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Old 09-04-2010, 02:33 PM   #21
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In other words, without a solid pension there's no way I'd put 80-100% of my portfolio into equities. But if I had a pension which, together with SS, provided at least 100% of my expenses I could easily afford to take that risk.
I think in opposite terms. With a solid pension and SS providing 100% of expenses, I'd be less inclined to take a risk. The higher risk, and presumably higher income, would not be necessary to fund living expenses. Therefore, I'd be more prone to take a very conservative, capital preservation approach.
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NPV in Excel
Old 09-04-2010, 03:24 PM   #22
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NPV in Excel

hello - may I recommend this site for NPV calculations :

NPV - Excel - Microsoft Office
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Old 09-04-2010, 10:01 PM   #23
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Originally Posted by obgyn65 View Post
hello - may I recommend this site for NPV calculations :

NPV - Excel - Microsoft Office
Welcome to Er.org

Thank you for the link.
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Old 09-04-2010, 11:44 PM   #24
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It is not valid to include things like this (NPV of pension, value of house, imputed rental income, etc.) when assessing your asset allocation. All you are doing is fooling yourself, and this will lead you to make faulty decisions.

The reason is that you can only spend a liquid asset. The NPV of a pension isn't spendable. What is spendable is the $X per month you receive.

Ditto for the house. You can't spend the equity in your house. All you can do is convert it to cash by selling it, and then spend that cash. (You can tap the equity with a loan but that doesn't help, because you have to pay it back.) But, unless you are willing to live in a cardboard refigerator box under the overpass then selling the house doesn't do you much good. You have to live somewhere.
?

Assume I have an absolute right to receive a million dollars in 5 years. That is an asset.

There are many kinds of illiquid assets. restricted stock, gold coins some bonds some real estate. They are still "Assets"

Some assets are income producing, some are not.
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Old 09-05-2010, 01:14 AM   #25
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Originally Posted by ziggy29 View Post
In other words, without a solid pension there's no way I'd put 80-100% of my portfolio into equities. But if I had a pension which, together with SS, provided at least 100% of my expenses I could easily afford to take that risk.
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Originally Posted by Purron View Post
I think in opposite terms. With a solid pension and SS providing 100% of expenses, I'd be less inclined to take a risk. The higher risk, and presumably higher income, would not be necessary to fund living expenses. Therefore, I'd be more prone to take a very conservative, capital preservation approach.
You guys have stated a conundrum which I've been struggling to resolve for 10 years. Maybe we can come up with an answer this time.

Right now I'm mostly in Ziggy's camp, but it can get awful volatile there during a bear market. Notice the date on that NPV thread? It was an attempt to rationalize cheer me up that the equity portion of our present net worth was too small to get frustrated about.

Part of it is stewardship, too. If you don't need it, then why not take prudent risks for profit? To take it to extremes, you'd expect Buffett & Gates to be in 100% Treasuries. Yet they keep on investing for the sake of making more money to give away as fast as they can.
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Old 09-05-2010, 06:50 AM   #26
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You guys have stated a conundrum which I've been struggling to resolve for 10 years. Maybe we can come up with an answer this time.

....
Speaking of those approaching FIRE or in FIRE...

The reason this is complicated is that people have multiple goals and are trying to achieve those goals (grow wealth and preserve capital) with risky assets and often a mindset that is a hold over from the accumulation days (versus decumulation).

The risk we are discussing is not total loss (because we would all cash out if we thought that would occur)... we are discussing managing volatility and/or bear markets (down-turn).... assuming we diversify.

Since I am approaching FIRE and have acquired enough to meet our needs, I am more in the preservation of capital camp.

However, I am struggling with this question right now as I prepare to FIRE.
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Old 09-05-2010, 07:03 AM   #27
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I tend to see my COLA pensions as "bonds" as well. But, lately I've been thinking that I should be less aggressive with my asset allocation too. I'm going to try to reach a happy medium. I guess my goal is have enough assets to cover living well and not take any unnecessary above what is required to reach my goal.

The problem is, my military pension doesn't kick in until I'm 60 (in 2026) and my FERS pension is still being "built" as I continue to work. A lot can happen between now and 2026. Taxpayer revolt against civil service pensions is my main concern.
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Old 09-05-2010, 07:11 AM   #28
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With respect to the Ziggy, Purron, Nords conundrum I agree with Chinaco. I was in the Ziggy camp for a long time and still have a high equity portion in our portfolio (73%). But I have gradually moved over to wanting a more conservative AA. The way I know look at it now is the portfolio is intended to fund certain expenses - largely discretionary expenses. I would like to leave an inheritance but I would rather do the discretionary things that the portfolio is intended to fund rather than leave a pile. So it seems sensible to move to a more "normal" AA to reduce volatility. A major drop in portfolio value (say 50% from today's valuation) would cause us to scale back our discretionary activities until the portfolio had time to recover. If that drop was reduced to 25% or 30% we would not need to scale back as much. In other words our orientation is tilted towards consistent spending rather than long term accumulation.

The major dilemma I have now is at what point do I reallocate to the new AA? Wait for DOW 14K to recover to the last high? Assume we are in a new environment with a lower set point and gradually sell off equities? I am inclined toward a middle ground - waiting for a somewhat higher market and then start moving. Oh, the angst of market timing. It will be nice to get to an AA I am happy with and stay there
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Old 09-05-2010, 07:33 AM   #29
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I don't think its a conundrum. Each person has to decide for him or herself the bare minimum they can live on to survive in the style that they want. That income should be in extremely low risk investments including a well funded inflation protected DB pension, or a personally owned home. If you have more assets than that you can go for the "risk reward" trade off.



For me, stock market success would pay for discretionary travel and extras for my kids. . Market goes down, I don't go.
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Old 09-05-2010, 12:35 PM   #30
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Originally Posted by obgyn65 View Post
hello - may I recommend this site for NPV calculations :

NPV - Excel - Microsoft Office
The mechanics of an NPV claculation are very easy. The parameters supplied can be tricky. IMO, for a government full COLA pension a very simple and accurate enough approach is to assume that the COLA offsets the discount rate, and simply add up the sum of all the expected payouts, in today's $$. So you are always dealing with real amounts. You can take whatver life expectancy you anticipate having, or you can use an Excel Monte Carlo plug in to give you an apparently more scientific estimate. You will see that however you figure it, it is worth a hell of a lot.

Fortunately for the recipients voters aren't very smart and they never realized just how much these things are worth.

Ha
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Old 09-05-2010, 02:17 PM   #31
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I'm in the "moderate risk" category, I think, and so I don't consider my pensions as the bond portion of our net worth. I look to what I want the portfolio to deliver as income, plus our ages and time horizons, and set the equity percentage on that. I'm comfortable approximating the age in bonds guideline.

However, I do see the value in adding the NPV of pensions into the total and counting them as the bond portion.
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Old 09-05-2010, 03:15 PM   #32
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It is not valid to include things like this (NPV of pension, value of house, imputed rental income, etc.) when assessing your asset allocation. All you are doing is fooling yourself, and this will lead you to make faulty decisions.

The reason is that you can only spend a liquid asset. The NPV of a pension isn't spendable. What is spendable is the $X per month you receive.
It depends what the purpose of the rest of your portfolio is. In my case it is mostly to provide income during retirement, exactly the same as my pension. So I feel that lumping the two together is fine.

If I were saving for a yacht which cost 1.3million, then it would indeed be a different story.
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Old 09-05-2010, 03:57 PM   #33
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This is an entirely theoretical, navel-gazing, net-worth exercise, of course.
IMO, the crux of the current discussion is the highlighted quote. Two fundamental problems exist with the entire premise of using the NPV of future cash flows as a specific amount that is included amongst currently investible assets as applied to individuals: (1) The discount rate is applied to NPV calculations in order to compare the NPV value vis a vis the opportunity cost of an alternative investment(s) using the same variables. The calculated NPV will determine whether the investment/cash flows will be better, the same or worse than the alternatives. NPV is otherwise a number that is easily modified by changing the discount rate so it clearly will have too much potential variance to be strictly applied with other liquid assets such as cash and marketable securities. (2) Secondly, even if one were to apply the NPV value of cash flows along with other current liquid assets to calculate a current portfolio size to determine asset allocations with, I would submit that most comments in the current discussion are utilizing the "offered-side" value as opposed to the "bid-side" value of the cash flows. The NPV of your cash flows may be "worth" to you a specific amount based on similar annuity calculations, NPV models, etc. but the reality is that to actually have real dollars in hand in exchange for your future cash flows you would have to enter a transaction with firms that deal in monetizing such cash flows. The actual real bid that you will receive for your cash flows vs. the NPV that you would probably like to use for personal net worth calculations will most likely be substantially different.

As a navel-gazing exercise for personal net worth calculations NPV is a decent, easy and happily ego-boosting method. For an honest assessment of current liquid and investible assets, it is a method that is, well, too ego-boosting...
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Old 09-06-2010, 06:42 PM   #34
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Retiree finance has two parts, withdrawals from and cash flows within pensions and portfolios. Just a few percent annual inflation may allow spending only 2/3 the initial cash from a fixed pension (assuming a desire for inflation adjusted spending), with the remainder invested into your portfolio to offset future inflation losses. Alternatively you increase the equity percentage in your portfolio to offset the inflation losses while spending all of the pension cash flow. A truly cola’d pension requires no portfolio changes as it is self supporting against inflation.
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