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

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

Post by Trophy_Husband » Sat Jan 27, 2018 3:42 pm

I've reached our "number" and am very interested in using the principles in the book. Especially Prime Harvesting as a withdrawal strategy. However, having followed bogle principles for most of my investing life, all of our bond allocation is currently in tax advantaged space (IRAs, 401ks, TSP) and not accessible until I'm 59 1/2. Being that I'm 50 yrs old, that's 9+ years between my planned retirement date and when I can access the bonds.

The only way I can see getting around this, is to cash out my stocks in the Taxable accounts and convert them into bonds and then do the exact opposite for my Tax-advantaged accounts in order to retain my target stock/bond allocation. This would essentially completely upend the bogle principle of placing bonds in Tax-advantaged accounts first.

To add to my dilemma, I'm in the 33% tax bracket and any sales in my Taxable accounts (stocks-to-bonds) would incur an 18.8% capital gains tax. Add to that, the need to pay ordinary tax on bond dividends for the period that the bonds exist in the Taxable account.

This seems to require a lot of upfront inefficiency in order to execute Prime Harvesting. So much so, that I wonder if the tax burden makes the strategy non-viable for early retirees.

Am I missing something? Thoughts?

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

Post by SpaceCowboy » Sat Jan 27, 2018 3:50 pm

To get the liquidity you need to live, you will need to make the withdrawals from taxable regardless if you use Prime Harvesting or another withdrawal method. Offsetting the transactions inside your tax preferenced accounts to make the withdrawal from the bond side is a tax free transaction.
I would stop reinvesting dividends and cap gains distributions in taxable to reduce the amount of sales required that are subject to cap gains.

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

Post by stlutz » Sat Jan 27, 2018 3:54 pm

To add to my dilemma, I'm in the 33% tax bracket and any sales in my Taxable accounts (stocks-to-bonds) would incur an 18.8% capital gains tax.
I'm confused. If you retire are you really going to have $250+ of income to put you in those brackets? Or are you saying that you would take over $250K in gains to adopt the Prime Harvesting strategy?

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

Post by Trophy_Husband » Sat Jan 27, 2018 8:24 pm

stlutz wrote:
Sat Jan 27, 2018 3:54 pm
To add to my dilemma, I'm in the 33% tax bracket and any sales in my Taxable accounts (stocks-to-bonds) would incur an 18.8% capital gains tax.
I'm confused. If you retire are you really going to have $250+ of income to put you in those brackets? Or are you saying that you would take over $250K in gains to adopt the Prime Harvesting strategy?
In order for me to prepare for retirement in 2019, I would need to convert $840k of stocks in my taxable accounts to bonds this year. While still working and earning ~$300K.

Ultimately I won't know what the LTCG Taxes are until I do the conversion, but I suspect they'd be in the tens of thousands of dollars.

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

Post by siamond » Sat Jan 27, 2018 8:34 pm

Trophy_Husband wrote:
Sat Jan 27, 2018 3:42 pm
The only way I can see getting around this, is to cash out my stocks in the Taxable accounts and convert them into bonds and then do the exact opposite for my Tax-advantaged accounts in order to retain my target stock/bond allocation. This would essentially completely upend the bogle principle of placing bonds in Tax-advantaged accounts first.
Well, the idea of placing bonds in tax-advantaged is really valid during accumulation, but is much less necessary when you're retired. During accumulation, bonds in taxable are painful because of the tax consequences of high dividends being distributed then reinvested. During retirement, dividends are welcome for your ongoing expenses, and paying taxes is only fair, so bonds in taxable are much less troublesome.

Anyhoo, back to your real question, no, you do NOT need to convert a big chunk of stocks into bonds in your taxable account. Every year, just sell securities in taxable, and then rebalance across all your accounts (e.g. by performing an exchange in your tax-advantaged account) to the target allocation mandated by Prime Harvesting. Selling stocks in taxable, then swapping bonds for stocks in tax-advantaged, is equivalent to selling bonds. Just do it in a small time window, don't wait between the two steps.

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

Post by AlohaJoe » Sat Jan 27, 2018 9:16 pm

Trophy_Husband wrote:
Sat Jan 27, 2018 3:42 pm
This seems to require a lot of upfront inefficiency in order to execute Prime Harvesting. So much so, that I wonder if the tax burden makes the strategy non-viable for early retirees.
I think you do raise a fair point that an awful lot of investing strategies (well, virtually all of them) hand wave away taxes. I understand why they do it -- in my own testing & simulations I'm lazy and ignore taxes, too -- but I do wish more book authors and professional bloggers made more of an effort to show at least some of the impact of taxes. Should someone bother investing in REITs if they can only do in taxable? What about CCFs (back when those were often recommended)? What about TIPS if you don't have any tax-advantaged space to hold them?

We rarely (never?) see good analyses of those kinds of things. And for early retirees or others with significant taxable portfolios, there's little real guidance to go on.

Prime Harvesting suffers from a similar issue. The key mechanic is "sell 20% of your stocks and buy bonds". For some people that could mean selling $600,000+ of stocks on a single day in order to "harvest". (How many people would really have the fortitude to enter that order with their broker?) A quick back of the envelope calculation gives me....

....If you have a portfolio of that size, then you're receiving probably $50,000+ in dividends and interest, so your capital gains start off in 15% tax bracket. So you'd end up paying something like $120,000 in capital gains on that $600,000 "harvest".

I don't know whether that actually makes the strategy non-viable (my guess is that it remains viable but is less effective) but it is hard to know with certainty without actually back testing it.

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

Post by grabiner » Sat Jan 27, 2018 9:21 pm

siamond wrote:
Sat Jan 27, 2018 8:34 pm
Trophy_Husband wrote:
Sat Jan 27, 2018 3:42 pm
The only way I can see getting around this, is to cash out my stocks in the Taxable accounts and convert them into bonds and then do the exact opposite for my Tax-advantaged accounts in order to retain my target stock/bond allocation. This would essentially completely upend the bogle principle of placing bonds in Tax-advantaged accounts first.
Well, the idea of placing bonds in tax-advantaged is really valid during accumulation, but is much less necessary when you're retired. During accumulation, bonds in taxable are painful because of the tax consequences of high dividends being distributed then reinvested. During retirement, dividends are welcome for your ongoing expenses, and paying taxes is only fair, so bonds in taxable are much less troublesome.
In retirement, it is still more desirable to hold stocks in your taxable account, particularly if you might leave them to your heirs. Suppose that you are in the 24% tax bracket, and withdraw $10,000 from your taxable account.

If this $10,000 was a dividend from a bond fund, the tax is $2400.
If this $10,000 was a qualified dividend from a stock fund, the tax is $1500.
If this $10,000 was a sale of a stock fund purchased for $5000, the tax is $750.
If this $10,000 was a sale of a bond fund, the tax is close to zero.

Thus, it is better to sell your taxable bonds (for a lower tax cost on the sale), and keep your taxable stocks (for a lower ongoing tax cost). (As always, keep your allocation correct; if selling taxable bonds would leave you with too much stock, then you either need to move money from stocks to bonds in your IRA, or sell taxable stocks if your IRA is already all bonds.)
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siamond
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by siamond » Sat Jan 27, 2018 10:12 pm

grabiner wrote:
Sat Jan 27, 2018 9:21 pm
In retirement, it is still more desirable to hold stocks in your taxable account, particularly if you might leave them to your heirs. [...]
I agree, note that I said 'less necessary' and 'less troublesome', not 'unnecessary' and 'perfectly fine'... I mostly wanted the OP to question a bit rules of thumb which tend to apply more during accumulation than during retirement...

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

Post by Kevin M » Sun Jan 28, 2018 10:58 am

Trophy_Husband wrote:
Sat Jan 27, 2018 8:24 pm
In order for me to prepare for retirement in 2019, I would need to convert $840k of stocks in my taxable accounts to bonds this year. While still working and earning ~$300K.
Why? Why not just wait until 2019 when you actually need the cashflow to start selling stocks? In the meantime, stop buying stocks in taxable and use whatever portion of your income you invest in taxable to buy bonds (or CDs) instead? And of course stop reinvesting stock dividends in taxable.

There are ways to tap tax-advantaged accounts penalty-free before age 59 1/2, but if you have a large taxable account, that probably doesn't make sense.

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

Post by kramer » Mon Jan 29, 2018 2:58 am

In order for me to prepare for retirement in 2019, I would need to convert $840k of stocks in my taxable accounts to bonds this year. While still working and earning ~$300K.
I agree with the other posters here. In addition to what has been said, throughout your retirement you will want to take maximum advantage of lower tax brackets by selling some stocks in taxable at low (or zero) capital gains rates and doing IRA to Roth conversions.

The ideal situation would be if you can start growing a Roth IRA, and it may make sense to do an IRA to Roth conversion up to the top of the 24% bracket early in your retirement. You can fill your Roth IRA up with stocks and in the event of a harvest, those are the first stocks you would sell. You can quickly fill it back up with stocks over time as you continue the capital gains process in your taxable account and the IRA to Roth conversion process.

You should do a detailed analysis for your situation, including calculating your marginal tax rates after you and your spouse take social security and are subject to RMDs. Also, don't forget to include the impact of State income taxes and secondary effects like managing income for things like ACA subsidies, student financial aid, and high income Medicare penalties.

As an example of modeling, it probably makes little sense for someone in your situation to do an IRA to Roth conversion up to only the top of the 22% bracket because all of your qualified dividends will be taxed that year at 15% instead of 0% ... so it makes more sense to go all the way up to the top of the 24% bracket and get more of your lifetime conversion over with all at once.

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

Post by 2pedals » Sun Apr 15, 2018 9:57 pm

I have bought this book and am currently reading it.

I am curious if anyone has had the time to review and think about the the subject book. Have you adjusted your retirement planning based on the information provided in this book.

After quickly skimming through the book, the prime harvesting approach and the extended mortality (EM) variable withdrawal method looks very interesting to me. I don't like the lazy portfolio construction (not asset allocation) and recommendation of the book but I do find it interesting. Portfolio selection is rather a personal decision based on preference.

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

Post by AtlasShrugged? » Mon Apr 16, 2018 6:44 am

I am curious if anyone has had the time to review and think about the the subject book. Have you adjusted your retirement planning based on the information provided in this book.
2pedals....I bought this book this month as a birthday present to myself, and like yourself, I am going through it. Yes, I am quite confident that my retirement planning is going to change as a result of this book, and Jane Bryant Quinn's book 'Making Your Money Last". How it will change is the question. But in my gut, I know there is something there. Also, that OmegaNot approach looks sort of interesting.

I am comparing 'Prime' and 'Alternate Prime' to longinvest's VPW. For now, VPW is my default setting, with the 'age' set at 102 (I will never live that long, unless there are breakthroughs in medicine). My cursory look tells me 'Prime' seems better if you have a bequest motive, and VPW if you do not. Also, VPW works best when combined with an income floor (pension, SSA, annuity).

Also want to say this: longinvest has heavily influenced my thinking on allocation. He makes a world of sense when he speaks to having a 50/50 allocation, and a MUCH smoother ride. He is right (I think). Because of longinvest's posts on this topic, I gradually modified my IPS to incorporate a glide path to 50/50 or 55/45 at FRA (have not made up my mind yet). As a complementary way to reinforce longinvest's thoughts on allocation: Bill Bengen in a reddit post indicated having a 55/45 allocation and withdrawing ~4.5% annually would leave you close with what you started - keep in mind, that is basically constant dollar withdrawal which is considered a toxic and spectacularly stupid withdrawal approach by some BHs.

Final point: It would be great if the author could show data through 2017. He cuts off at 2010. Today is 2018. More data now available.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Mon Apr 16, 2018 7:10 am

AtlasShrugged? wrote:
Mon Apr 16, 2018 6:44 am
I am comparing 'Prime' and 'Alternate Prime' to longinvest's VPW. For now, VPW is my default setting, with the 'age' set at 102 (I will never live that long, unless there are breakthroughs in medicine). My cursory look tells me 'Prime' seems better if you have a bequest motive, and VPW if you do not. Also, VPW works best when combined with an income floor (pension, SSA, annuity).
VPW and Prime Harvesting are not comparable, one is a withdrawal strategy and one is not. You have to compare VPW to EM.

VPW doesn't work any better (or worse) with an income floor.

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

Post by siamond » Mon Apr 16, 2018 10:28 am

2pedals wrote:
Sun Apr 15, 2018 9:57 pm
I am curious if anyone has had the time to review and think about the the subject book. Have you adjusted your retirement planning based on the information provided in this book.
I was actually the OP initiating this thread, and expressed a lot of interest for this book, which is well researched, plus the author clearly thinks on his own in a creative manner, which is quite rare. I continue to believe this is an excellent book.

I didn't adjust my retirement plan in any way related to this book though. Neither Prime Harvesting, nor withdrawal methods like EM seemed clearly superior to what I do. Again, I applaud the author's creativity and research, but I just didn't find the case convincing enough. I am happy with a fixed asset allocation for life, to use simple rebalancing to 'harvest' income during retirement, and to use my own VPW/PMT derivative (adding a 'grace' period, and a strong smoothing method) for realistic withdrawals. Been doing that for a few years now. Let's see what happens in the future, life is always a learning experience. I suspect the next crisis will be quite the wake-up call for various harvesting/withdrawal methods users and/or thinkers.

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

Post by dbr » Mon Apr 16, 2018 10:43 am

siamond wrote:
Mon Apr 16, 2018 10:28 am
2pedals wrote:
Sun Apr 15, 2018 9:57 pm
I am curious if anyone has had the time to review and think about the the subject book. Have you adjusted your retirement planning based on the information provided in this book.
I was actually the OP initiating this thread, and expressed a lot of interest for this book, which is well researched, plus the author clearly thinks on his own in a creative manner, which is quite rare. I continue to believe this is an excellent book.

I didn't adjust my retirement plan in any way related to this book though. Neither Prime Harvesting, nor withdrawal methods like EM seemed clearly superior to what I do. Again, I applaud the author's creativity and research, but I just didn't find the case convincing enough. I am happy with a fixed asset allocation for life, to use simple rebalancing to 'harvest' income during retirement, and to use my own VPW/PMT derivative (adding a 'grace' period, and a strong smoothing method) for realistic withdrawals. Been doing that for a few years now. Let's see what happens in the future, life is always a learning experience. I suspect the next crisis will be quite the wake-up call for various harvesting/withdrawal methods users and/or thinkers.
I think it is extraordinarily difficult to come up with a robust way to engineer retirement investment and financial management that is a breakthrough compared to any variety of alternatives including down to seat of the pants. There are just too many uncontrollable and unpredictable factors that influence the outcome and too much variation between what is expected and actual outcome. That doesn't mean that attempts to do these things might not be enlightening.

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

Post by siamond » Mon Apr 16, 2018 10:49 am

dbr wrote:
Mon Apr 16, 2018 10:43 am
I think it is extraordinarily difficult to come up with a robust way to engineer retirement investment and financial management that is a breakthrough compared to any variety of alternatives including down to seat of the pants. There are just too many uncontrollable and unpredictable factors that influence the outcome and too much variation between what is expected and actual outcome. That doesn't mean that attempts to do these things might not be enlightening.
Yup, agreed. The whole domain is incredibly under-researched, and I continue to be in awe of McClung's efforts in this respect.

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

Post by 2pedals » Mon Apr 16, 2018 9:21 pm

siamond, dbr and AtlasShrugged thanks for the posts

I am retiring next year. I have read Wade Pfau's book, "How Much Can I Spend in Retirement?". Pfau and McClung both have given me plenty of help. I like McClung's method and presentation, I just don't know how practical it is to my situation. My feeling is I am going to adjust my plan. I currently have an asset allocation of 45/55 and thinking to boost it to 50/50 or 55/45 and I do like the prime harvesting approach and a endowment hybrid approach that combines fixed and variable withdrawals that Pfau presented. I was attracted to the endowment hybrid approach because it always has a fixed lower limit. The EM method appears to be more sophisticated than the endowment hybrid approach and the floor can set to your essential income rate.

Simond, I agree McClung's book is a outstanding.

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

Post by Broken Man 1999 » Tue Apr 17, 2018 12:22 pm

Well, as usual after reading some of the Boglehead forum comments, I will be ordering Mr McClung's book. I'm satisfied many strengths have been thououghly vetted, so I'm taking the plunge.

I am currently waiting for the last Swedroe book, Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns with Less Volatility by Larry Swedroe and Kevin Grogan. Looks to be back in stock. I haven't bought a book by Larry that I didn't find something useful in it.

I also found Wade Pfau's book, How Much Can I Spend in Retirement?: A Guide to Investment-Based Retirement Income Strategies a very good read. Well researched, many withdrawal strategies discussed

Frankly, having realized at retirement that the figure we had was the figure we had, I haven't stopped reading books such as those listed here. I believe I pick up something useful in almost every financial book I read.

Don't misunderstand, I am in no way obsessing about the retirement planning financials, but I am open minded to things that might tighten the portfolio even more.

We have been very blessed in life, and I'm not about to waste resources at this stage of our life. I'm pretty sure I can offset the book's price easily, given what members have shared already.

Broken Man 1999
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Re: Prime Harvesting anyone?

Post by Lieutenant.Columbo » Sat May 05, 2018 1:06 pm

zzcooper123 wrote:
Mon Jun 06, 2016 6:44 am
I use the Larry portfolio with a rising equity glidepath
zzcooper123,
How do you determine by how much and when to rise the equity allocation of your Larry Portfolio?
Is there any source or BH topic you recommend to learn about your approach?
Thank you.
L.C.
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AtlasShrugged?
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AtlasShrugged? » Sun May 20, 2018 12:18 pm

I am trying to wrap my head around 'tilt'. It is the author's method to adjust the initial withdrawal rate. And there are a bunch of tilts here (0% to 60%). In the book, the author states it might be appropriate to have a 50% or 60% tilt if you are invested in just US equities (pg 228). But right afterward, the author discusses global markets/investing and seems to make the case that having a globally diversified portfolio is safer for a retiree in the long run.

All fine and good, but I am still 'tripping' on what 'tilt' I would want to use. Or does it really matter all that much?

Right now (5/20/2018), using his valuation method, I have these numbers.

Q value: 26952.9 / 24205.8 = 1.113 :: This is a valuation level 4
iCAGR20: 4.817% (August 1995 through April 2018) :: This is a valuation level 2
CAPE10: 32.24 :: This is a valuation level 4
Calc: (4 + 4 + 2)/3 = 3.33 US

Developed Mkt CAPE10: 25.1 :: This is a valuation level 4
Emerging Mkt CAPE10: 17.3 :: This is a valuation level 3
Calc (0.6 * 4) + (0.4 * 3) = 2.4 + 1.2 = 3.6 ROW (rest of world)

Final calc: (3.33 * 0.5) + (3.6 * 0.5) = 1.665 + 1.800 = 3.465 (round to valuation level 3.5). Then you adjust for the amount of equities you hold in international funds. I am about 25% international and the valuation level was adjusted to 3.6 ==> this equates to a withdrawal rate of 3.9% to 4.1% depending on the tilt that you select.

This is where I start to fall apart. I am trying to figure out if a 60% tilt is really all that different from a 10% tilt, and from the looks of it, there really isn't much of a difference here. What am I missing? I mean, the difference here is $2,000 annually withdrawing from a 1MM portfolio. Not to make light of it, but so what. VPW would pull a lot more, no?
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by Dazed&Confused » Sun May 20, 2018 6:25 pm

I don't believe VPW uses valuation metrics to determine initial withdrawal rates. Prime harvesting both lowers the initial withdrawal rates and the range of the initial rates in "tilts" are compressed at higher initial valuations. I assume today we are at the higher end of valuations according to the valuation metrics. For my stock portfolio it was at a 3.4 valuation from the worksheet, with different tilts for valuations from 1 to 4.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by DaufuskieNate » Sun May 20, 2018 6:35 pm

Dazed&Confused wrote:
Sun May 20, 2018 6:25 pm
I don't believe VPW uses valuation metrics to determine initial withdrawal rates. Prime harvesting both lowers the initial withdrawal rates and the range of the initial rates in "tilts" are compressed at higher initial valuations. I assume today we are at the higher end of valuations according to the valuation metrics. For my stock portfolio it was at a 3.4 valuation from the worksheet, with different tilts for valuations from 1 to 4.
There is no reason VPW can't use valuation metrics to determine initial withdrawal rates. Returns are a variable that can be defined in the VPW model.

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

Post by longinvest » Sun May 20, 2018 7:00 pm

Dear DaufuskieNate,
DaufuskieNate wrote:
Sun May 20, 2018 6:35 pm
Dazed&Confused wrote:
Sun May 20, 2018 6:25 pm
I don't believe VPW uses valuation metrics to determine initial withdrawal rates. Prime harvesting both lowers the initial withdrawal rates and the range of the initial rates in "tilts" are compressed at higher initial valuations. I assume today we are at the higher end of valuations according to the valuation metrics. For my stock portfolio it was at a 3.4 valuation from the worksheet, with different tilts for valuations from 1 to 4.
There is no reason VPW can't use valuation metrics to determine initial withdrawal rates. Returns are a variable that can be defined in the VPW model.
There's a good reason not to use valuation metrics to determine initial withdrawal rates; using valuations to set withdrawal rates would lead to a "sell less when high, sell more when low" behavior. That would be a pretty bad investing approach.

The VPW table doesn't change with "valuation metrics".

The volatility of total retirement income (e.g. portfolio withdrawals + stable lifelong non-portfolio income) is best controlled by the ratio of stable lifelong non-portfolio income and the ratio of stocks and bonds in the portfolio. It's futile to try predicting future long-term returns using simplistic metrics. It's best to accept that we don't know future returns and plan accordingly.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Sun May 20, 2018 9:03 pm

Dazed&Confused wrote:
Sun May 20, 2018 6:25 pm
Prime harvesting both lowers the initial withdrawal rates and the range of the initial rates in "tilts" are compressed at higher initial valuations.
Prime Harvesting doesn't do either one of these things. Prime Harvesting has nothing to do with withdrawal rates. You are talking about EM or ECM. Prime Harvesting and EM are very different things.

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

Post by AlohaJoe » Sun May 20, 2018 9:23 pm

AtlasShrugged? wrote:
Sun May 20, 2018 12:18 pm
This is where I start to fall apart. I am trying to figure out if a 60% tilt is really all that different from a 10% tilt, and from the looks of it, there really isn't much of a difference here.
Of course there's a difference. Just look at the first part of the table where the difference between 60% tilt and 10% tilt is the difference between 6.3% withdrawal and 4.3% withdrawal.

What you're seeing is just a natural fall out of what McClung (or anyone else for that matter) means by "tilting". When people build a "tilt" it works like this. (Again, this isn't anything specific to McClung. Anyone who wanted to tilt based on valuations would end up with the same basic concept.)

1. The highest valuations mean the lowest expected future returns. That means the highest valuations should have the lowest starting withdrawal rate. It doesn't matter what amount of "tilt" you have because at the highest valuation everyone will be using the lowest starting withdrawal rate. You can see this by looking at the rows for 3.8, 3.9, and 4.0 on Valuation Level. No matter what your tilt, you use the same withdrawal rate.

2. If valuations aren't at their highest then you can afford to increase your starting withdrawal. How much you want to increase it as valuations drop is how much you are tilting. If you only have a 10% tilt then as valuations drop your withdrawal rate will only go from 3.8% to 4.3%. But if you have a 60% tilt, the the withdrawal rate will go from 3.8% to 6.3%.

In your example, a valuation of 3.5 is near the very top, so we don't expect all of the withdrawal rates -- no matter how much you tilt -- to be close to the minimum of 3.8%.

In short: a "tilt" is just saying "if the market is undervalued, that means future expected returns are higher, which means I can take some risk by increasing my starting withdrawal rate". Since the market is currently not undervalued by the metrics McClung chose, there's not much room to increase the starting withdrawal rate.
VPW would pull a lot more, no?
VPW assumes that future stock returns will be 5% real and bonds will return 1.8% real, so of course it will pull a lot more. If you think stocks will return 2% and bonds will return 0% then go to the "Table" tab, change "Override" from "No" to "Yes" in the VPW Parameters for Long-Term Growth Trends and put in the numbers you think that current valuations warrant. If you do that, then VPW will drop from a 4.8% withdrawal in the first year to 3.4% in the first year.

It is possible to update those numbers every year in the VPW spreadsheet as your beliefs about valuations and future returns change.

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

Post by marcopolo » Sun May 20, 2018 10:20 pm

AlohaJoe wrote:
Mon Apr 16, 2018 7:10 am

VPW and Prime Harvesting are not comparable, one is a withdrawal strategy and one is not. You have to compare VPW to EM.
Is there a good comparison of VPW vs EM (and/or ECM) somewhere? I was a bit surprised this long and informative thread did not look at that (maybe i missed it). It seems Prime Harvesting may or may not add much value as a mechanism to implement the withdrawals. It seems to me that it might be just as important to consider how to choose the amount to withdraw and see how that decision is impacted by use of Prime Harvesting. Reading the thread it appears all the analysis was done using either constant withdrawal percentage or VPW. It would be interesting to see how those compare to EM and ECM.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Sun May 20, 2018 10:50 pm

marcopolo wrote:
Sun May 20, 2018 10:20 pm
AlohaJoe wrote:
Mon Apr 16, 2018 7:10 am

VPW and Prime Harvesting are not comparable, one is a withdrawal strategy and one is not. You have to compare VPW to EM.
Is there a good comparison of VPW vs EM (and/or ECM) somewhere? I was a bit surprised this long and informative thread did not look at that (maybe i missed it).
Hmmm....looking back in the thread I don't immediately see anything either. I've written a few blogs comparing them. Here are two:

https://medium.com/@justusjp/harvesting ... 61f323a5fc
https://medium.com/@justusjp/wer-inputs ... 6e3bb72e78

(This is just one of many charts from the above links....so don't take it as the final, definitive word on your question.)

Image

There is no one definitive measure of what is best, so sometimes EM comes out ahead and sometimes VPW comes out. And sometimes Stout & Mitchell's method or just using IRS RMDs comes out ahead. And quite often Bengen's Floor-to-Ceiling does very well.

If you pick any of the top 4 or 5 variable withdrawal strategies you'll do fine. Overall I'd say that the lack of a floor or way to smooth income tends to hurt VPW compared to many other strategies. Markets do seem to bounce back and VPW tells you to explicitly not count on that -- but since it does happen most of the time, strategies with a floor or gradual income changes outperform those without in many scenarios. But the differences tend to be very small in the grand scheme of things and it is hard to know which exact strategy would be "best" until you're lying on your deathbed and can look back on things.

Personally, I think that PMT based schemes are "the best". They are transparent in their construction. They don't rely on historical fitting of data. They are easy to understand. They are flexible. They are easy to adjust for personal circumstances or tastes. (Maybe you need to plan a 45 year retirement instead of a 35 year retirement.) They can pretty easily handle things like "I want to leave a bequest of 10% of my current portfolio" or "It may be irrational but I don't want my portfolio to drop below $1 million if I can avoid it". They can incorporate valuations, if that's your thing. They can handle when the wife is 20 years younger than the husband. They can handle things like "I'd rather spend more now when I'm in my 60s and active than later when I'm 85 and rarely leave the house".

Sure, you can do all of that with other strategies but it tends to be in a very ad hoc way. I don't really like ad hoc when there's a non-ad-hoc alternative.

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

Post by longinvest » Sun May 20, 2018 11:53 pm

Dear AlohaJoe,
AlohaJoe wrote:
Sun May 20, 2018 9:23 pm
VPW assumes that future stock returns will be 5% real and bonds will return 1.8% real, so of course it will pull a lot more.
This is false. VPW doesn't assume that future stocks returns will be 5% real and future bonds returns will be 1.8% real.

VPW needs fixed internal growth trends for stocks and bonds to avoid "sell less when high, sell more when low" behavior.

A way to understand a growth trend is to view it as a growth rate that is lower than high returns and higher than low returns. In other words, when stocks have just crashed, their future growth should likely be higher than the stocks growth trend. Similarly, when stocks are in a bubble, their future growth should likely be lower than the stocks growth trend. A growth trend is just an imprecise wild-ass guess (WAG). Why 5% real and 1.8% real? Because nobody was able to provide me with better WAGs than using long-term historical world-wide stocks and bonds returns since 1900.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international) stocks / (nominal/inflation-indexed) long-term bonds | VCN/VXC/VLB/ZRR

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

Post by longinvest » Mon May 21, 2018 12:25 am

The best time to sell stocks is when they are in a bubble, and the worst time is just after they've crashed. Trying to smooth withdrawals by selling less (lower percentage) when stocks are expensive during a bubble is equivalent to invest the non-withdrawn money into bubbly stocks. After the crash, this additional money will have melted along with stocks. Withdrawing more (higher percentage) after a crash hurts a portfolio at the worst time.

One robust way to protect money, in a stocks bubble, is to put it into bonds (of average short or intermediate duration, to limit volatility). Doing this perfectly is a problem, though; it would require knowing when stocks are in a bubble; unfortunately we only know after the fact.

Fortunately, the Bogleheads investment philosophy provides a solution. It suggests to never try timing the market, but to adopt a strategic asset allocation instead (like a 50/50 stocks/bonds allocation). This results in a good-enough portfolio and leads to sell more stocks when they are "expensive", and sell less stocks when they are "cheap" when rebalancing to keep the portfolio's asset allocation on target (when using VPW with a fixed growth trend, or when using the constant-percentage withdrawal method).
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AtlasShrugged? » Mon May 21, 2018 6:02 am

In short: a "tilt" is just saying "if the market is undervalued, that means future expected returns are higher, which means I can take some risk by increasing my starting withdrawal rate". Since the market is currently not undervalued by the metrics McClung chose, there's not much room to increase the starting withdrawal rate.
AlohaJoe....You're awesome. I read this and everything just clicked. So thank you! I have learned a lot from your posts, and especially like the graphs you put out there.

Let me ask what is maybe a dumb question. CAPE10 is one of the valuation metrics. Isn't CAPE10 about to decline several points because we are dropping 2008 from the calculation? I tend to think it won't have a big effect on the calculation I did, since it is one of three metrics. But I am wondering if my thinking is right about this.

When I look at your chart above, and maybe this is not correct, but my thoughts are that when looking at the harvesting efficiency rate (that is what the chart is, right), it is basically "pick 'em" for VPW and the methods to the right.
VPW assumes that future stock returns will be 5% real and bonds will return 1.8% real, so of course it will pull a lot more. If you think stocks will return 2% and bonds will return 0% then go to the "Table" tab, change "Override" from "No" to "Yes" in the VPW Parameters for Long-Term Growth Trends and put in the numbers you think that current valuations warrant. If you do that, then VPW will drop from a 4.8% withdrawal in the first year to 3.4% in the first year.
Holy Cow! :shock: Ok, so you can make the growth assumptions more conservative if you want. I have not played with adjusting that table. But this is good for me to know. I figure I have 10-15 more years (Health permitting and God willing) to figure it all out. :happy
“If you don't know, the thing to do is not to get scared, but to learn.”

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

Post by longinvest » Mon May 21, 2018 6:54 am

Dear AtlasShrugged?,
AtlasShrugged? wrote:
Mon May 21, 2018 6:02 am
VPW assumes that future stock returns will be 5% real and bonds will return 1.8% real, so of course it will pull a lot more. If you think stocks will return 2% and bonds will return 0% then go to the "Table" tab, change "Override" from "No" to "Yes" in the VPW Parameters for Long-Term Growth Trends and put in the numbers you think that current valuations warrant. If you do that, then VPW will drop from a 4.8% withdrawal in the first year to 3.4% in the first year.
Holy Cow! :shock: Ok, so you can make the growth assumptions more conservative if you want. I have not played with adjusting that table. But this is good for me to know. I figure I have 10-15 more years (Health permitting and God willing) to figure it all out. :happy
Here's what I wrote about this:
longinvest wrote:
Sun May 20, 2018 11:53 pm
AlohaJoe wrote:
Sun May 20, 2018 9:23 pm
VPW assumes that future stock returns will be 5% real and bonds will return 1.8% real, so of course it will pull a lot more.
This is false. VPW doesn't assume that future stocks returns will be 5% real and future bonds returns will be 1.8% real.

VPW needs fixed internal growth trends for stocks and bonds to avoid "sell less when high, sell more when low" behavior.

A way to understand a growth trend is to view it as a growth rate that is lower than high returns and higher than low returns. In other words, when stocks have just crashed, their future growth should likely be higher than the stocks growth trend. Similarly, when stocks are in a bubble, their future growth should likely be lower than the stocks growth trend. A growth trend is just an imprecise wild-ass guess (WAG). Why 5% real and 1.8% real? Because nobody was able to provide me with better WAGs than using long-term historical world-wide stocks and bonds returns since 1900.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international) stocks / (nominal/inflation-indexed) long-term bonds | VCN/VXC/VLB/ZRR

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

Post by AtlasShrugged? » Mon May 21, 2018 8:24 am

Why 5% real and 1.8% real? Because nobody was able to provide me with better WAGs than using long-term historical world-wide stocks and bonds returns since 1900.
longinvest....Yep, I read your post. The snippet above made me smile. On another note, a response you made to me some time ago makes more and more sense as I think about it. That 50/50 allocation does make for a much smoother ride.
“If you don't know, the thing to do is not to get scared, but to learn.”

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

Post by marcopolo » Mon May 21, 2018 8:44 am

AlohaJoe wrote:
Sun May 20, 2018 10:50 pm
marcopolo wrote:
Sun May 20, 2018 10:20 pm
AlohaJoe wrote:
Mon Apr 16, 2018 7:10 am

VPW and Prime Harvesting are not comparable, one is a withdrawal strategy and one is not. You have to compare VPW to EM.
Is there a good comparison of VPW vs EM (and/or ECM) somewhere? I was a bit surprised this long and informative thread did not look at that (maybe i missed it).
Hmmm....looking back in the thread I don't immediately see anything either. I've written a few blogs comparing them. Here are two:

https://medium.com/@justusjp/harvesting ... 61f323a5fc
https://medium.com/@justusjp/wer-inputs ... 6e3bb72e78

(This is just one of many charts from the above links....so don't take it as the final, definitive word on your question.)
Thank you AlohaJoe. Always find your analysis very informative. I will take a look at the blog posts you linked.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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

Post by longinvest » Mon May 21, 2018 9:05 am

Dear AlohaJoe,
AlohaJoe wrote:
Sun May 20, 2018 10:50 pm
I've written a few blogs comparing them. Here are two:

https://medium.com/@justusjp/harvesting ... 61f323a5fc
https://medium.com/@justusjp/wer-inputs ... 6e3bb72e78
I like that the withdrawal methods were applied on various asset allocations, including a balanced allocation, in your comparisons.
Last edited by longinvest on Mon May 21, 2018 11:42 am, edited 7 times in total.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by AlohaJoe » Mon May 21, 2018 9:06 am

AtlasShrugged? wrote:
Mon May 21, 2018 8:24 am
That 50/50 allocation does make for a much smoother ride.
Joe Tomlinson has written a few articles in AdvisorPerspectives on smoothing withdrawals.
These authors (Siegel & Waring) contended that withdrawals should adjust immediately for changes in the underlying portfolio and should not be smoothed out or deferred. They pointed out that a series of bad investment years and keeping withdrawals too high can permanently impair a retirement plan. If a smoother pattern of withdrawals is desired, they argue for solving the problem by lowering the stock allocation in the underlying portfolio.

My expectation before doing the modeling was that Waring and Siegel’s no-smoothing approach would produce the best outcomes. [...] I expected that applying smoothing techniques would give rise to the types of problems Waring and Siegel warned about. But sometimes research produces surprises.

The top two rows are upside measures, and 40% smoothing produces better outcomes than reducing the stock allocation.

We see that the smoothing approach in the middle column wins out over the stock-reduction approach in the right column.

However, the results caution against following the Waring/Siegel advice and rejecting smoothing. The ARVA approach that they recommend produces excellent results in generating retirement income, but adding smoothing further improves the approach.
Image

Source: https://www.advisorperspectives.com/art ... ithdrawals

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

Post by siamond » Mon May 21, 2018 11:31 am

AlohaJoe wrote:
Sun May 20, 2018 10:50 pm
Personally, I think that PMT based schemes are "the best". They are transparent in their construction. They don't rely on historical fitting of data. They are easy to understand. They are flexible. They are easy to adjust for personal circumstances or tastes. (Maybe you need to plan a 45 year retirement instead of a 35 year retirement.) They can pretty easily handle things like "I want to leave a bequest of 10% of my current portfolio" or "It may be irrational but I don't want my portfolio to drop below $1 million if I can avoid it". They can incorporate valuations, if that's your thing. They can handle when the wife is 20 years younger than the husband. They can handle things like "I'd rather spend more now when I'm in my 60s and active than later when I'm 85 and rarely leave the house".
That is a perfect summary of the conclusions I reached. A strong theoretical basis, a simple base formula that you can easily customize, and then a solid dose of pragmatism and flexibility, this all goes a long way. There is no one-size-fits-all solution, just a spectrum of possibilities. Pick the ones that you deem the most suitable to your own situation (for both AA and withdrawal system), something you truly believe in, and then stick to *your* plan.

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

Post by Dazed&Confused » Mon May 21, 2018 9:07 pm

AlohaJoe wrote:
Sun May 20, 2018 9:03 pm
Dazed&Confused wrote:
Sun May 20, 2018 6:25 pm
Prime harvesting both lowers the initial withdrawal rates and the range of the initial rates in "tilts" are compressed at higher initial valuations.
Prime Harvesting doesn't do either one of these things. Prime Harvesting has nothing to do with withdrawal rates. You are talking about EM or ECM. Prime Harvesting and EM are very different things.
You are correct, its EM or ECM. I used the wrong terminology as I had observed this behavior in the downloadable worksheet and have only read the first 3 chapters available in pdf form. The book is on order so that I can read the sections on EM and ECM.
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Re: [Book: Living off Your Money, by M. McClung (Prime Harvesting)]

Post by munemaker » Tue May 22, 2018 7:23 pm

Trophy_Husband wrote:
Sat Jan 27, 2018 8:24 pm
In order for me to prepare for retirement in 2019, I would need to convert $840k of stocks in my taxable accounts to bonds this year.
The recommended approach when approaching retirement is to gradually shift from stocks to bonds on a glide path, not move them all at once.

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