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- Joined
- Jun 25, 2005
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I wanted to draw attention to a new paper by Zachary S. Parker in the Journal of Financial Planning: Income-Harvesting Strategy: Acheiving Inflation-Adjusted Income from a Lump-Sum Asset
This paper describes an algorithm to accomplish what its title states. The algorithm consists of the use of 4 different accounts:
1. Income guarantee account consisting of say laddered CDs and/or bonds, an SPIA, or money market funds. The interest and dividends from this account are spent every year, but you can also spend some of the other money in this account. It should be good for 4.5 to 8 years of all your spending needs. The account has about 25% of your total assets.
2. Equity withdrawal account consisting of equities (no fixed income) in a typical slice-and-dice asset allocation of equities. Withdrawal are made from this account to replenish the Income guarantee account unless there is a 5% or more decline in the value of this account. This account has 30%.
3. Equity harvest account consisting of equities as in the previous equity account. Only gains are harvested from this account. If the account has no gains, then no money is taken from this account. In years with gains, then some of the gains are harvested as needed to other accounts. This account has about 34% of your initial assets.
4. Derivative Protection account consisting principal protected assets with maturities of less than one year such as CDs or very short term bonds. 10% of one's initial assets are in this account. This account is used only in a one-year or consecutive two-year period when the equity harvest account declines by 30% or more. The money gets transfered to the equity harvest account.
OK, this looks like a 65% equities, 35% fixed income asset allocation to me. And it also looks like a Buckets approach. What I found interesting was the algorithm of how to move money among the accounts, the testing and the goal of the testing described in the paper: 90% success rate, initial assets doubled in 25 years and relatively high (> 5%) initial withdrawal rate.
Maybe some of y'all can read the article and make comments on it?
Maybe it can become an algorithm for a withdrawal scheme in FIREcalc?
This paper describes an algorithm to accomplish what its title states. The algorithm consists of the use of 4 different accounts:
1. Income guarantee account consisting of say laddered CDs and/or bonds, an SPIA, or money market funds. The interest and dividends from this account are spent every year, but you can also spend some of the other money in this account. It should be good for 4.5 to 8 years of all your spending needs. The account has about 25% of your total assets.
2. Equity withdrawal account consisting of equities (no fixed income) in a typical slice-and-dice asset allocation of equities. Withdrawal are made from this account to replenish the Income guarantee account unless there is a 5% or more decline in the value of this account. This account has 30%.
3. Equity harvest account consisting of equities as in the previous equity account. Only gains are harvested from this account. If the account has no gains, then no money is taken from this account. In years with gains, then some of the gains are harvested as needed to other accounts. This account has about 34% of your initial assets.
4. Derivative Protection account consisting principal protected assets with maturities of less than one year such as CDs or very short term bonds. 10% of one's initial assets are in this account. This account is used only in a one-year or consecutive two-year period when the equity harvest account declines by 30% or more. The money gets transfered to the equity harvest account.
OK, this looks like a 65% equities, 35% fixed income asset allocation to me. And it also looks like a Buckets approach. What I found interesting was the algorithm of how to move money among the accounts, the testing and the goal of the testing described in the paper: 90% success rate, initial assets doubled in 25 years and relatively high (> 5%) initial withdrawal rate.
Maybe some of y'all can read the article and make comments on it?
Maybe it can become an algorithm for a withdrawal scheme in FIREcalc?