leif » Wed Jun 08, 2016 9:55 pm

Kevin M wrote:I also like the LMP approach, but if you can afford to do this, then your withdrawal rate probably is lower than the maximum safe withdrawal rates that appear in the book and in other studies, or you are planning on a shorter expected lifetime. At least that's the case for my situation (the former, not the latter).
True, at least to the former. On the latter, I'm not "planning" on a shorter life, but only God knows.
Kevin M wrote:So although I think the book does a good job of evaluating withdrawal (harvesting) strategies based on historical returns, I don't feel motivated to adopt one of the strategies that seems optimal in terms of maximizing safe withdrawal rate.
Kevin M wrote:I think the author kind of tries to address this point of view in one of the comments toward the end of chapter 3:
Some retirees might conclude, annual rebalancing is good enough because they plan on taking a lower than
necessary withdrawal rate. After all, annual rebalancing had a 100% success rate for 4% annual withdrawals
using the default portfolio with the SBBI data. There’s a problem with this thinking though — the potential
effects of speculative risk are unknown, in theory stressing any withdrawal rate. It’s always safer to have an
efficient income-harvesting strategy
Its interesting. I read this in a different way. I read it as if you can take less then the MSWR then you should still use an efficient withdrawal method (Prime Harvesting), but now to also have a bit of slack in case returns are worse then in the past.
Last edited by Leif on Wed Jun 08, 2016 10:37 pm, edited 6 times in total.

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

Post by siamond » Wed Jun 08, 2016 9:58 pm

AlohaJoe wrote:
LadyGeek wrote:What I'd like to know is why your values appear to differ from the Simba backtesting spreadsheet by approx. 0.15 or so. For example:

1871: Stocks = 15.12 in 1871_returns.csv, but Stocks = 15.32 in the Simba spreadsheet.
Interesting! I'll have to investigate. I'm not sure what could have gone wrong there since I just took the Simba spreadsheet, chopped out some columns, and exported it to CSV. Maybe I had an old version of the spreadsheet? I know that SBBI and CRSP often update historical information...
I think I can easily explain:
- Ladygeek, you were looking at the columns on the far right of the spreadsheet, which are returns directly derived from Shiller's database, without applying any kind of ER adjustment. Just the S&P 500 historical returns. Then stocks = 15.32 in 1871.
- AlohaJoe, you were probably using the columns on the far left of the spreadsheet (e.g. the VFINX column), where returns do take in account an ER equivalent to what we pay today for such a fund. Such adjusted data is more consistent with an existing fund like VFINX (and the bottom part of this column does indeed use the VFINX returns, while the upper part of it is approximated to Shiller's S&P returns adjusted for the ER). Then stocks = 15.12 in 1871.

There is no wrong choice here. Many historical analysis are indeed based on S&P 500 historical returns, while neglecting the reality of an ER fund. Still, I prefer the choice that AlohaJoe made, as this is closer to the reality of a fund owner, who always has to pay some ER. It is of course somewhat theoretical as there was no such thing as an S&P 500 index fund in 1871!

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

Post by LadyGeek » Wed Jun 08, 2016 10:11 pm

^^^ Yes, I think that's it. I was looking at the raw data and AlohaJoe was pullling data from a dependent cell somewhere else.

I recommend the spreadsheet column titles be changed to match the Simba spreadsheet, e.g. "VFINX", "IT Bonds", "CPI-U" and the python code modfied to match. In common.py, line 466:

Code: Select all

(stocks, bonds, inflation) = (Decimal(row[1][x]) / 100 for x in ("Stocks", "Bonds", "Inflation"))
The free reviewers will appreciate it. :)
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Re: New Book: Living off Your Money (Michael McClung)

Post by AlohaJoe » Wed Jun 08, 2016 10:47 pm

LadyGeek wrote:^^^ Yes, I think that's it. I was looking at the raw data and AlohaJoe was pullling data from a dependent cell somewhere else.

I recommend the spreadsheet column titles be changed to match the Simba spreadsheet, e.g. "VFINX", "IT Bonds", "CPI-U" and the python code modfied to match. In common.py, line 466:

Code: Select all

(stocks, bonds, inflation) = (Decimal(row[1][x]) / 100 for x in ("Stocks", "Bonds", "Inflation"))
The free reviewers will appreciate it. :)
Done :D

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

Post by AlohaJoe » Wed Jun 08, 2016 11:07 pm

Kevin M wrote:I also like the LMP approach, but if you can afford to do this, then your withdrawal rate probably is lower than the maximum safe withdrawal rates that appear in the book and in other studies

...

But to me it's this "speculative risk" (that does not show up in the historical returns) that is exactly the reason to prefer an LMP approach to an approach that might end up putting you 100% into stocks when the speculative risk shows up.
As you mention, any kind of guaranteed income is "expensive". What that means is you need to work longer in order to have the money to afford it. For some people, working longer is not a problem for whatever reason (job is a calling, workaholic, etc). For others they may decide that tradeoff, working longer for the "guarantee", is worth it.

The book includes a chapter on "Guaranteed Income" for people like you :wink:

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

Post by Kevin M » Thu Jun 09, 2016 1:37 pm

Leif wrote:
The book wrote:Some retirees might conclude, annual rebalancing is good enough because they plan on taking a lower than
necessary withdrawal rate. After all, annual rebalancing had a 100% success rate for 4% annual withdrawals
using the default portfolio with the SBBI data. There’s a problem with this thinking though — the potential
effects of speculative risk are unknown, in theory stressing any withdrawal rate. It’s always safer to have an
efficient income-harvesting strategy
Its interesting. I read this in a different way. I read it as if you can take less then the MSWR then you should still use an efficient withdrawal method (Prime Harvesting), but now to also have a bit of slack in case returns are worse then in the past.
I think we're reading it the same way, but drawing different conclusions. If you (can afford to) use a solid LMP strategy, say with a TIPS ladder, then stock returns can be as bad as you want to imagine, and you'll still be OK (at least for the 30 years covered by the TIPS ladder). Not so for a harvesting strategy that depends on stock returns for some of your withdrawals. So again, it's the "speculative risk" that the LMP is better suited to handle.
AlohaJoe wrote: The book includes a chapter on "Guaranteed Income" for people like you :wink:
Care to summarize the key points? I assume it covers things like annuities. Does it also cover things like TIPS ladders?

I'm personally in the camp that thinks TIPS are too expensive now; i.e., too high a price for the unexpected inflation insurance. And I don't particularly like annuities--also too expensive, and being in the green zone, not required. So instead I use mostly fixed income with no credit risk and very little term risk, but that has yields in the ballpark of long-term Treasuries (e.g., 20-year at about 2.1%) that have much higher term risk.

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

Post by Leif » Thu Jun 09, 2016 2:31 pm

Kevin M wrote: I think we're reading it the same way, but drawing different conclusions. If you (can afford to) use a solid LMP strategy, say with a TIPS ladder, then stock returns can be as bad as you want to imagine, and you'll still be OK (at least for the 30 years covered by the TIPS ladder). Not so for a harvesting strategy that depends on stock returns for some of your withdrawals. So again, it's the "speculative risk" that the LMP is better suited to handle.
I primary use CDs for the liquid assets, so I have some exposure to inflation.

As you say, if you have enough safe assets you can do anything you want with the risky assets. Sound like you have enough safe assets, and the willingness, to throw some of them at risky assets when they are on sale. Chances are that will work just fine.

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

Post by NMJack » Thu Jun 09, 2016 3:18 pm

AlohaJoe wrote:
NMJack wrote:I've ran some numbers of my own. If the market tanks within the first five years of retirement, and it never reached the magic "+20%" cash in point, things don't look that great. Sure, things can get better, but who wants to spend those golden years worrying about "when?" I would rather cash in those profits via traditional rebalancing, and be able to buy stocks when they go on sale. Sure, this might be a worse case scenario, but that's the one we're all worried about, right?
Could you share more details on this scenario? I tried to replicate some "worst case scenarios" and can't find any examples where Prime Harvesting does noticeably worse than Rebalancing or leaves a retiree wondering "when?". In general, questions of "when?" tend to be driven by your withdrawal strategy, not your harvesting strategy, but maybe I'm just not able to find the right combination of market returns to replicate what you found.
This is just a quick and dirty illustration. A "what if the worst happens during first 7 years of retirement" scenario comparing prime harvesting, rebalancing and rising equity glide path. Yes, I acknowledge, it is "rotten cherry picking." Just an illustration of how a 62 year old might wind up at age 70. I've plugged in several ugly market scenarios and they tend to yield similar outcomes.

Portfolio value at beginning of retirement: $1,000,000
Annual withdrawal: $40,000
Scenario 1 equity real returns:
Retirement year 1 8.0%
Retirement year 2 8.0%
Retirement year 3 -30.0%
Retirement year 4 0.0%
Retirement year 5 6.0%
Retirement year 6 6.0%
Retirement year 7 6.0%
Average: 0.6%

Prime Harvesting Bonds Stocks Total % stocks
Beginning balance: $400,000 $600,000 $1,000,000 60.0%
End year 1 $360,000 $648,000 $1,008,000 64.3%
End year 2 $320,000 $699,840 $1,019,840 68.6%
End year 3 $280,000 $489,888 $769,888 63.6%
End year 4 $240,000 $489,888 $729,888 67.1%
End year 5 $200,000 $519,281 $719,281 72.2%
End year 6 $160,000 $550,438 $710,438 77.5%
End year 7 $120,000 $583,464 $703,464 82.9%
Average: 69.5%
Annual Rebalancing
Beginning balance: $400,000 $600,000 $1,000,000 60.0%
End year 1 $403,200 $604,800 $1,008,000 60.0%
End year 2 $406,554 $609,830 $1,016,384 60.0%
End year 3 $317,374 $476,061 $793,435 60.0%
End year 4 $301,374 $452,061 $753,435 60.0%
End year 5 $296,223 $444,335 $740,559 60.0%
End year 6 $290,887 $436,331 $727,219 60.0%
End year 7 $285,359 $428,039 $713,399 60.0%
Average: 60.0%
Rising equity glide path:
Beginning balance: $430,000 $570,000 $1,000,000 57.0%
End year 1 $422,352 $583,248 $1,005,600 58.0%
End year 2 $415,027 $597,233 $1,012,260 59.0%
End year 3 $317,236 $475,854 $793,090 60.0%
End year 4 $293,705 $459,385 $753,090 61.0%
End year 5 $281,448 $459,205 $740,653 62.0%
End year 6 $269,436 $458,769 $728,205 63.0%
End year 7 $257,663 $458,068 $715,731 64.0%
Average: 60.5%

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

Post by AlohaJoe » Fri Jun 10, 2016 12:31 am

NMJack wrote: This is just a quick and dirty illustration. A "what if the worst happens during first 7 years of retirement" scenario comparing prime harvesting, rebalancing and rising equity glide path. Yes, I acknowledge, it is "rotten cherry picking." Just an illustration of how a 62 year old might wind up at age 70. I've plugged in several ugly market scenarios and they tend to yield similar outcomes.
You seem to only be measuring the stock/bond ratio, I think? (The final portfolio values are different but not by enough for me to think that's what you're talking about.)

I think the author would suggest that's not something retirees should care deeply about. That a certain amount of bonds is a means to achieve an end, rather than an end in and of itself. That a retiree should care more about the income produced and whether it will last the entire retirement.

I tend to agree with that assessment but also think it is unrealistic to expect people to not care about bond levels at all and the author could have done more in that area.

Using your scenario of returns, this is what a retiree would see:

Image

Their income would be nearly identical, though nearly $100 a year more under Annual Rebalancing.

Image

The portfolio values are similar, though Annual Rebalancing is about 3% ahead for the 3-4 years after the market collapse. If the goal is to maintain a steady/constant amount of bonds, then I agree Prime Harvesting is unlikely to meet that goal.

Overall, the example sequence of returns doesn't strike me as something to be worried about if I'm using Prime Harvesting. If I look at the full 30-year picture (this assumes "normal" returns after the big drop), the temporary Annual Rebalancing outperformance isn't even visible:

Image

But it does look like Annual Rebalancing does well over those first few years. What do things look like if we repeat the cycle over and over again?

This is what withdrawals look like if we have that 30% drop every 7-years (i.e. 8%, 8%,-30%, 0%, 6%, 6%, 6% ... and then 8%, 8%, -30%, 0%, etc all over again, like a market Sisyphus....)

Image

And this is what portfolio values look like

Image

In both cases Annual Rebalancing is clearly ahead. Of course that represents a real return for equities of 0% over a 30-year period; if that's the worst case scenario I'm willing to run that risk, though others may decide that forgoing income in more likely conditions is worth the extra income if this speculative risk manifests. (In both cases, though, you're not in a good spot unless you have a very substantial portfolio to start with.)

If we have just three years of 10% returns during the 30-year retirement window, that brings the 30-year returns up to 0.017% then it erases nearly all of Annual Rebalancing's relative performance:

Image

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

Post by SpaceCowboy » Fri Jun 10, 2016 3:41 am

AlohaJoe thanks for all your analysis of this. It's pretty helpful.
I think I understand the harvesting strategy of where to take the annual withdrawal from. Can someone explain the proposed method for calculating the annual withdrawal amount and how it compares to VPW.

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

Post by dcabler » Fri Jun 10, 2016 6:08 am

As I understand it from my first pass through the book, once you have an amount of withdrawal calculated for any given year, Prime Harvesting simply tells you to withdraw it from the bond portfolio only, then applies a rule for when to replenish the bond portfolio from stocks. It doesn't tell you how to calculate the total amount withdrawn every year. In other words, it's an overlay on top of your favorite systematic withdrawal method.

The amount withdrawn can be a Bengen-style withdrawal method. For example, withdraw x% the first year then increase it every year by inflation. This is what he shows in the first 3 chapters of the free download. In subsequent chapters, he goes through a number of different systematic withdrawal methods before honing in on his favorites: EM and ECM. It is not exhaustive, but it does include many of the popular methods - but not VPW.

Prime Harvesting could also be applied to just about any variable withdrawal method such as VPW. Though I think VPW uses expected return in the calculation to set the % withdrawn each year and since Prime Harvesting changes the AA annually, calculating the expected return would require a different method from what's currently in the VPW spreadsheet.

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

Post by SGM » Fri Jun 10, 2016 6:42 am

I don't expect I will take withdrawals based on a formula. The Prime Harvesting method of selling stocks when they are 120% above the inflation adjusted initial amount has appeal. It does prevent you from selling too soon. It strikes me that the 120% figure would be lower if you are spending the dividends instead of reinvesting them. I haven't read the 3 chapters that closely however.


I generally don't sell stocks unless they have gone up, unless I am harvesting a loss and reinvesting in a fund that tends to trend with the fund I am selling. Spending dividends and interest and doing some selective selling to capture capital gains is probably what I will do in the rest of retirement. I am not trying to absolutely maximize withdrawal rates.

I am amazed at the amount of effort people are putting into back-testing. I differentiate between precision and accuracy. I am a back-testing skeptic I guess.

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

Post by dbr » Fri Jun 10, 2016 8:47 am

SGM wrote:
I am amazed at the amount of effort people are putting into back-testing. I differentiate between precision and accuracy. I am a back-testing skeptic I guess.
A way of putting it is that application of the results to future events requires estimates of error bounds on figures of merit. In this case safe withdrawal rate numbers need to have margins of uncertainty assigned. Most of the numbers in those tables are almost certainly not meaningfully different. Having some idea which one's really are different is missing information that leaves the results interesting but not actionable.

Just glancing through the data the only "system" that appears to even be a candidate for being a good idea or a bad idea is age in bonds. Others can assess their estimates as well.

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

Post by marcwd » Fri Jun 10, 2016 9:41 am

dbr wrote:
SGM wrote:
I am amazed at the amount of effort people are putting into back-testing. I differentiate between precision and accuracy. I am a back-testing skeptic I guess.
A way of putting it is that application of the results to future events requires estimates of error bounds on figures of merit. In this case safe withdrawal rate numbers need to have margins of uncertainty assigned. Most of the numbers in those tables are almost certainly not meaningfully different. Having some idea which one's really are different is missing information that leaves the results interesting but not actionable.
I believe the OP (siamond) is a back-testing enthusiast. Maybe he could weigh in on this "interesting but not actionable" point.

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

Post by qwertyjazz » Fri Jun 10, 2016 11:27 am

I think you could use Monte Carlo simulation and central limit theorem to give error bars as long as you assume a static process (stocks not increasing or at a minimum if use rate of change then no momentum effect) and that you describe the entire world (no stock market collapse like Russia preSoviets)

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

Post by LadyGeek » Fri Jun 10, 2016 11:47 am

FYI - I merged buckeye7983's thread into here and retitled the thread.

siamond's discussion was originally about the book, then diverted into prime harvesting. buckeye7983's discussion was about prime harvesting, but also discussed the book. The two topics are now merged.

(The software sorts posts by time, siamond's discussion was first.)
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Re: New Book: Living off Your Money (Michael McClung)

Post by AlohaJoe » Sat Jun 11, 2016 11:27 am

rrppve wrote:AlohaJoe thanks for all your analysis of this. It's pretty helpful.
I think I understand the harvesting strategy of where to take the annual withdrawal from. Can someone explain the proposed method for calculating the annual withdrawal amount and how it compares to VPW.
The general idea looks something like:

- Based on your current age, look up your life expectancy (you recalculate this every year)
- Based on your life expectancy, look up a withdrawal rate from a table

Then apply some adjustments to that number:
- If it is too low, apply a floor (e.g. don't drop below 2.25% of your inflation-adjusted initial portfolio value)
- If it is too high, apply a ceiling (e.g. don't grow above 150% of your inflation-adjust initial withdrawal amount)
- If is too big of a jump from last year's withdrawal (due to your portfolio size going up dramatically due to a great year in the market), then scale things back a bit from what the table tells you to do. (e.g. instead of going from $50,000 to $100,000 in a single-year, only go to $75,000)

At the end of the day both of them have you making withdrawals based on a fixed table. If you put them side-by-side the first part of the tables look like...(with VPW you need to input some parameters to generate the table, so this is based on a 40-year retirement)

VPW -- EM
4.7% -- 5.4%
4.7% -- 5.4%
4.8% -- 5.4%
4.9% -- 5.5%
4.9% -- 5.5%

VPW starts a bit more conservative with the raw percentage but has some other features that ultimately makes it a bit less conservative.

The biggest differences between VPW and EM are:
- VPW makes your pick your mortality up front
- VPW exhausts the portfolio every time (which means you end up with withdrawal rates like 34.6% and 50.9%, and always have a Terminal Portfolio Value of $0)
- VPW has no floor, so it could end up telling you take out very low levels of money
- VPW has no ceiling, so it could end up telling you take out lots of money (and thus reducing the overall portfolio value)

Overall I would say that VPW appears to be slightly more aggressive at withdrawing money (at the expense of lower portfolio values). Also, its behaviour in the last ~10 years or so is totally implausible. No one's going to be taking out 12-26% of their portfolio unless they know something specific about their own mortality. This makes analysis a little trickier because it means you can't really test performance under unexpected longevity ("I accidentally lived to 110!") with vanilla VPW.

Here's an example of what the incomes a 1952 retiree would have seen (year chosen at random, just to have something to look at):

Image

And here's the portfolio value, where you can see how VPW kinda "goes crazy" at the end.

Image

In practice, I doubt they are different enough to lose much sleep over. This the cumulative "first 10 years of income retirement" for the two:

Image

In some cases, VPW does better. In others, EM. Overall, there's a slight nod to VPW. But the numbers either way are on the order of an extra $1,000 to $2,000 a year. (There's a massive outlier for 1921, that I'll come back to at the end.)

VPW lacks a floor but in the historical data, those extremely low rates are extremely infrequent. And in practice, people would just ignore VPW and take out slightly more money for a year or two. (Taking out $27,000 instead of $24,000 for three or four years is unlikely to "break" any withdrawal scheme.)

VPW lacks a ceiling, which is a slightly larger problem, since it means there is less left in the portfolio for potential future bad years, spending shocks, or unexpected longevity. It still isn't a big problem, though. And I think in practice, most people would ignore VPW's suggestions when it climbs to those crazy levels, though. If you started out on $47,000 a year, it is hard to imagine an 80-year old taking out $110,000 a year.

So in practice I think most people would behave as if VPW had a floor and a ceiling, which make the results even harder to distinguish between the two.

Sidebar: As mentioned above, 1921 is an outlier. It was, by far, the best year in American history to retire. The ceiling on EM means that VPW blows it away in this scenario.

Image

To further complicate comparisons, you can use any floor and ceiling you want with EM. And VPW adjusts its recommendations based on your current portfolio. So......that makes things trickier :)

It isn't a comparison of VPW to EM but....Blanchett et al's 2008 paper "Optimal Withdrawal Strategy for Retirement Income Portfolios" compares their own mortality-based approach (which is similar to EM from the book we're talking about) and the RMD approach (which is similar to VPW).

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

Post by SpaceCowboy » Sat Jun 11, 2016 3:17 pm

Big Thanks To AlohaJoe :sharebeer

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

Post by heyyou » Thu Jun 16, 2016 3:36 pm

Original message deleted after a second reading of the book

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

Post by skatterZ » Fri Jun 17, 2016 8:55 pm

I was excited to see this book as you always prefer one's withdrawal method to be evaluated by a third party who is not biassed about their own method. I downloaded the first three chapters and was very impressed. I also convinced my local library to order the $60 hard copy. (Eat your heart out Kevin M).

I have been a fan of Guyton's method as published in 2004 and Guyton's and Klinger 2006. Guyton allows a higher initial withdrawal which my DW likes ☺️ but pays for it by potentially lowering withdrawals in years where your withdrawal percentage exceeds a certain percentage. I and probably most Bogleheads are not retiring at supsistance level and can temporarily cut our spending levels. McClug seems to have omitted this part of Guyton's method as shown on page 50 in the free partial copy. I am concerned that he may have missed part of Guyton's plan which would make Guyton's method test better. Has any one noticed similar errors for other methods? Or does he expand on the tested methods later in the whole book? I am waiting on my library for the complete book.

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

Post by AlohaJoe » Fri Jun 17, 2016 9:54 pm

skatterZ wrote:I have been a fan of Guyton's method as published in 2004 and Guyton's and Klinger 2006. Guyton allows a higher initial withdrawal which my DW likes ☺️ but pays for it by potentially lowering withdrawals in years where your withdrawal percentage exceeds a certain percentage. I and probably most Bogleheads are not retiring at supsistance level and can temporarily cut our spending levels. McClug seems to have omitted this part of Guyton's method as shown on page 50 in the free partial copy. I am concerned that he may have missed part of Guyton's plan which would make Guyton's method test better. Has any one noticed similar errors for other methods? Or does he expand on the tested methods later in the whole book?
I think you've misunderstood the book. Chapter 3 is about income harvesting strategies. You seem to be talking about withdrawal strategies, which is discussed in a later chapter. The author hasn't made an error: he talked about Guyton's income harvesting strategy in the income harvesting section and he talks about Guyton's variable withdrawal strategy in the variable withdrawal section.

As far as I know, the free download includes the table of contents so you can see what you're getting and pages 15-18 of the introduction offer additional explanation.

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

Post by skatterZ » Fri Jun 17, 2016 10:41 pm

Thanks for your additional information. As I said I am waiting for the test of the book. My usual plan is to read financial books from the library and when or if they prove valuable to me and my financial situation, then I buy them for reference. I continue to look forward to finishing the book . Thanks again, your input has always been valuable .

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

Post by One Ping » Sun Jul 03, 2016 8:20 pm

siamond wrote:http://www.amazon.com/Living-Off-Your-M ... 0997403411

This book is such a breath of fresh air for anybody with a bit of an analytical mind. The author obviously reflected for years on the best strategies to be used by retirees when it comes to manage one's portfolio and 'harvest' it during a happy retirement. But instead of rehashing the same old, same old (and pretty much flawed) basic recommendations, or picking his own favorite ideas, he provides a very thorough analysis on multiple facets of the problem, facets coming from an overall framework assembling the whole picture when combined.
I picked up this book a while back and with anticipation started through it today. One thing I cannot seem find a clear definition of in the book is the term "TILT" the way the author uses it.

I'm sure it's probably in there somewhere, but I would greatly appreciate a page citation from the book that defines what McClung means by the term 'tilt' or alternatively a quantitative explanation of how the BH collective perceives the term to be defined in this context.

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

Post by siamond » Sun Jul 03, 2016 9:09 pm

One Ping wrote:I picked up this book a while back and with anticipation started through it today. One thing I cannot seem find a clear definition of in the book is the term "TILT" the way the author uses it.

I'm sure it's probably in there somewhere, but I would greatly appreciate a page citation from the book that defines what McClung means by the term 'tilt' or alternatively a quantitative explanation of how the BH collective perceives the term to be defined in this context.
Can't remember if the term "TILT" is defined by the book. Here is a wiki page which explains how to tilt towards value stocks.

You can easily generalize the idea (e.g. tilting international investments by overweighing emerging markets; tilting equities towards REITs; etc). Quite a few Bogleheads do exactly that -myself included- while others prefer the purity/simplicity of a 3-funds portfolio with no tilt.

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

Post by One Ping » Sun Jul 03, 2016 9:16 pm

siamond wrote:
One Ping wrote:I picked up this book a while back and with anticipation started through it today. One thing I cannot seem find a clear definition of in the book is the term "TILT" the way the author uses it.

I'm sure it's probably in there somewhere, but I would greatly appreciate a page citation from the book that defines what McClung means by the term 'tilt' or alternatively a quantitative explanation of how the BH collective perceives the term to be defined in this context.
Can't remember if it is defined by the book. Here is a wiki page which explains how to tilt towards value stocks.

You can easily generalize the idea (e.g. tilting international investments by overweighing emerging markets; tilting equities towards REITs; etc). Quite a few Bogleheads do exactly that -myself included- while others prefer the purity/simplicity of a 3-funds portfolio with no tilt.
Thanks for the reply, siamond.

I am familiar with the term 'tilt'. I tilt to SCV myself. I just don't understand the term the way McClung uses it, e.g, "20% tilt". Tilt toward what? And how, quantitatively, is the 20% (as opposed to 60%, for example) defined?

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

Post by AlohaJoe » Sun Jul 03, 2016 9:23 pm

One Ping wrote:I'm sure it's probably in there somewhere, but I would greatly appreciate a page citation from the book that defines what McClung means by the term 'tilt' or alternatively a quantitative explanation of how the BH collective perceives the term to be defined in this context.
The author uses tilt in several contexts; which one are you referring to? The index lists, under "tilt", initial withdrawal rate, market portfolio, towards Asian REITs, towards higher stock percentage, towards US markets.

The vast majority of the references in the book are to "tilting the initial withdrawal rate". If you provided a bit more context, we could try to give a better answer.

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

Post by One Ping » Sun Jul 03, 2016 9:48 pm

AlohaJoe wrote: The author uses tilt in several contexts; which one are you referring to? The index lists, under "tilt", initial withdrawal rate, market portfolio, towards Asian REITs, towards higher stock percentage, towards US markets.

The vast majority of the references in the book are to "tilting the initial withdrawal rate". If you provided a bit more context, we could try to give a better answer.
Thanks, Aloha Joe

Your right. It's the initial withdrawal rate tilt. What does, for example, "The initial withdrawal rate is set according to the starting valuation level with a 40% tilt." mean? (pg . 239)
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AlohaJoe
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Mon Jul 04, 2016 12:56 am

One Ping wrote:Your right. It's the initial withdrawal rate tilt. What does, for example, "The initial withdrawal rate is set according to the starting valuation level with a 40% tilt." mean? (pg . 239)
You should read the chapter immediately before that reference, instead of skipping to the "Putting It All Together" chapter ;)

It has a section title "Tilting the Initial Withdrawal Rate":
Tilting the initial withdrawal rate means using the average valuation level (from the previous section) to modestly adjust the initial withdrawal rate up or down. [...] These tilts were initially calibrated by aligning the lowest valuation level (4) to the lowest withdrawal rate of 3.8% (as determined by the regression function from the previous section). As valuations increase from the lowest level, the withdrawal rate is tilted upward (accordingly to the degree of tilt and the increase in valuation).
But it looks like you're right. It doesn't look like McClung is super-clear about what the "40%" means. Based on Figure 137 it implies that "40%" means "40% more than the MSWR". But that doesn't line up with the numbers in Figure 138 which look more like "40th percentile MSWR" or something.

I would send the author an email for clarification :). Let us know what he says.

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