[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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siamond
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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.
“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 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
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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