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Old 12-22-2010, 11:15 AM   #21
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No, the pension is not COLA’d nor is my wife currently 64. For illustrative purposes I used her pension formula to generate the hypothetical fixed payment due from the pension and assumed that the OP desires inflation adjusted spending so as to maintain their lifestyle through retirement (as is commonly used with the 4% + inflation rule). A truly COLA’d pension is a much simpler problem – just spend it (after taxes) as it is contractually obligated to maintain purchasing power. No portfolio allocation is needed to support it. Changing interest rates will change the pension lump sum value – which is why I used nice round numbers, so as to not pretend that there is a high level of precision in this calculation.

Using the 4% + annual inflation rule as a starting point, a $48,000 annual withdrawal from a mixed portfolio required a $1,200,000 portfolio – much more than the $700,000 estimated value of the pension. To maintain the purchasing power of the pension, my wife historically needed an additional $500,000 in her personal portfolio. I set her equity allocation in the illustration at the minimum suggested by withdrawal studies with the intent of generating a cash flow from the pension, bond payments, and stock dividends in excess of withdrawals.

Taking a fixed pension, subtracting some expenses, then taking an inflation adjusted withdrawal from a portfolio is mixing nominal spending and real withdrawals – apples and oranges as I see it.
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Old 12-22-2010, 12:51 PM   #22
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Using the 4% + annual inflation rule as a starting point, a $48,000 annual withdrawal from a mixed portfolio required a $1,200,000 portfolio – much more than the $700,000 estimated value of the pension. To maintain the purchasing power of the pension, my wife historically needed an additional $500,000 in her personal portfolio.
On the surface that sounds sensible but think about it. If the interest rate climate was better for annuities you might find that you could buy it for $650,000. Then you would calculate another $550,000 for your portfolio. Which one is right?
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Old 12-22-2010, 01:26 PM   #23
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I do consider my pension and SS in making AA decisions. Right now, at age 63, I'm running about 50-50. Without the pension and SS, I'd target something on the order of 40 - 60.
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Old 12-22-2010, 01:28 PM   #24
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Taking a fixed pension, subtracting some expenses, then taking an inflation adjusted withdrawal from a portfolio is mixing nominal spending and real withdrawals – apples and oranges as I see it.
FYI, FireCalc does handle a non-cola'd pension plus inflation adjusted portfolio withdrawals correctly.
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Old 12-22-2010, 02:00 PM   #25
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FYI, FireCalc does handle a non-cola'd pension plus inflation adjusted portfolio withdrawals correctly.
I coudln't get it to do it but I don't often use Firecalc so I was probably inputting the variables incorrectly. How about running a 48,000 expense with a non-COLAd 48K annuity and see what FC puts out as a 95% portfolio.
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Old 12-22-2010, 02:09 PM   #26
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I would be interested in views on whether or not to consider pensions or SS in AA.

For example, right now I have a pension from a former employer that I can begin to draw anytime between now and 65. The sweet spot under that plan is about age 60 and I am now 55.

To date in AA, I have totally ignored this "asset".

However, I wonder if I should impute a value for this pension and include that as a fixed income in my AA, which would then result in higher equity positions in my investment accounts, but would still overall remain at my 60% equities/40% fixed income targets.

Do any of you consider pensions to be fixed income for AA purposes?

Also, if it is appropriate for private pension, should we apply the same notion to SS?
I would take a step back and ask "Where did I get my AA? and What am I trying to accomplish with my AA?"

To me, asset allocation is a risk/reward question. My SS an pension give me a base income, so in general I could be willing to take more risk with my invested assets because I have less fear of a down market.

But that doesn't provide any particular number. I think the best way of establishing an AA is to look at the full range of possible scenarios with different AAs and decide which of them "feel right" given my personal risk tolerance. When I do that, I certainly want to include the cash payments from my pension an SS since they are part of my total income.

If, instead of looking at scenarios, I decided to just use a rule-of-the-thumb like bond % = age, then I'd use the pv of my pension and my SS as bonds.
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Old 12-22-2010, 02:22 PM   #27
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I coudln't get it to do it but I don't often use Firecalc so I was probably inputting the variables incorrectly. How about running a 48,000 expense with a non-COLAd 48K annuity and see what FC puts out as a 95% portfolio.
Youbet was correct. I re-did my inputs and it worked this time. FC says a $309K portfolio would handle it. I left the default settings which I think are 75% equities.
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Old 12-22-2010, 02:30 PM   #28
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Youbet was correct. I re-did my inputs and it worked this time. FC says a $309K portfolio would handle it. I left the default settings which I think are 75% equities.
Soooo....... to spend $48k inflation adjusted with a $48k non-cola'd pension, you'd need a $309k supplemental portfolio. (All default values.)


I tell ya, it's hard to overstate the value of a COLA'd pension. Wish I had one!
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Old 12-22-2010, 04:11 PM   #29
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I don't factor pension or SS into my AA.
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Old 12-22-2010, 04:17 PM   #30
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I don't factor pension or SS into my AA.
Ditto. I've always thought of these as income streams separate from what I take from my portfolio. I manage the portfolio in terms of my risk tolerance, and what income I need from it above any other income streams I might have.
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Old 12-22-2010, 04:39 PM   #31
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Here's another discussion of asset allocation in retirement including bonds, pensions, and SS - perhaps with a somewhat different take...

Phantom Bonds Redux
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Old 12-22-2010, 05:57 PM   #32
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.....Maybe the math gurus can calculate how you estimate the cost of an increasing stream of payments starting at about 3% of 48K and increasing by 3% of that plus $48K the next year and so on.
I built an excel model (though there probably is a way the REAL math gurus do it through formulas). A key assumption is the term of the payments and the interest rate while the funds are held and the 3% inflation rate. For example, if I assume payments from age 64 to age 99, and a 5% earnings rate and 3% inflation rate you would need a kitty of $1.2 million at age 64 to pay $48k a year increasing 3% annually and the kitty would be exhausted at age 99. The cost of the annuity is lower because it also factors in mortality (the probability that only 1 year will be paid, 2 years will be paid, etc to 36 payments).
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