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Re: Asset alocation with pension
Old 01-31-2007, 06:01 PM   #21
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Re: Asset alocation with pension

Even though I am almost all in equities now, I wonder about the "consider it a bond" school of thought on pensions. I have a fed pension that will be supplemented by a portfolio. Using the Cut-Throat, maximize spending theory, I would want to ensure the largest SWR from the portfolio that I could manage. The pension does provide a lot of security in a worst case scenario, but I wouldn't want to unnecessarily court frequent years in which I had to cut back spending due to high volatility. Thus if I calculate what WR I want from the portfolio for my lifestyle of choice and - if that starts approaching 4% - shouldn't I add 20 - 30% bonds or so to reduce volatility and allow myself access to some slices to dice to keep my spending on an even keel?
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Re: Asset alocation with pension
Old 01-31-2007, 06:39 PM   #22
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Re: Asset alocation with pension

Quote:
Originally Posted by donheff
Even though I am almost all in equities now, I wonder about the "consider it a bond" school of thought on pensions. I have a fed pension that will be supplemented by a portfolio. Using the Cut-Throat, maximize spending theory, I would want to ensure the largest SWR from the portfolio that I could manage. The pension does provide a lot of security in a worst case scenario, but I wouldn't want to unnecessarily court frequent years in which I had to cut back spending due to high volatility. Thus if I calculate what WR I want from the portfolio for my lifestyle of choice and - if that starts approaching 4% - shouldn't I add 20 - 30% bonds or so to reduce volatility and allow myself access to some slices to dice to keep my spending on an even keel?
Doneff,

That's what I would suggest - to simply minus the pension $$ from your yearly expenses, and use that # as the withdrawal amount from your portfolio. Then, simply keep a couple of years expenses [5,6,15, your call here] in Bonds/CD's [ala Nords].

I think whatever makes you comfortable is applicable here.

One should also note that the COLA, or non COLA, aspect of a pension may influence what the rest of your investments are in. You, for example, don't have to be as concerned about inflation as someone with a fixed pension. A person with a fixed pension may want to use more TIPS, commodities, etc. [i.e. those assets that are more highly correlated with inflation].

Also, for people with corporate pensions, they may want to favor treasury bonds over corporates b/c corporates may suffer more when/if their company goes under and sheds gifts their pension onto the PBGC.

- Alec
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Re: Asset alocation with pension
Old 01-31-2007, 07:54 PM   #23
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Re: Asset alocation with pension

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$58,000 is more in line with what we are spending now. Her pension will be $54,000 and does have a cola and survivor benefits.
You can invest in anything as you desire. All you need is a fixed income of $4,000.
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Re: Asset alocation with pension
Old 01-31-2007, 08:11 PM   #24
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Re: Asset alocation with pension

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You can invest in anything as you desire. All you need is a fixed income of $4,000.
I don't have a problem with spending more.
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Re: Asset alocation with pension
Old 01-31-2007, 08:48 PM   #25
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Re: Asset alocation with pension

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I don't have a problem with spending more.
Back to your original question - you do not need any more bonds. You can simply invest in high dividend stocks or funds and live off the dividends. Also, it might not be a bad idea to have a couple of years of emergency cash in a money market account.
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Re: Asset alocation with pension
Old 01-31-2007, 09:52 PM   #26
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Re: Asset alocation with pension

Which is pretty much what my plan is...
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Re: Asset alocation with pension
Old 02-01-2007, 05:53 AM   #27
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Re: Asset alocation with pension

Quote:
Originally Posted by Spanky
Back to your original question - you do not need any more bonds. You can simply invest in high dividend stocks or funds and live off the dividends. Also, it might not be a bad idea to have a couple of years of emergency cash in a money market account.
This is what I think I'll do. It still puts my after tax allocation at around 80% stocks.

Thanks everyone.
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Re: Asset alocation with pension
Old 02-01-2007, 09:51 AM   #28
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Re: Asset alocation with pension

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Originally Posted by dm
This is what I think I'll do. It still puts my after tax allocation at around 80% stocks.

Thanks everyone.
sometimes figuring out what to do with a pension in Firecalc can be challenging. For example, in my case

receive pension in 2008. No inflation adjustment.
in 2013, pension receives 50% of the CPI increase
in 2018 and thereafter it receives 75% of the CPI increase

dw begins receiving pension in 2011 receives 50% of CPI
in 2016 and thereafter, receives 75% of CPI

tough to do in firecalc. Also, receiving, for example, 50% of the CPI is not the same thing as calling half the pension COLA'd and half not. It's slightly worse than that.

What I have to do is make assumptions of different rates of inflation and "curve-fit" the resulting series. Then figure out a percentage COLA'd and percentage not that results in the closest cash flow, and input that. It works pretty good up until about age 80, then starts to deviate more. I figure by then, most of the other assumptions are shot anyway.
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Re: Asset allocation with pension
Old 02-03-2007, 02:01 PM   #29
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Re: Asset allocation with pension

Here's more thoughts on asset allocation with employment (& pensions) from Roy Weitz at FundAlarm.com. The link will roll off his board in a couple weeks so I'll reproduce it here:

Quote:
: Your portfolio seems devoid of a bond (or similar) position as well as a cash (CD, MM etc.) position. Is this by design or do you not consider cash as part of your portfolio or...?
Roy's answer:
Quote:
It's a good question, and in last year's version of this exercise I addressed it as follows. I still feel basically the same way, though at some point in the next few years I probably will begin to lighten up on stocks, maybe down to the 80-85% range from 100% today.
[Below is from the discussion of my portfolio in the Feb 2006 Highlights and Commentary]
"This is the seventh year in a row that I don't show any bond funds in my portfolio and, from time to time, FundAlarm readers ask me why I've left such a gap......
In general, I feel that bond fund managers don't do a great job managing interest rate risk, which means that bond funds often suffer during periods of rising interest rates (like now).....
Bond funds also help cushion the bumps in a portfolio, which are typically caused by stock funds.....But if you can handle the bumpy ride that comes with owning an all-stock fund portfolio -- and I think I can -- then bond funds don't serve much purpose.....
Another reason for taking a pass on bond funds is suggested by Canadian finance professor Moshe Milevsky.....I can't say that I knew about Milevsky's work before I stopped owning bond funds, but what Milevsky says makes sense......Basically, Milevsky believes that each person's human capital -- which he defines as the present value of future earnings, net of income taxes and expenses -- should be viewed as an asset class, and considered in every personal portfolio allocation......A person who has a relatively secure job (and I'm fortunate to be in that category, I think) can look forward to an assured income stream for a predetermined number of years, which is essentially the description of a high-quality bond.....In a sense, people with secure jobs are bonds, and if they add traditional bonds or bond funds to their portfolios they risk being too heavily invested in that category.....On the other hand, people who work in volatile industries, like technology or finance, are more like growth stocks, and a generous helping of traditional bonds (or bond funds) could help dampen volatility and diversify their portfolios.....Milevsky is still refining his concept of human capital by profession and asset category, to the point where he'll be able to describe a tenured university professor (for example) as "70% inflation-indexed bond, 30% nominal bond".....I'm not sure that this level of precision will do much to help the average investor.....But Milevsky's big-picture insight is a good one, and relatively easy to understand: Each investor's employment situation should be considered as part of his or her portfolio design.
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Re: Asset alocation with pension
Old 02-03-2007, 03:02 PM   #30
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Re: Asset alocation with pension

In short, if you are working for the government or receiving a "nice" pension, you do not need any bonds.
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Re: Asset alocation with pension
Old 02-03-2007, 03:15 PM   #31
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Re: Asset alocation with pension

Nords, et al:

If you going to take your human capital into account as an asset, shouldn't we also take your debts into account?

For example, if you're young with a secure job, and have a huge mortgage, you could be long long-term TIPS or bonds, but short long term mortgage backed bonds, right?

So, the mortgage could cancel out your human capital somewhat. And by the time you pay off the mortgage, your human capital could be very small.

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Re: Asset alocation with pension
Old 02-03-2007, 03:21 PM   #32
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Re: Asset alocation with pension

Quote:
Originally Posted by Spanky
In short, if you are working for the government or receiving a "nice" pension, you do not need any bonds.
I think its pretty straightforward. Trying to figure out what % of specific asset classes is a little too far into the weeds. Prairie dog it a little and figure out WHY you need to hold an asset class.

Most people hold bonds to reduce portfolio volatility, provide steady income, and act as ballast in a period of tough equity conditions. An income, pension or other income stream does the same approximate thing, for many people. Removing the need for the income (ie, reducing debt or spending) also can perform the same function.

So if you have an income stream, little debt, and the ability to reduce your spending for a period of time...you may need a lot less in bonds and other stable income producing assets. Or none at all.
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Re: Asset alocation with pension
Old 02-03-2007, 10:03 PM   #33
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Re: Asset alocation with pension

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Originally Posted by ats5g
If you going to take your human capital into account as an asset, shouldn't we also take your debts into account?
For example, if you're young with a secure job, and have a huge mortgage, you could be long long-term TIPS or bonds, but short long term mortgage backed bonds, right?
So, the mortgage could cancel out your human capital somewhat. And by the time you pay off the mortgage, your human capital could be very small.
You & I may be able to have a conversation about hedging assets & liabilities and balancing maturities & durations, but I suspect that doesn't happen very often among the 20-something crowd or from the mutual-fund reps.

Another perspective would be the young investor who foregoes years of retirement savings (and compounding) in order to pay off a 30-year fixed-rate mortgage early. They better hope they don't deplete their human capital either, because compounding's not going to be able to help them.

I'm sure there's a middle ground between 40-year zero-amortization variable-rate loans and paying off a 15-year mortgage 12 years early.

I should point out that although we'll have our 5.375% 30-year fixed-rate mortgage money invested in a small-cap value index ETF for another 27+ years, we could stomp the next seven years courtesy of PenFed's 6.25% CDs. Not much risk there!
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Re: Asset alocation with pension
Old 02-04-2007, 10:28 AM   #34
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Re: Asset alocation with pension

Nords...your example is perfectly consistent with both reasonable asset allocation strategies for accumulators AND the thesis of using an income stream or reduced debt as "a bond".

Someone who is a 20-something in the accumulation phase should not pay off their mortgage debt early at the expense of investing. Nor should they be holding a bunch of bonds

You're also in an unusual position with regards to your mortgage situation. As a nearly all equities investor with a COLA'd pension and a spousal income, your pension and wifes income act as your "bond". Five or ten bad investing years isnt much of a problem for you...just pay your mortgage and bills from the income stream. Same with the 20-something example I just made.

A traditional ER with no pension or separate income stream, on the other hand, could probably use either a significant emergency cash buffer or a fairly decent allocation to bonds to be able to afford the monthly mortgage payments.

On the flip side, a traditional ER experiencing tough times in the market with no debt gets the benefit of a 'reverse pseudo income stream' in the form of housing payments they dont have to make.
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Re: Asset alocation with pension
Old 02-04-2007, 12:02 PM   #35
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Re: Asset alocation with pension

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Maybe I'll just go with a fairly high stock allocation with the money I have to invest. Something like 85/15.
According to most retirement withdrawal studies, including the one below from the FPA Journal, allocations above 75% stocks aren't actually helpful during retirement.

From the article:
Despite advice you may have heard to the contrary, the historical record supports an allocation of between 50-percent and 75-percent stocks as the best starting allocation for a client. For most clients, it can be maintained throughout retirement, or until their investing goals change. Stock allocations below 50 percent and above 75 percent are counterproductive.


http://www.fpanet.org/journal/articl...p0304-art8.cfm

Bob
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Re: Asset alocation with pension
Old 02-04-2007, 02:36 PM   #36
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Re: Asset alocation with pension

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Originally Posted by Splitter
According to most retirement withdrawal studies, including the one below from the FPA Journal, allocations above 75% stocks aren't actually helpful during retirement.
Most retirement withdrawal studies use pretty narrow definitions of "stocks". In nearly all cases they are referring to US equities, most often the S&P.

If you were to diversify your equity portfolio more broadly, such as in the examples shown on this chart:

[img width=750 height=508]http://gnobility.com/ER/15_Portfolios.jpg[/img]

...the SWR benefits of holding more than 75% equities would probably become apparent.*

Cb
*assuming that we're not in a "this time it's different" era in which the equity premium has suddenly been halved, as so many seem to believe.
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Re: Asset alocation with pension
Old 02-05-2007, 08:30 PM   #37
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Re: Asset alocation with pension

Thanks for the chart, Cb. To retain that info, I need reinforcement occasionally. First saw one in Roger Gibson's book, "Asset Allocation." Note how far left (low deviation) the 4-way portfolio is.
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Re: Asset alocation with pension
Old 02-05-2007, 09:37 PM   #38
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Re: Asset alocation with pension

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Originally Posted by heyyou
Thanks for the chart, Cb. To retain that info, I need reinforcement occasionally. First saw one in Roger Gibson's book, "Asset Allocation." Note how far left (low deviation) the 4-way portfolio is.
I grabbed that from a webcast Roger Gibson gave last May - you listen to him go through a ~20 slide presentataion - here's what I posted on raddr's board a few weeks ago:

"....there's an excellent 58 minute webcast by Roger C. Gibson (author of "Asset Allocation: Balancing Financial Risk", the 4th edition of which is due out shortly)

Here's a link to the webcast:

http://www.vcall.com/CustomEvent/NA0....asp?ID=104143

To launch the presentation click on the webcast titled "The Role Of Commodities in Asset Allocation". You might be prompted for a first and last name & email address, I used two initials and a bogus hotmail addy and the presentation launched."
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