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

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
One Ping
Posts: 403
Joined: Thu Sep 24, 2015 4:53 pm

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

Post by One Ping » Mon Jul 04, 2016 3:18 pm

AlohaJoe wrote:
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.
I going back and reviewing some of the earlier sections and also comparing what's said in those sections to how the companion spreadsheet is constructed to gain insight into the 'nuts & bolts' of how he implements this.

Once I've reviewed the pertinent sections and familiarized myself enough with the details of what's in the book to be able to ask intelligent questions, I'll contact the author. I'll report back on what I find out.

One Ping
"Re-verify our range to target ... one ping only."

User avatar
One Ping
Posts: 403
Joined: Thu Sep 24, 2015 4:53 pm

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

Post by One Ping » Mon Jul 04, 2016 6:01 pm

OK, after a little more reading and some spreadsheet analysis (in between the firecrackers, cherry bombs and M-80s :) ), I think I get it now.

McClung uses a combination of Market Valuation Level and Initial Withdrawal Rate Tilt to set the Initial Withdrawal Rate. For each Market Valuation Level (1.0 through 4.0) he has apparently determined a Maximum Sustainable Withdrawal Rate. (I ‘reverse engineered’ these MSWRs to be ~3.72% through ~7.96%, respectively - see table below.) He calibrates his ‘0% Tilt’ across all valuation levels by anchoring it with the lowest withdrawal rate for the lowest valuation level, or roughly 3.82% (determined elsewhere in the book). The Initial Withdrawal Rate Tilt is the fraction of the distance between the lowest withdrawal rate (3.82%) and the MSWR for a given market valuation level:

initial withdrawal rate = lowest withdrawal rate + tilt * [MSWR – lowest withdrawal rate]

He also provides general guidance of what ‘good’ tilts would be (p. 230):
“It’s not difficult to come up with a safe tilt. A 10% tilt is extremely conservative … for the Baseline Market and Portfolio. The challenge is determining how much tilt remains safe. Ultimately, the line of safety is subjective, but a low tilt should always be used. The question is, how low?

If investing only in US stocks a 50% or 60% tilt in the initial withdrawal rate looks reasonable. But the best retirement portfolios are globally diversified with performance distinct form the US markets, so a lower tile is needed. A 30% or 40% tilt appears right (i.e., very safe) for the needs of most retirees with a global portfolio …”
For example, if the market valuation level is 3.1 (he explains how to determine this elsewhere in the book), the MSWR corresponding to that level (based on my reverse engineering of his tables) is 5.00%. Using a 40% initial withdrawal rate tilt results in an initial withdrawal rate of 4.3%.

3.82% + 40% * (5.00% – 3.82%) = 4.29%

Here is my reverse engineered Initial Withdrawal Rate Table. I've added the 0% and 100% (MSWR) tilts for clarity. It compares favorably with McClung's Figure 138 - "Baseline market and portfolio tilts to the intial withdrawal rate for a 30-year retirement." on p. 230.
Image
(Anyone know how to make an inserted image 'sharper'? This was originally in a .png format and uploaded through 'TinyPic' to create a a 640x320 image. Not very readable ... :annoyed )

Back to more reading & studying …

One Ping
"Re-verify our range to target ... one ping only."

User avatar
siamond
Posts: 3979
Joined: Mon May 28, 2012 5:50 am

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

Post by siamond » Mon Jul 04, 2016 6:29 pm

One Ping wrote:(Anyone know how to make an inserted image 'sharper'? This was originally in a .png format and uploaded through 'TinyPic' to create a a 640x320 image. Not very readable ... :annoyed )
Assuming your PNG file has more pixels, you could upload it TWICE, say making a 640*320 image and a 1200*600 image. Then instead of inserting in your post something like (img)Web-address-640(/img), insert something like (url=Web-address-1200)(img)Web-address-640(/img)(/url) - replacing parenthesis by brackets. This will not make the display sharper, but will allow readers to click on the image to see something bigger & sharper.

User avatar
LadyGeek
Site Admin
Posts: 46105
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

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

Post by LadyGeek » Mon Jul 04, 2016 8:03 pm

The forum software is scaling the image to fit the post. Your next best option is to turn it into a clickable link, or just supply the link without the image. You can embed an image inside the link's BBCode. If you're not sure what that means, hack replace the code below with the URL of the image:

Code: Select all

[url=http://i68.tinypic.com/m8lgl4.png][img]http://i68.tinypic.com/m8lgl4.png[/img][/url]
Will appear as a clickable link:

Image

Feel free to experiment in the Please Try Out Test Posts Here thread.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
One Ping
Posts: 403
Joined: Thu Sep 24, 2015 4:53 pm

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

Post by One Ping » Mon Jul 04, 2016 8:19 pm

Thanks siamond and Lady Geek, I'll do some experimenting.
"Re-verify our range to target ... one ping only."

AlohaJoe
Posts: 3457
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

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

Post by AlohaJoe » Tue Jul 05, 2016 6:27 am

One Ping wrote:The Initial Withdrawal Rate Tilt is the fraction of the distance between the lowest withdrawal rate (3.82%) and the MSWR for a given market valuation level:

initial withdrawal rate = lowest withdrawal rate + tilt * [MSWR – lowest withdrawal rate]
Nice investigation. This is more or less what I was guessing but it isn't very clear from the book.

User avatar
Leif
Posts: 2425
Joined: Wed Sep 19, 2007 4:15 pm

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

Post by Leif » Tue Jul 05, 2016 10:48 am

I was also confused by the tilt reference as it relates to the initial withdrawal rate and aggressive/conservative investing (ability/desire to take risk).
Page 228 wrote: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. The exact function* for applying the tilt is not so important, but the end results shown below are. Note, multiple tilts are provided, to give retirees a choice, although specific recommendations will be made.
Page 230 wrote:It’s not difficult to come up with a safe tilt. A 10% tilt is extremely conservative with its highest value only reaching MSWR-100% for the Baseline Market and Portfolio. The challenge is determining how much tilt remains safe. Ultimately, the line of safety is subjective, but a low tilt should always be used. The question is, how low?
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

User avatar
HomerJ
Posts: 11317
Joined: Fri Jun 06, 2008 12:50 pm

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

Post by HomerJ » Tue Jul 05, 2016 2:13 pm

thx1138 wrote:I also find it amusing that people penny pinch on knowledge, I can't imagine a more apropos example of knowing the price of everything and the value of nothing.
Penny-pinch on "potential" knowledge.

I could sell a book for $100 that just has the same info you've already gotten from the free wiki on this board. Would it be foolish or wise of you to pay $100 for knowledge you already have?

User avatar
Leif
Posts: 2425
Joined: Wed Sep 19, 2007 4:15 pm

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

Post by Leif » Tue Jul 05, 2016 2:57 pm

deleted
Last edited by Leif on Tue Jul 05, 2016 4:13 pm, edited 1 time in total.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

User avatar
siamond
Posts: 3979
Joined: Mon May 28, 2012 5:50 am

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

Post by siamond » Tue Jul 05, 2016 3:13 pm

Leif wrote:After reading the first 3 chapters (free) I bought the PDF for $50. It has changed how I expected to manage my portfolio in retirement. I think I said in an earlier post that these days it is rare when I read a book or a posting here that it actually changes how I invest or plan to invest in the future.
Just out of curiosity, what did you change in your plan?

User avatar
Raybo
Posts: 1623
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

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

Post by Raybo » Tue Jul 05, 2016 4:23 pm

I have a practical question.

I retired in 2000 (at 48). Since that time, I've sold a house and lived off my portfolio. I have always taken less than 4% from my pile each year. Up to now, I've used rebalancing to a set AA to harvest the money I need yearly.

After reading some of McClung's book (I bought it and am slowly moving through it), I like both his Prime Harvesting and EM withdrawal methods. My question is how to implement them 16 years into my retirement?

The Prime Harvesting method calls for me to only sell equities when they are 120% above their real value (initial value plus inflation). But, do I go back to their values in 2000, when I first retired or should use their current value and, essentially, start my harvesting program anew?
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

User avatar
One Ping
Posts: 403
Joined: Thu Sep 24, 2015 4:53 pm

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

Post by One Ping » Tue Jul 05, 2016 4:45 pm

Raybo wrote:I have a practical question.

I retired in 2000 (at 48).
......

My question is how to implement them 16 years into my retirement?

The Prime Harvesting method calls for me to only sell equities when they are 120% above their real value (initial value plus inflation). But, do I go back to their values in 2000, when I first retired or should use their current value and, essentially, start my harvesting program anew?
If it were me and I wanted to use this approach, I'd start the program as if I'd just retired. Use current balance(s) and remaining time horizon and call it good.

What's passed is past and only the future need be worried about from here on out.

Just my 2-cents.

One Ping
"Re-verify our range to target ... one ping only."

AlohaJoe
Posts: 3457
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

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

Post by AlohaJoe » Tue Jul 05, 2016 7:42 pm

One Ping wrote: If it were me and I wanted to use this approach, I'd start the program as if I'd just retired. Use current balance(s) and remaining time horizon and call it good.

What's passed is past and only the future need be worried about from here on out.
I agree. The author briefly hints this is what he would suggest as well (p.249 20-year and 15-year Plans: "These plans are for retiring late in life (or perhaps restarting a plan late in life".)

Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

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

Post by Rodc » Tue Jul 05, 2016 8:17 pm

3.82% + 40% * (5.00% – 3.82%) = 4.29%
Does the author actually believe he has a method accurate to three significant digits, or was that introduced by a poster?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

User avatar
One Ping
Posts: 403
Joined: Thu Sep 24, 2015 4:53 pm

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

Post by One Ping » Tue Jul 05, 2016 8:32 pm

Rodc wrote:
3.82% + 40% * (5.00% – 3.82%) = 4.29%
Does the author actually believe he has a method accurate to three significant digits, or was that introduced by a poster?
That's my fault and no, and I don't believe it. I showed two digits in the table above just to 'show my reverse engineering work'.

Most, if not all, of the tables in the book are single digits after the decimal.

One Ping
"Re-verify our range to target ... one ping only."

Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

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

Post by Rodc » Wed Jul 06, 2016 8:39 am

One Ping wrote:
Rodc wrote:
3.82% + 40% * (5.00% – 3.82%) = 4.29%
Does the author actually believe he has a method accurate to three significant digits, or was that introduced by a poster?
That's my fault and no, and I don't believe it. I showed two digits in the table above just to 'show my reverse engineering work'.

Most, if not all, of the tables in the book are single digits after the decimal.

One Ping
Thank you.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

User avatar
One Ping
Posts: 403
Joined: Thu Sep 24, 2015 4:53 pm

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

Post by One Ping » Wed Jul 06, 2016 10:24 am

Rodc wrote:
One Ping wrote:
Rodc wrote:
3.82% + 40% * (5.00% – 3.82%) = 4.29%
Does the author actually believe he has a method accurate to three significant digits, or was that introduced by a poster?
That's my fault and no, and I don't believe it. I showed two digits in the table above just to 'show my reverse engineering work'.

Most, if not all, of the tables in the book are single digits after the decimal.

One Ping
Thank you.
Good comment, though. One should always be mindful of the difference between 'precision' and 'accuracy.'

:sharebeer
"Re-verify our range to target ... one ping only."

rgs92
Posts: 1989
Joined: Mon Mar 02, 2009 8:00 pm

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

Post by rgs92 » Wed Jul 06, 2016 12:29 pm

Isn't this approach at odds with the Firecalc method of simply withdrawing an amount that is apportioned exactly at the asset allocation of your total portfolio? That is my understanding of how Firecalc estimates your portfolio survival chance.

Firecalc does not require you to do market forecasting which is essentially what this author is prescribing when he says to sell stocks when the market is "up" according to his theory.

So by using these methods, you are abandoning for the most part (it looks to me) the huge body of research behind Firecalc (and the similar calculators from Vanguard and I guess other reputable sources that are based on the same studies). I think the Trinity study is used by Firecalc. And I assume Mr.Bogle's own source of research is also these core studies.

I mean, Mr. Bogle says the correct holding period is forever, not until the market is up according some specific metrics, especially one as simplistic as an all-time-high.

wesgreen
Posts: 155
Joined: Fri Jan 07, 2011 9:14 am

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

Post by wesgreen » Wed Jul 06, 2016 1:51 pm

Excellent questions, I think. Thanks!

User avatar
Raybo
Posts: 1623
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

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

Post by Raybo » Wed Jul 06, 2016 3:16 pm

rgs92 wrote:Isn't this approach at odds with the Firecalc method of simply withdrawing an amount that is apportioned exactly at the asset allocation of your total portfolio? That is my understanding of how Firecalc estimates your portfolio survival chance.

Firecalc does not require you to do market forecasting which is essentially what this author is prescribing when he says to sell stocks when the market is "up" according to his theory.

So by using these methods, you are abandoning for the most part (it looks to me) the huge body of research behind Firecalc (and the similar calculators from Vanguard and I guess other reputable sources that are based on the same studies). I think the Trinity study is used by Firecalc. And I assume Mr.Bogle's own source of research is also these core studies.

I mean, Mr. Bogle says the correct holding period is forever, not until the market is up according some specific metrics, especially one as simplistic as an all-time-high.
Can you identify the "huge body of research" that shows that maintaining an asset allocation through retirement is the best method to harvest your money during retirement?

Since you clearly haven't actually read the book, I will point out that the author tries his best to test every reasonable harvesting method. His baseline is constant asset allocation. There are several that turn out to be "better" (according to various measures used by the author) than constant asset allocation and provide for a higher minimum sustainable withdrawal rate under all market conditions.

The one you are referring to, Prime Harvesting, says to always withdraw from bonds. Money is moved from stocks to bonds only if there is a positive real (starting point plus interest) return of 120%, though he says that using 100% or 110% doesn't change things much. My recollection is that none of the backtests showed bonds becoming less that 20% of a portfolio (at the 120% rule). But, yes, your AA will fluctuate under this method.

What's more, as has been pointed out above, the author only uses backtesting of actual market returns or random arrangements of actual market returns. He eschews monte carlo simulation on the theory that no one has proposed an accurate working model of the/any stock market such that trusting its results would provide any confidence that what was tested will hold up in the real world.

So, my question to you is "How do you KNOW that constant asset allocation is the best harvesting method?" After reading some of this book (I am still making my way through it), it is not possible to simply accept someone asserting that constant asset allocation is the best approach when harvesting retirement money without some actual research being presented.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

heyyou
Posts: 3039
Joined: Tue Feb 20, 2007 4:58 pm

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

Post by heyyou » Thu Jul 07, 2016 12:09 am

Deleted upon further reading of the book.

AlohaJoe
Posts: 3457
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

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

Post by AlohaJoe » Thu Jul 07, 2016 10:56 pm

rgs92 wrote:Firecalc does not require you to do market forecasting which is essentially what this author is prescribing when he says to sell stocks when the market is "up" according to his theory.
There is no market forecasting required.

DaufuskieNate
Posts: 247
Joined: Wed May 28, 2014 11:53 am

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

Post by DaufuskieNate » Fri Jul 08, 2016 1:11 pm

rgs92 wrote: I mean, Mr. Bogle says the correct holding period is forever, not until the market is up according some specific metrics, especially one as simplistic as an all-time-high.
The entire subject of this book is to describe how to spend down a portfolio in retirement. Most people do not plan to live off of only interest and dividends, leaving their entire investment to their heirs. So, SOMETHING is going to be sold sometime as opposed to holding everything you own "forever." Also, there is nothing in the book that says to only sell at all-time highs.

longinvest
Posts: 2891
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest » Sat Jul 16, 2016 12:52 pm

The thing that annoys me, in all the withdrawal methods that have a "memory of the past" (I'll explain later), is that we end up with a possibility of two retirees of the same age, with the same portfolio and same target allocation, in the same year, which must take different withdrawal/rebalancing decisions.

By "memory of the past", I mean a withdrawal method which bases the current withdrawal decision based on metrics based on the current portfolio state relative to what it was at retirement.

SWR is a prime example of this. Retiree A retires in year X at age 65, and takes a 4% withdrawal. In year X+1, retiree A takes out an amount based on the portfolio's status in year X. So, another retiree B, retiring in year X+1 at age 66, takes a 4.xx% withdrawal (based on a 29-year SWR, a little higher than a 30-year SWR) of his portfolio, regardless of market returns in year X. So, now both retirees A and B have the same age, and the exact same retirement horizon. Let's also assume that they have identical portfolios in year X+1 with an identical asset allocation. What annoys me is that both won't take the same withdrawal. This, in my opinion, is completely illogical.

From what I've read of McClung's withdrawal method, in this thread, it has a memory of the past.

The whole "not rebalance" a portfolio, to avoid selling some asset to buy another, leads to the same illogical situation. Two investors A and B with identical target asset allocations won't rebalance their portfolios identically in the same year, because of their personal investing history. This makes no sense whatsoever to me.

Please let me know if I am wrong in my assessment of the "memory" property of McClung's method.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

technovelist
Posts: 2917
Joined: Wed Dec 30, 2009 9:02 pm
Contact:

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

Post by technovelist » Sat Jul 16, 2016 1:11 pm

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
There aren't too many certainties in retirement. In this case, though, I think it is safe to say that it is certain (even by very strict Boglehead standards of certainty) that you will in fact make it to the end of life. :sharebeer
In theory, theory and practice are identical. In practice, they often differ.

User avatar
Raybo
Posts: 1623
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

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

Post by Raybo » Sat Jul 16, 2016 2:23 pm

longinvest wrote:Please let me know if I am wrong in my assessment of the "memory" property of McClung's method.
It is easy to conflate research results with real-life results. McClung is attempting to use the data we have to test various withdrawal methods to see how they do when pitted against one another and real-world data. He is fastidious in trying to avoid data-mining mistakes and bias. But, ultimately, he is creating rules that are then strictly followed to a conclusion. There is no way to deal with the uncertainties of inflation and investment returns directly, since the future is unknown. Instead, he uses past data is test "reasonable" outcomes on the theory that the future will look something like the past. If this assumption is not true, no amount of back testing or modeling will be accurate or even reasonable.

It makes sense to me that whatever method I use to harvest and investment my retirement pile, it will have to account for the fact that my expenses will vary due to inflation, plus other, currently unknown, factors. In reality, I harvest money from my investments into cash when I need to not January 1st of every year. Further, I don't have to know how much money I will need in 2025 today. But, if I am doing research on withdrawal rates and methods, then I have to have a way to realistically simulate that. Does this mean any "method with a memory" is useless to me? I find McClung's work to be thorough, thought provoking, well documented, and enlightening. While my future harvesting method will be informed by his work, I expect to implement it in light of the reality I see when it comes time to make harvesting decisions.

Since you so dislike "methods with a memory," what is your suggestion for determining which harvesting method to use for your own retirement?
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

User avatar
Leif
Posts: 2425
Joined: Wed Sep 19, 2007 4:15 pm

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

Post by Leif » Sat Jul 16, 2016 2:27 pm

longinvest wrote: From what I've read of McClung's withdrawal method, in this thread, it has a memory of the past.

Please let me know if I am wrong in my assessment of the "memory" property of McClung's method.
There are bands that are set up around the initial withdrawal rate. The Initial withdrawal rate depends on the market valuation when you start retirement and the length of time you are estimating for withdrawal. 30 year will be one number. 40 year will be a bit less. He even has tables that go out to a 50 year retirement for early retirement. I was surprised that the withdrawal rate did not decrease "much" when going from 30 to 40 to 50 years. Good news for those doing early retirement IF their withdrawal depends on a portion of the REMAINING portfolio, as suggested in the book.

After the initial withdrawal the amount depends on your portfolio value and your remaining portfolio length (age). A lower limit and upper limits are suggested. From the standpoint of the upper limit, it does have a memory. However, the high limit is based on the market valuation when you start. So someone starting in a high market can take less percentage then someone starting in a low market.

He does say you can reset the numbers if a big change is made. However, he warns against this, since it could result in cherry picking a reset to get a higher withdrawal rate. He does say this will increase your risk. No free lunch.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

longinvest
Posts: 2891
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest » Sat Jul 16, 2016 4:37 pm

Raybo wrote:Since you so dislike "methods with a memory," what is your suggestion for determining which harvesting method to use for your own retirement?
I am a big fan of "percent of current portfolio balance" methods with rebalancing (e.g. rebalance while taking withdrawal, which leads to withdraw mainly from bonds when stocks are down, and mainly from stocks when they are up). So, I like constant percentage (CPW), variable percentage (VPW), and similar methods. I have nothing against a little smoothing of withdrawals, as long as it doesn't go too far from a percent of current portfolio balance guideline.

I'm relatively young (in my late 40s), so retirement is still quite far. But, I like to plan long ahead. For my own retirement plan I have a huge bias towards VPW combined with base income. (Search for it in our forums and Wiki). That shouldn't surprise anybody. :wink:
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

NMJack
Posts: 836
Joined: Sun Feb 14, 2016 1:22 pm

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

Post by NMJack » Sat Jul 16, 2016 4:57 pm

longinvest wrote:The thing that annoys me, in all the withdrawal methods that have a "memory of the past" (I'll explain later), is that we end up with a possibility of two retirees of the same age, with the same portfolio and same target allocation, in the same year, which must take different withdrawal/rebalancing decisions.

By "memory of the past", I mean a withdrawal method which bases the current withdrawal decision based on metrics based on the current portfolio state relative to what it was at retirement.

SWR is a prime example of this. Retiree A retires in year X at age 65, and takes a 4% withdrawal. In year X+1, retiree A takes out an amount based on the portfolio's status in year X. So, another retiree B, retiring in year X+1 at age 66, takes a 4.xx% withdrawal (based on a 29-year SWR, a little higher than a 30-year SWR) of his portfolio, regardless of market returns in year X. So, now both retirees A and B have the same age, and the exact same retirement horizon. Let's also assume that they have identical portfolios in year X+1 with an identical asset allocation. What annoys me is that both won't take the same withdrawal. This, in my opinion, is completely illogical.

From what I've read of McClung's withdrawal method, in this thread, it has a memory of the past.

The whole "not rebalance" a portfolio, to avoid selling some asset to buy another, leads to the same illogical situation. Two investors A and B with identical target asset allocations won't rebalance their portfolios identically in the same year, because of their personal investing history. This makes no sense whatsoever to me.

Please let me know if I am wrong in my assessment of the "memory" property of McClung's method.
You make a very valid point, and I am waiting along side you for somebody to provide a reasonable justification.

longinvest
Posts: 2891
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest » Sat Jul 16, 2016 4:59 pm

Leif wrote: However, the high limit is based on the market valuation when you start. So someone starting in a high market can take less percentage then someone starting in a low market.
I have personally no faith whatsoever in anybody's ability to properly valuate the stock market.

If an investor has strong beliefs in valuations, it would make no sense for that person to have a strategic (or traditional) asset allocation; he should use tactical/dynamic asset allocation, instead. That's fine for that investor.

As for me, I won't consider adopting a withdrawal method that throws me into a tactical/dynamic asset allocation model.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

User avatar
Kevin M
Posts: 9781
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

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

Post by Kevin M » Sat Jul 16, 2016 5:09 pm

longinvest wrote:The thing that annoys me, in all the withdrawal methods that have a "memory of the past" (I'll explain later), is that we end up with a possibility of two retirees of the same age, with the same portfolio and same target allocation, in the same year, which must take different withdrawal/rebalancing decisions.
Good point.
Raybo wrote: Since you so dislike "methods with a memory," what is your suggestion for determining which harvesting method to use for your own retirement?
I can add two data points to the conversation.

For my own retirement, I don't use any withdrawal method, but I am in the fortunate position of having a very low withdrawal rate, if I bother to calculate it--maybe ballpark 2.2% based on portfolio, and maybe 1.7% based on net worth (including real estate). This is based on typical annual spending, and does not include, for example, the purchase of an expensive car last year (so probably about doubled my typical annual spending).

I honestly don't even track spending anymore, although I did for a few years starting during the financial crisis, since it helped me not freak out too much about the significant decline in wealth then. I retired at age 55 (in 2007, so just before the financial crisis got really bad) and am now 64. My asset allocation is 30/70 stocks/fixed-income, but I also keep the liability-matching portfolio (LMP) concept in mind to put a lower floor on my safe assets.

I use 5/25 rebalancing bands as a guideline, but also spend down whichever asset class is most over target. My investment policy allows for increasing my stock allocation if and only if we experience another financial crisis, or experience any significant stock decline that raises my anxiety level significantly (hasn't happened since 2009, since this is the only way I'll really know if my willingness to take risk has increased since 2008/2009. I also rebalance into stocks, if they are below target, using proceeds from CDs that mature. I also have some lower-level rebalancing policies that have me rebalancing into and out of a few stock sub-asset classes more often. So I don't have any rule against rebalancing into stocks, as long as it doesn't breach what seems like a reasonable LMP in safe assets.

We also don't use any formal withdrawal rate method for my mom and her husband. They are in their mid 80s, and their residual expenses are about 4.75% of portfolio value, and about half of that if you include the value of their home. What I do to help them feel comfortable is tell them their withdrawal rate based on the IRS Uniform Lifetime table based on my mom's age (they are one year apart in age, she is the youngest), which for 2016 is 7.09%. So they are spending down their portfolio at about 2/3 of the rate computed from the IRS table, which seems extremely safe to me, especially if you add their home equity into the equation.

For what it's worth, we have had a 20/80 stock/fixed-income portfolio for them since we formalized this some years ago, and they added to their international stocks as recently as February of this year to bring them back to target (using cash from a matured CD). I can see us trimming back on the stocks at some point, since they really don't need to take the risk, but we have not set up anything formal for this yet.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Leif
Posts: 2425
Joined: Wed Sep 19, 2007 4:15 pm

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

Post by Leif » Sat Jul 16, 2016 5:14 pm

longinvest wrote:
Leif wrote: However, the high limit is based on the market valuation when you start. So someone starting in a high market can take less percentage then someone starting in a low market.
I have personally no faith whatsoever in anybody's ability to properly valuate the stock market.

If an investor has strong beliefs in valuations, it would make no sense for that person to have a strategic (or traditional) asset allocation; he should use tactical/dynamic asset allocation, instead. That's fine for that investor.

As for me, I won't consider adopting a withdrawal method that throws me into a tactical/dynamic asset allocation model.
I'm relatively young (in my late 40s), so retirement is still quite far. But, I like to plan long ahead. For my own retirement plan I have a huge bias towards VPW combined with base income. (Search for it in our forums and Wiki). That shouldn't surprise anybody. :wink:


The recommended Income harvesting (Prime Harvesting) is similar to VPW. His spreadsheet uses the same ideas of % of remaining portfolio and mortality based. However, unlike yours which goes to zero at the end of term Prime Harvesting does not.

The idea I found new (at least for me) is to allow asset allocation to move with the market. His goal in evaluating different income harvesting methods is to compare the maximum safe withdrawal rate (MSWR) using 2 different US data sources and 2 different International source (one was Japan, which I find interesting). Based on that, higher MSWR has (in the past) been produced by Prime Harvesting then traditional rebalancing.

You do not withdraw from equity while equity is below its inflation adjusted $ point (determined at retirement time). His point is if the market has been bad, over an extended period, you do not withdraw from equities (withdrawals are ALWAYS from FI). Your equity % will increase due to withdrawals from FI. But guess what, when you equity allocations are high the market valuations are low, giving a high expected return on equity. Although sub-optimal, you can set limits of % equity if that makes you nervous (cannot sleep).

Correction:
WR can change substantially based on the current market value. The lowest WR is 3.8%. The highest is 6.3% (60% tile). Within each valuation you can adjust the WR with a tilt.
Last edited by Leif on Sun Jul 17, 2016 5:30 pm, edited 1 time in total.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

longinvest
Posts: 2891
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest » Sat Jul 16, 2016 6:40 pm

Leif wrote: Its more of a nudge then anything else. We are talking a few tenths of a percent change (in the initial withdrawal rate) based on valuation. I don't have a problem with that. Even Bogle changed his asset allocation around 2000 due to valuations. If still not convenced then go with the conservative 0% tilt from his table.
OK, a small nudge is probably similar to some small smoothing that doesn't stray too far from a percent of portfolio balance. That's fine with me, even if it creates the equivlent of a "short-term memory" into the method. (Note that I have not read the book; I am merely commenting based on what I read in this thread).

Leif wrote: The recommended Income harvesting (Prime Harvesting) is similar to VPW. His spreadsheet uses the same ideas of % of remaining portfolio and mortality based. However, unlike yours which goes to zero at the end of term Prime Harvesting does not.
There might be a small misunderstanding of VPW, here. I think that the Wiki is pretty clear about it; VPW is not a "set it and forget" plan; one should revise the plan every few years. Let me cite the Wiki:

https://www.bogleheads.org/wiki/Variabl ... retirement
Every few years, you should review your overall retirement plan. (If you are over 80 years old and your health is better than anticipated, for example, you might want to increase the Last Withdrawal Age beyond its initial 99 value).
I've added the bold and underline.

So, in real life, VPW should never get to zero before the retiree dies. The idea is to set the age when zero is reached beyond the latest likely age of death of the retiree. If I have a reasonable possibility of reaching 114 years old, I just set VPW's last withdrawal age to 119. (VPW's default last withdrawal age is 99).

OK, I'll admit that VPW won't work if the pill of eternal life is invented. But, then, why shouldn't one be in good enough health to contribute to society and get paid for it, as a supplement to whatever SPIAs, and Social Security, and the remaining portfolio would be able to sustain using a constant-percentage withdrawal (CPW) ?
Leif wrote:The idea I found new (at least for me) is to allow asset allocation to move with the market. His goal in evaluating different income harvesting methods is to compare the maximum safe withdrawal rate (MSWR) using 2 different US data sources and 2 different International source (one was Japan, which I find interesting). Based on that, higher MSWR has (in the past) been produced by Prime Harvesting then traditional rebalancing.
I see. For me, it's not the first time I hear about withdrawal methods that move the portfolio with the market.

There's a whole pile of literature about tactical and dynamic asset allocation. Isn't that what "active management" is all about, in the first place? (Where "active" is as defined in William Sharpe's The Arithmetic of Active Management paper).

Without exception, whatever dynamic allocation method is advocated in an academic paper backtests well. The problem is that whenever such a method has been implemented into a mutual fund, in the past, it usually started to fail its outperformance promises.
Leif wrote:You do not withdraw from equity while equity is below its inflation adjusted $ point (determined at retirement time). His point is if the market has been bad, over an extended period, you do not withdraw from equities (withdrawals are ALWAYS from FI). Your equity % will increase due to withdrawals from FI. But guess what, when you equity allocations are high the market valuations are low, giving a high expected return on equity. Although sub-optimal, you can set limits of % equity if that makes you nervous (cannot sleep).
But, this fails the logical test of considering another retiree commencing retirement just after the stock market has dropped. This other retiree, if not dynamically/tactically allocating his assets, will have rebalanced into more stocks, unlike the already retired person. So both, even if they have the same age, same portfolio balance, same retirement horizon, and same target asset allocation, won't have similar allocations, and will probably take different withdrawals. This makes no sense to me.

I am sure that it "feels better" not to sell bonds to buy stocks, when stocks get cheaper fall into an abyss. So, most people will prefer not rebalancing. :wink:
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

User avatar
Raybo
Posts: 1623
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

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

Post by Raybo » Sat Jul 16, 2016 6:49 pm

longinvest wrote:
Raybo wrote:Since you so dislike "methods with a memory," what is your suggestion for determining which harvesting method to use for your own retirement?
I am a big fan of "percent of current portfolio balance" methods with rebalancing (e.g. rebalance while taking withdrawal, which leads to withdraw mainly from bonds when stocks are down, and mainly from stocks when they are up). So, I like constant percentage (CPW), variable percentage (VPW), and similar methods. I have nothing against a little smoothing of withdrawals, as long as it doesn't go too far from a percent of current portfolio balance guideline.

I'm relatively young (in my late 40s), so retirement is still quite far. But, I like to plan long ahead. For my own retirement plan I have a huge bias towards VPW combined with base income. (Search for it in our forums and Wiki). That shouldn't surprise anybody. :wink:
McClurg makes a distinction between how you take money out of your accounts (harvesting) from how much you take out. He recommends a VPW method for determining how much to take out. Prime Harvesting is a method for taking money out of your retirement pile.

You are "a big fan" of maintaining a set AA in retirement. I used to be, too. But, McClung presents data showing it isn't the best method for doing so. Unlike Kevin, I'm not sure my pile will last, so I want to make the best decision regarding harvesting my money. While I am open to other ideas, I find McClurg's work to be a strong argument for changing my approach.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

User avatar
Raybo
Posts: 1623
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

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

Post by Raybo » Sat Jul 16, 2016 7:10 pm

longinvest wrote:(Note that I have not read the book; I am merely commenting based on what I read in this thread).
This does make it hard to respond to your clarifications when I am trying to respond to what is in the book.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

longinvest
Posts: 2891
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest » Sat Jul 16, 2016 7:12 pm

Kevin,
Kevin M wrote: I can add two data points to the conversation.

For my own retirement, I don't use any withdrawal method, but I am in the fortunate position of having a very low withdrawal rate, ...
I like your approach, given that you can afford it and you sleep well at night.

At first sight, your approach looks a lot like Taylor Larimore's method, but with a little more structure (the LMP part).
Kevin M wrote: We also don't use any formal withdrawal rate method for my mom and her husband. They are in their mid 80s, and their residual expenses are about 4.75% of portfolio value, and about half of that if you include the value of their home. What I do to help them feel comfortable is tell them their withdrawal rate based on the IRS Uniform Lifetime table based on my mom's age (they are one year apart in age, she is the youngest), which for 2016 is 7.09%. So they are spending down their portfolio at about 2/3 of the rate computed from the IRS table, which seems extremely safe to me, especially if you add their home equity into the equation.

For what it's worth, we have had a 20/80 stock/fixed-income portfolio for them since we formalized this some years ago, and they added to their international stocks as recently as February of this year to bring them back to target (using cash from a matured CD). I can see us trimming back on the stocks at some point, since they really don't need to take the risk, but we have not set up anything formal for this yet.
Again, this seems like a very robust approach.


I do not believe that there's a single "best" approach to retirement. There are many reasonable ones.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

longinvest
Posts: 2891
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest » Sat Jul 16, 2016 7:28 pm

Raybo wrote:
longinvest wrote:(Note that I have not read the book; I am merely commenting based on what I read in this thread).
This does make it hard to respond to your clarifications when I am trying to respond to what is in the book.
Yet, it could be very valuable for readers of this thread that do not possess a copy of the book to understand the discussion. I don't mind you explaining to me what I have missed.

I have explained that I am annoyed by the "memory" property of his harvesting. I did not say that it does not backtest well. I am a fan of backtesting, but not for the purpose of maximizing wealth or withdrawals*; for me, backtesting is a tool to learn about risk (or whatever you want to call things like volatility and years of low withdrawals).

* That would imply a belief that the past helps predict future outperformance.

I do not believe that any withdrawal method from a portfolio risky assets can insure a spending floor. There exists inflation-indexed SPIAs and Social Security, for that. One could also build a TIPS ladder (see #Cruncher's viewtopic.php?f=10&t=71927&p=2576960#p2576960 for a link to his TIPS Ladder Builder) for a horizon of a maximum of 30 years (could be useful as a bridge until delayed Social Security, or as a bridge until buying a SPIA at 80).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

AlohaJoe
Posts: 3457
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

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

Post by AlohaJoe » Sat Jul 16, 2016 8:36 pm

longinvest wrote:
Leif wrote: Its more of a nudge then anything else. We are talking a few tenths of a percent change (in the initial withdrawal rate) based on valuation. I don't have a problem with that. Even Bogle changed his asset allocation around 2000 due to valuations. If still not convenced then go with the conservative 0% tilt from his table.
OK, a small nudge is probably similar to some small smoothing that doesn't stray too far from a percent of portfolio balance. That's fine with me, even if it creates the equivlent of a "short-term memory" into the method. (Note that I have not read the book; I am merely commenting based on what I read in this thread).
From the chapter on setting an initial withdrawal rate:
Research over the last 20 years shows valuations can predict future long-term returns; however, the research also shows it’s generally difficult to profit from these predictions because they aren’t precise or consistent enough. In the context of retirement, Pfau shows54 valuations are able to predict future withdrawal rates, but again the reliability of these predictions is not strong enough. In a nutshell, market valuations are too unpredictable to be considered reliable, while at the same time too reliable to ignore.
I think he has a good point but I also find it the most problematic chapter, even though he takes a fairly agnostic approach (i.e. he basically suggests picked 3 different valuation metrics (CAPE10, Q, iCAGR20) and averaging their results) and leaves it up to the reader to select how much "tilting" they want to do. Some of the problems:

- He doesn't discuss any of the recent (well, going back a few years now) arguments about CAPE10
- He doesn't give much detail how he picked the 3 valuation metrics (he does say in preliminary research he investigated many others)
- What if the reader prefers to use another valuation metric like http://www.philosophicaleconomics.com/2 ... t-returns/ ? Or Bogle's from "Occam's Razor Redux"?
- The lack of data makes extending it to global markets (which is virtually necessarily if you're building a global portfolio) problematic; only CAPE10 is readily available (although only one source seems to provide it)

That said, the numbers involved are generally pretty small. If you're using a global portfolio then it goes from extremes 3.8% (which we aren't even at right now) to 5.1% (at the bottom of something like the Great Depression). In practice we're mostly going to be talking about the difference between, say, 3.9% and 4.4%.

I think it is also what many people are likely to do anyway, except they would do it without any rigor or factual basis. You can see it here on bogleheads when people say things like, "I think the 4% SWR isn't conservative enough due to today's unique environment so knock it down a bit; I use/you should 3.5%." Why 0.5%? Why not 0.3%? Or 0.7%?
But, this fails the logical test of considering another retiree commencing retirement just after the stock market has dropped. This other retiree, if not dynamically/tactically allocating his assets, will have rebalanced into more stocks, unlike the already retired person. So both, even if they have the same age, same portfolio balance, same retirement horizon, and same target asset allocation, won't have similar allocations, and will probably take different withdrawals. This makes no sense to me.
I don't follow why you say they will probably take different withdrawals. As Leif said earlier, there is no "memory effect", the amount you withdraw is a percentage of your current portfolio value.

They won't have similar allocations but McClung appears to be from the school of thought (he is hardly alone on this) that asset allocation and volatility is the wrong measure of risk for a retiree.
There might be a small misunderstanding of VPW, here. I think that the Wiki is pretty clear about it; VPW is not a "set it and forget" plan; one should revise the plan every few years. Let me cite the Wiki:
It hardly seems fair for you to expect people to read your wiki when you haven't read the book ;)

longinvest
Posts: 2891
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest » Sat Jul 16, 2016 10:05 pm

AlohaJoe wrote:
But, this fails the logical test of considering another retiree commencing retirement just after the stock market has dropped. This other retiree, if not dynamically/tactically allocating his assets, will have rebalanced into more stocks, unlike the already retired person. So both, even if they have the same age, same portfolio balance, same retirement horizon, and same target asset allocation, won't have similar allocations, and will probably take different withdrawals. This makes no sense to me.
I don't follow why you say they will probably take different withdrawals. As Leif said earlier, there is no "memory effect", the amount you withdraw is a percentage of your current portfolio value.
Maybe I was wrong there. Yet, I thought there was a ceiling and a floor, based on an inflation-adjusted amount determined at retirement; this would be a "long-term memory" effect. Maybe I understood this incorrectly?
AlohaJoe wrote:They won't have similar allocations but McClung appears to be from the school of thought (he is hardly alone on this) that asset allocation and volatility is the wrong measure of risk for a retiree.
OK, but then I don't see why a retiree and a non-retiree shouldn't use the same approach to maintaining asset allocation. If one believes in valuations strongly enough to let them impact his asset allocation during retirement, one should probably also let valuations impact his asset allocation during accumulation. If it works for increasing withdrawals, there's no reason it shouldn't work to increase wealth, don't you think?

As I said, I don't believe in valuations. But, on the other hand, I know that many people do believe in them. What I like to see is people trying to be coherent with their beliefs. I don't see the coherency in using traditional asset allocation during accumulation and switching to tactical asset allocation at retirement, without a change in beliefs. Or, maybe I missed something, again?

Let me say that I really like that it is seems to be one of a very few books about retirement which does not go blindly with a brain-dead 4% SWR without taking into account age, horizon, and uncertainty. From what I read in this thread, the author looked at various approaches and advocates flexible (e.g. variable, percent of current assets) and age-related withdrawals. This is a huge improvement over the usual retirement literature (which often doesn't deserve a better name than financial porn).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

jjface
Posts: 2527
Joined: Thu Mar 19, 2015 6:18 pm

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

Post by jjface » Sat Jul 16, 2016 11:30 pm

I have only read the first 3 chapters being a frugal boglehead so keep that in mind.

It was all interesting reading and opened my eyes to how different withdrawal strategies work.

One thing I do not like is the lack of the human element in these studies (which is understandable as they are studies). For instance Bogleheads are recommended to keep to their asset allocation during accumulation and stay the course but many of these "better" withdrawal methods rely on varying asset allocations or tactical asset allocations (I think longinvest mentioned that earlier). I think that can get a lot of people in trouble. Asset allocation is also the way one matches investing to their risk appetite and allowing stocks to grow a larger and larger proportion unchecked fir a period is surely asking human investors to ignore the risk that brings. If we all were robots then 100% stocks through to retirement should work out best but few suggest doing that. Someone in retirement starting off with 50:50 may not feel comfortable letting their stocks go to 75 or 80%.A lot of the outperformance of the discussed methods rely on increased stock allocations which is likely to be undesirable for many retirees to sleep easy at night.

I also do not like the memory effect. Take prime harvesting with an extreme example - we have two people and the first retires in 2007 and the other with the same portfolio as the first at the end of 2007 unfortunately waits a year and is forced to retire near the low point in 2008. The second has a lower start portfolio as the first but they are in the exact same position - both portfolios are the same in 2008. The first will not sell stocks for several years since their start value is high (and prime harvesting compares to 120% of the inflation adjusted start value) but the second will be selling stocks much earlier and quicker as the recovery ploughs on rapidly and exceeds 120% of the inflation adjusted start value very quickly. That seems illogical. Both should instead be taking the same withdrawals from the same asset type as they have the same portfolios and we assume they have the same everything other than the start date. To do this one must focus on the portfolio balance and not making changes by comparing it to something related to an arbritary start value that does not reflect current conditions very well.

I am not sure how the valuation bit in the spreadsheet impacts this - maybe that is an attempt to ensure the initial start value is equalized? Please enlighten me.
Last edited by jjface on Sat Jul 16, 2016 11:44 pm, edited 3 times in total.

AlohaJoe
Posts: 3457
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

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

Post by AlohaJoe » Sat Jul 16, 2016 11:33 pm

longinvest wrote:Maybe I was wrong there. Yet, I thought there was a ceiling and a floor, based on an inflation-adjusted amount determined at retirement; this would be a "long-term memory" effect. Maybe I understood this incorrectly?
The cap and the floor are optional and user-defined (i.e. you can set the floor to 2.25% or 2.5% or whatever else you want). The author explores how strategies perform under various scenarios. For instance, he wonders if apparent good performance of some strategies "is being skewed by dispersing excess portfolio value during strong markets" and finds there is only limited support for having a ceiling (it helps but not by as much as one might initially expect).

That said I don't see how taking into account the retiree's actual lifestyle is illogical. There is very little to support the idea that people can or do tolerate large, constant changes in their annual income (in either direction). You frequently suggest that retirees get a pension or an inflation-indexed SPIA to maintain their spending floor which is exactly this same kind of "memory effect". You've simply made the "memory effect" someone else's problem making it easy to, by definition, say it is out of scope of your preferred strategy. Any strategy (e.g. Guyton's Decision Rules) could do the same and remove their floor.
AlohaJoe wrote:They won't have similar allocations but McClung appears to be from the school of thought (he is hardly alone on this) that asset allocation and volatility is the wrong measure of risk for a retiree.
OK, but then I don't see why a retiree and a non-retiree shouldn't use the same approach to maintaining asset allocation. If one believes in valuations strongly enough to let them impact his asset allocation during retirement, one should probably also let valuations impact his asset allocation during accumulation.
I'm not following how you see valuations affecting asset allocation under the author's suggestions. Could you give a bit more detail (or an example) to help me understand?

In any case, another forum member and I did wonder how McClung's suggestions would perform during the accumulation stage. Neither of us did an exhaustive investigation but at first pass, it does seem to outperform annual rebalancing.

AlohaJoe
Posts: 3457
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

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

Post by AlohaJoe » Sat Jul 16, 2016 11:55 pm

jjface wrote:Someone in retirement starting off with 50:50 may not feel comfortable letting their stocks go to 75 or 80%.A lot of the outperformance of the discussed methods rely on increased stock allocations which is likely to be undesirable for many retirees to sleep easy at night.
I agree. I did a deeper investigation of bond levels with Prime Harvesting: https://medium.com/@justusjp/prime-harv ... .v65h3llcy. In quite a few circumstances the equity levels drift pretty high and, like you, I'm doubtful that -- whatever one may have said at age 50 when picking a strategy -- many would be very comfortable at age 83 with 75% stocks. That said, I think it is also a bit more complex than that in reality.

If I'm 65 with a portfolio of $1,000,000 I'm worried about a 50% drop leaving me with $500,000 affecting the next 40 years of my retirement. But fast-forward during some good times...and I'm 85 with a $2,500,000 portfolio. I'm probably a bit less worried about a 50% drop because my portfolio is much bigger and my horizon is smaller.

And each person's constant relative risk aversion (CRRA) also affects things, which is something that is rarely included in any kind of rigorous way in these kinds of conversation. Jagannathan's "Why Should Older People Invest In Stocks?" has a nice attempt to both include and contextualise CRRA numbers. If you have a CRRA of 2 then you need stocks to return 4.5% more than bonds to consider investing in them. If you have a CRRA of 5 you need stocks to return 11.7% more before you're willing to abandon the safety of bonds. If you have a CRRA of 5 and an investing horizon of 5-years then you would prefer $1 in bonds instead of $1.11 in equities.

I think it would be interesting to try to account for some of these things. How often does a retiree end up with a high equity position...but has also seen enough portfolio growth that are no longer worried about volatility? And how does an individual's risk aversion affect those findings?

jjface
Posts: 2527
Joined: Thu Mar 19, 2015 6:18 pm

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

Post by jjface » Sun Jul 17, 2016 12:02 am

I think that certainly the risk tolerance relationship is not going to be linear with portfolio growth. I can't imagine the feeling of losing $1m in a year (even if it is just on paper) from $2.5m even if I still had $1.5m left at 85!

There comes a point that I'd rather just have $2.5m or whatever you consider a high level in cash and will say bye to the stock market.

Unfortunately I think investing is part analysis and part psychology and dealing with emotions so one cannot obtain the complete picture without considering all of it. I often think that thinking about these things is futile and Taylor has the better method of just keeping things simple to keep the psychology and emotions in check and sticking to a reasonable plan based on sensible/simple analysis. May not be the best but it probably works more universally and consistently.

That was an interesting article you linked - thanks for that. It confirms some of my thoughts with a bit more detailed investigation.

AlohaJoe
Posts: 3457
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

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

Post by AlohaJoe » Sun Jul 17, 2016 1:26 am

jjface wrote:Both should instead be taking the same withdrawals from the same asset type as they have the same portfolios and we assume they have the same everything other than the start date.
I'm not sure that "should" has a place in this. You seem to be getting arguing about a fundamental (philosophical) split between the two main camps of retirement decumulation. In his paper from last year ("Making Sense Out of Variable Spending Strategies for Retiree"), Pfau calls the two camps "decision rule methods" and "actuarial methods". (He mentions a third camp, "dynamic programming computation methods" that our own bogleheads gordoni has been at the forefront of, but it is very new, requires programming, and isn't suitable for "analysis by spreadsheet".)

(He briefly mentions the "Bogleheads" method in his article.)

The "actuarial methods" camp prefers to ignore past history (for the most part; some use history to provide income smoothing; others say if you care about smooth income you should be invested in less volatile assets). Ken Steiner was one of the first to talk much about this much (not a surprise, since he's a retired actuary). VPW and Steiner's approach are basically the same (Steiner came first but VPW was independently reinvented). For whatever reason, bogleheads never talks about Steiner (I think there was one thread ever); I guess he does a poor job of marketing. Not surprising given he's an actuary :D

If the actuarial method fits your mental model, I think that's a perfectly fine choice. Personally, I'm not convinced that discarding all history is necessary or even a good idea, given (as you said earlier) that we need to also account for the reality of human emotions involved in all of this.
jjface wrote:I often think that thinking about these things is futile and Taylor has the better method of just keeping things simple to keep the psychology and emotions in check and sticking to a reasonable plan based on sensible/simple analysis.
Taylor's advice and experience is based on retiring in the single best year to retiree in all of American history. Similarly, we often see people say, "I'm withdrawing 1% and I plan on using Taylor's simple method". When you have a huge margin of safety, then you don't need any rigor or precision. Anything you do will work out fine.

But I don't think that's who any of this is targeted at.

jjface
Posts: 2527
Joined: Thu Mar 19, 2015 6:18 pm

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

Post by jjface » Sun Jul 17, 2016 2:39 am

I'm not sure that "should" has a place in this.
I was merely stating that for a method to be reliable it should treat two otherwise identical persons exactly the same if the only difference is they retire one year apart - one just before a crash and one during the crash (and therefore have different starting values but identical wealth at any given time).

Say person 1 retires at the end of 2007 with $1m stock and $550K bonds and by the end of 2008 he has $600k stocks and $500k bonds

Person 2 is one year younger and retires at the end of 2008 and also has exactly the same 600k stocks and 500k bonds and both follow prime harvesting.

If the next year the value of their stocks became say $900k then 1 would sell bonds and let stocks grow because $900k is nowhere near 120% of $1m adjusted for inflation. However 2 would sell stocks as $900k is more than 120% of $600k adjusted for inflation (assuming a small inflation rate). Remember at the end of 2007 person 2 also had $1m stocks just like person 1. Why should the method treat them differently? They both had the same portfolio value,mix, lifespan etc.

The method should at least take into account that person 2 started after equities crashed so the starting balance reference point is distorted. Similarly for person 1.

User avatar
TimeRunner
Posts: 1313
Joined: Sat Dec 29, 2012 9:23 pm

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

Post by TimeRunner » Sun Jul 17, 2016 9:06 am

I didn't see Roth conversions mentioned in the Table of Contents. Decisions around conversions between retirement and claiming SS will be impactful for me. Is that discussed in the book?
One cannot enlighten the unconscious. | "I like people - I just don't want to be around 'em." - Russell Gordy

User avatar
Leif
Posts: 2425
Joined: Wed Sep 19, 2007 4:15 pm

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

Post by Leif » Sun Jul 17, 2016 9:30 am

Longvest - May I ask if you have read the book? It makes a difference in evaluating your responses.
I am sure that it "feels better" not to sell bonds to buy stocks, when stocks get cheaper fall into an abyss. So, most people will prefer not rebalancing. :wink:
Your right. It certainly feels better, particularly when you are retired, to not spending money from safe assets to rebalance risk assets in a declining market. No question. Remember, tho', this is a retirement "Income Harvesting" method. I would not use it for pre-retirement. I have not retired yet and I just rebalanced into EM at the beginning of the year by selling bonds :happy.

However, for Prime Harvesting you need to accept varying asset allocation. That does not "feel better". Given the two choices, however, I'm more willing to accepting varying AA.

If you look at the many charts in the book, along with the multiple datasets (US and Intl.), and find a way that avoids anti-momentum (selling bonds to buy stocks in a dropping market) and still beats the performance of traditional rebalancing (based on MSWR), then I think it is worth considering.

Update - I see from a later post that you have not read the book.
Last edited by Leif on Sun Jul 17, 2016 10:02 am, edited 5 times in total.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

soboggled
Posts: 901
Joined: Mon Jun 27, 2016 10:26 am

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

Post by soboggled » Sun Jul 17, 2016 9:35 am

If you implement these strategies and have a spouse who isn't up on all this, better assign a computer as your trustee if you suffer any loss of mental capacity or predecease.

User avatar
Raybo
Posts: 1623
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

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

Post by Raybo » Sun Jul 17, 2016 9:44 am

jjface wrote: They both had the same portfolio value,mix, lifespan etc.
They aren't the same age and don't have the same lifespan. As long as we are creating straw men, assume we know that they will both die on the same day. Then, person 1 has had to fund 1 more year of retirement. Why should any method treat these as equivalent?
The method should at least take into account that person 2 started after equities crashed so the starting balance reference point is distorted. Similarly for person 1.
Person 1's AA has gone from roughly 65/35 to 55/45, while person 2 starts with 55/45. Why should two people with different starting AAs, though the same starting totals, invest the same?

Under the constant AA in retirement scenario, person 1 would rebalance to 65/35 by selling bonds to both fund his/her yearly withdrawal and to move his/her stock amount up to $715k. Person 2 would simply sell stocks and bonds in the same 55/45 percentage to fund his/her withdrawal. On January 2, after all these changes have been made, persons 1 and 2 are still in completely different situations.

You appear to be suggesting that person 1 and 2 should do the same thing on January 1, which means you think the best move for person 1 is to change his/her AA as a result of what the market returns in the first year of person 1's retirement. This is the same tactical asset allocation that you say is a bad idea and should be avoided. You can't have it both ways.

Your example doesn't show what you purport it to show.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

User avatar
Raybo
Posts: 1623
Joined: Tue Feb 20, 2007 11:02 am
Location: San Francisco
Contact:

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

Post by Raybo » Sun Jul 17, 2016 9:49 am

TimeRunner wrote:I didn't see Roth conversions mentioned in the Table of Contents. Decisions around conversions between retirement and claiming SS will be impactful for me. Is that discussed in the book?
In a private communication with the author, I asked how Roth conversions might change things. Here is the author's response:
3) You got me on the third question....implications related to converting to
a Roth-IRA are probably outside the scope of my book. In a sense the
conversion is a different kind of hedging based on what future tax code
might look like (i.e. a kind of speculative risk).
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

Post Reply