I've been developing this post on other boards with help from REWahoo, Martha, CFB, Rodmail, James22, Michael, KCowan, & Mike.
I've been trying to put 2008's market meltdown in perspective alongside our total assets. Although it was no fun to watch our equity portfolio drop by over 50%, I was pretty sure that the loss is a minority of our overall balance sheet. All I had to do was to look spouse in the eye and come up with a convincing [-]rationalization[/-] rationale.
Milevsky talks about our "human capital" of lifetime earnings power and pensions as well as savings, and I wanted to try to assess our income streams as equivalent lump-sum dollars. I don't know if CFPs even bother to try to convert cash flows to lump sums for retirement planning.
"Net worth" doesn't accurately describe income from pensions or Social Security, so I tried to calculate their annuity equivalent as part of "present value net worth". For example, I'm receiving my military pension now but its COLA is not easily equated to decades of inflation-adjusted dividend payments from a lump sum. Spouse gets her military pension in 13 years but that's not easily discounted to a present-value lump sum either. Payout options like survivor benefits have even more complications. Defined-benefit pensions have a number of variables. And then there's the financial & legislative uncertainty swirling around Social Security.
Annuity calculators used to be ubiquitous but they seem scarce since AIG's collapse. Vanguard no longer has a website annuity calculator-- instead it's now "Call us for a quote!" There's an annuity calculator at the TSP website (TSP: Annuity Calculator; 2008 Feb 26) and a net-present-value one at Time Value of Money Calculator. I'm still looking for more annuity calculators.
The interesting thing about an inflation-adjusted pension is that its payout is constant inflation-adjusted dollars-- they maintain their hypothetical buying power for the rest of the retiree's life. So the value of an inflation-adjusted pension is the owner's life expectancy. That's great for a military pension because veterans can plug their parameters into a retirement calculator (https://staynavytools.bol.navy.mil/RetCalc/Default.aspx) and multiply the result by the number of years they'll be collecting it. My results were close enough to the TSP annuity calculator, assuming I die in accordance with an actuarial table.
So active-duty military pensions are the simple case of converting cash flows to lump sums. Reserve/National Guard pensions and Social Security are a bit more complicated because we don't get them until later. However military pay is keeping up with the ECI so let's make another (hopefully valid) assumption that future pay dollars will have the same CPI buying power as 2009 dollars. The Social Security benefits calculator spits out its numbers in 2009 dollars, too, and benefits are adjusted at CPI so it doesn't need any discounting either. That means a Reserve/NG pension starts at age 60 and SS at age 62 in inflation-adjusted dollars for the rest of a life expectancy. Again my results were close enough to the TSP's annuity calculator.
The math gets messier for defined-benefit pensions that don't have a COLA. You'd have to take a pension-plan estimate for the year of ER and then discount it to 2009 dollars at some assumed rate of inflation.
After converting cash flows to lump sums, I added in the assessed value of our homes and subtracted the mortgages. I added in the college savings and our ER portfolio's value to get the total "present value net worth".
The interesting numbers are the percentages. As lump sums, my military pension contributes about 27% of our total and spouse's Reserve pension is a tad more. Our total SS is 13%. Our real estate is another 20%. Our equity portfolio has always been less than 20%, even at the 2007 market peak, and never dropped below 10%.
I thought spouse & I had a high-equity ER portfolio. The reality of "present value net worth" is that it's roughly 70% government bonds, 20% REITs, and only 10% equities. Not quite as recklessly aggressive as our brokerage account appears.
I figured that our earnings record, with its years of zeroes, would make our SS hardly worth the bother-- but it's over an eighth of the total. Maybe this is why Milevsky pushes "human capital" and "lifetime asset allocation" so hard.
ERs spend decades analyzing their stock & bond portfolios-- saving money, choosing asset allocations, and minimizing expenses. Then there's coping with the emotional sleep-at-night roller-coaster ride of market volatility. However that might only be a fraction of the reality. Young Dreamers expecting to receive a pension or SS should probably focus on maximizing their annuitized benefits. Because of those annuities, military retirees can easily be overweighted in federal pension bonds. Their other investments can be tilted extremely heavily toward equities, commodities, and real estate.
Our wild-eyed hard-partyin' mortgage debt is only 5% of the total. Military retirees don't need to pay off our mortgages-- we need to get bigger ones. Perhaps even Bernstein would agree that we should go back on margin and start trading options.
Anyway the conclusion is that a 50% meltdown of our equity portfolio isn't so nasty after all-- barely a 10% effect on our overall net worth. Golly gee whillikers, what a relief. I feel better about the market already!
I'm still looking for other annuity website calculators where we can get numbers without having to provide contact info. Post your links to this thread.
I've been trying to put 2008's market meltdown in perspective alongside our total assets. Although it was no fun to watch our equity portfolio drop by over 50%, I was pretty sure that the loss is a minority of our overall balance sheet. All I had to do was to look spouse in the eye and come up with a convincing [-]rationalization[/-] rationale.
Milevsky talks about our "human capital" of lifetime earnings power and pensions as well as savings, and I wanted to try to assess our income streams as equivalent lump-sum dollars. I don't know if CFPs even bother to try to convert cash flows to lump sums for retirement planning.
"Net worth" doesn't accurately describe income from pensions or Social Security, so I tried to calculate their annuity equivalent as part of "present value net worth". For example, I'm receiving my military pension now but its COLA is not easily equated to decades of inflation-adjusted dividend payments from a lump sum. Spouse gets her military pension in 13 years but that's not easily discounted to a present-value lump sum either. Payout options like survivor benefits have even more complications. Defined-benefit pensions have a number of variables. And then there's the financial & legislative uncertainty swirling around Social Security.
Annuity calculators used to be ubiquitous but they seem scarce since AIG's collapse. Vanguard no longer has a website annuity calculator-- instead it's now "Call us for a quote!" There's an annuity calculator at the TSP website (TSP: Annuity Calculator; 2008 Feb 26) and a net-present-value one at Time Value of Money Calculator. I'm still looking for more annuity calculators.
The interesting thing about an inflation-adjusted pension is that its payout is constant inflation-adjusted dollars-- they maintain their hypothetical buying power for the rest of the retiree's life. So the value of an inflation-adjusted pension is the owner's life expectancy. That's great for a military pension because veterans can plug their parameters into a retirement calculator (https://staynavytools.bol.navy.mil/RetCalc/Default.aspx) and multiply the result by the number of years they'll be collecting it. My results were close enough to the TSP annuity calculator, assuming I die in accordance with an actuarial table.
So active-duty military pensions are the simple case of converting cash flows to lump sums. Reserve/National Guard pensions and Social Security are a bit more complicated because we don't get them until later. However military pay is keeping up with the ECI so let's make another (hopefully valid) assumption that future pay dollars will have the same CPI buying power as 2009 dollars. The Social Security benefits calculator spits out its numbers in 2009 dollars, too, and benefits are adjusted at CPI so it doesn't need any discounting either. That means a Reserve/NG pension starts at age 60 and SS at age 62 in inflation-adjusted dollars for the rest of a life expectancy. Again my results were close enough to the TSP's annuity calculator.
The math gets messier for defined-benefit pensions that don't have a COLA. You'd have to take a pension-plan estimate for the year of ER and then discount it to 2009 dollars at some assumed rate of inflation.
After converting cash flows to lump sums, I added in the assessed value of our homes and subtracted the mortgages. I added in the college savings and our ER portfolio's value to get the total "present value net worth".
The interesting numbers are the percentages. As lump sums, my military pension contributes about 27% of our total and spouse's Reserve pension is a tad more. Our total SS is 13%. Our real estate is another 20%. Our equity portfolio has always been less than 20%, even at the 2007 market peak, and never dropped below 10%.
I thought spouse & I had a high-equity ER portfolio. The reality of "present value net worth" is that it's roughly 70% government bonds, 20% REITs, and only 10% equities. Not quite as recklessly aggressive as our brokerage account appears.
I figured that our earnings record, with its years of zeroes, would make our SS hardly worth the bother-- but it's over an eighth of the total. Maybe this is why Milevsky pushes "human capital" and "lifetime asset allocation" so hard.
ERs spend decades analyzing their stock & bond portfolios-- saving money, choosing asset allocations, and minimizing expenses. Then there's coping with the emotional sleep-at-night roller-coaster ride of market volatility. However that might only be a fraction of the reality. Young Dreamers expecting to receive a pension or SS should probably focus on maximizing their annuitized benefits. Because of those annuities, military retirees can easily be overweighted in federal pension bonds. Their other investments can be tilted extremely heavily toward equities, commodities, and real estate.
Our wild-eyed hard-partyin' mortgage debt is only 5% of the total. Military retirees don't need to pay off our mortgages-- we need to get bigger ones. Perhaps even Bernstein would agree that we should go back on margin and start trading options.
Anyway the conclusion is that a 50% meltdown of our equity portfolio isn't so nasty after all-- barely a 10% effect on our overall net worth. Golly gee whillikers, what a relief. I feel better about the market already!
I'm still looking for other annuity website calculators where we can get numbers without having to provide contact info. Post your links to this thread.