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Fixed allocations --- Adjusted for SS, Pension,etc
Old 09-13-2008, 04:41 AM   #1
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Fixed allocations --- Adjusted for SS, Pension,etc

I think this topic may have been discussed before. Perhaps indirectly.

How many of you that run portfolios with fixed asset allocations use your pensions and SS as bond allocations and run the portfolio a bit rich on the equity allocation.

I know many target a 60/40 mix. But if your pensions and ss were considered, it would be more like a 50/50 mix.

Of course the formula is a little complex when on considers that one spouse will likely die first. Which could be an argument for maintaining a bit more stock early on for increased growth.

Please share your thoughts.
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Old 09-13-2008, 08:59 AM   #2
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Retiring last year (age 59) and drawing income from my (small) VA disability check, along with income from an SPIA (and withdrawls from my portfolio), I do not look at those "guaranteed income" (VA/SIPA) sources as a "bond". Nor when I start drawing SS (another 9.5 years, at age 70) will that be considered as part of my "investment mix".

Currently, in "early retirement", I keep a 60/40 mix AA (with the 40 split between bonds and MM securities for my current income). Around age 70, as I start taking SS (and RMD's come into play), I'm considering to become more conserative (50/50 or 40/60).

Regardless of the AA, I still don't consider any "outside income sources" (e.g. any income not derived from my portfolio) to influnce my AA.

Others may (and will) disagree. However "in my life" this works for me.

-Ron
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Old 09-13-2008, 09:13 AM   #3
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Without considering my pension my allocation is:

Equities: 75%
Fixed Income: 15%
Cash: 10%

That looks kind of risky for a retiree but...

When I include the bond equivalent that would generate my pension income the allocation becomes:

Equities: 38%
Fixed Income: 57%
Cash: 5%

On that basis it looks very conservative. Since my COLA'd pension covers virtually all of my non-discretionary spending, the high allocation to equities still allows me to sleep well at night. Even it the market fell to zero, I would still have a roof over my head and three squares a day.

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Old 09-13-2008, 11:58 AM   #4
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I hav e a Cola'd pension that covers 90% of our expenses, so I have a 80/20 equities/bonds allocation.

Rick
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Old 09-13-2008, 02:57 PM   #5
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Not retiring until next year, but my plan is to maintain a 45:55 (equity:fixed) asset allocation in my investment portfolio only, counting my Vanguard accounts, TSP, and bank account, but not counting my SS, pension, house, etc.

I will probably only withdraw 2-3%. I admit it; I'm a little bit risk averse.
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Old 09-13-2008, 09:01 PM   #6
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When I retire next year my AA will be 57/43. I'm not planning on figuring in my pension and SS. If I did the AA would be 22/78.
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Old 09-14-2008, 01:52 PM   #7
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I do not consider SS in my asset mix. But then, I'm about 20 years away from claiming SS.
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Old 09-14-2008, 04:42 PM   #8
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I don't translate my pensions and SS into a bond equivalent when looking at portfolio asset allocation. To generate the ~$30k/year I need from my portfolio I only look at it as needing to creating that income stream. Since it is only about 30% of my overall needs and I'll need less than a 3% withdrawal rate I have it conservatively invested at 40/50/10.

When calculating net worth I do include pensions but not SS as I consider them equivalent to annuities.
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Old 09-16-2008, 07:44 AM   #9
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I calculate the amount of cash I would be willing to sell my social security pension entitlement for today, if that were possible, and include that amount as cash in my asset allocation. There are about twenty years to go until I can draw my pension, but if I were retired and taking an income today I would currently allow myself about $2000 per year extra withdrawals, as a result of including it. $2000 is the real return from interest that I would expect to make if the cash value weren't notional. (If I were withdrawing today my policy would be to spend only investment income, not capital.)
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Old 09-16-2008, 07:58 AM   #10
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Mechanically, it seems a good way to do this is to assume your pensions are expense reducers rather than conventional investments, rather than trying to back them into some asset class where they don't quite fit.

With a pension you can use a lower SWR from your conventional portfolio.
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Old 09-16-2008, 01:45 PM   #11
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Quote:
Originally Posted by Rich_in_Tampa View Post
Mechanically, it seems a good way to do this is to assume your pensions are expense reducers rather than conventional investments, rather than trying to back them into some asset class where they don't quite fit.
Agreed. I don't think it's really practical to try to classify a pension as FI. If I did this with my military pension then I could invest my entire portfolio in equities and still would only end up at about a 28% equity allocation. And since I need some income stream from my portfolio to reach the income level I want/need, that won't work. I need a cash/FI portion to draw from and to weather downturns in the market without having to fall back to spending just the pension.

Instead I will just figure how much I want/need from my portfolio to get my income to the level I want over and above the pension, and then manage my portfolio to produce that amount.

For example if I have a 40K pension and want 16K more from a 400K portfolio (4% WR), then I manage my AA based on that assumption. That's essentially what FireCalc is figuring too.

I will grant you that I can be more aggressive with my AA (and my WR) since I could always get by on the pension alone if things got ugly. So I keep that in mind. But that's not the same as classifying it as FI.

Quote:
With a pension you can use a lower SWR from your conventional portfolio.
That all depends on your porfolio value and the additional amount of income you want from it of course. Just having a pension doesn't necessarily mean you can use a lower WR.
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Old 09-16-2008, 02:44 PM   #12
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IMO, anyone under the age of 50 shouldn't even include SS at all, not even as an "implicit bond allocation". If it comes to today's younger people without means testing punishing those who save for themselves, IMO it's just a bonus.
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Old 09-16-2008, 03:39 PM   #13
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IMO, anyone under the age of 50 shouldn't even include SS at all, not even as an "implicit bond allocation". If it comes to today's younger people without means testing punishing those who save for themselves, IMO it's just a bonus.
Hey - I'm in my early 60's and I don't count on SS ..

I guess you can say that I'm "over prepared"...

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Old 09-17-2008, 03:37 AM   #14
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I sympathise up to a point with the point of view that says treat it as a bonus or insurance policy that makes one's position better than the spreadsheet shows. However I suspect the real reason people do that is that they just don't have a way of incorporating it they are comfortable with. To a certain extent I'm guilty of that, as the value I place on it undervalues it, because my (British) SS pension entitlement will switch from being inflation-linked to earnings-linked in a few years time, and I've valued it only on the basis of it being inflation-linked. My reason for not including the extra value is simply that I haven't worked out how to calculate it.

As it happens, if it were inflation-linked, then I think my treatment of it would be appropriate, as far as calculating asset allocations and withdrawal rates are concerned. I'd be interested to hear why not if anyone thinks otherwise.

I believe that for planning purposes we need to reflect everything as accurately as possible, and that means avoiding beneficial inaccuracies (by having off-the-books assets) as much as it does detrimental ones. Once I have my most accurate picture, I can still choose to be cautious by spending considerably less than my central estimate of what is supportable, and building up big reserves to fund unanticipated spending.
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Old 09-17-2008, 04:26 AM   #15
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Anyone using the PV approach to make the income stream look like a bond? If so, what rate do you discount the income streams to get the PV??
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