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Pension and Asset Allocation
Old 10-28-2013, 09:24 AM   #1
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Pension and Asset Allocation

My wife and I have pensions at our current employer. These pensions are funded by our employers, but only earn a small fixed rate each year guaranteed no lower than the 1 year T-Bill rate. The current rate this year is 0.18%. At retirement the amount can be taken as a lump sum, or annuitized.

My question is on figuring this amount into our total allocation plan. It amounts to about 10% of our total investments. I am thinking I should include this amount in our asset allocation plan as a fixed income investment. Anyone see anything wrong with doing that? Or would you not figure this into the AA plan at all?
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Old 10-28-2013, 09:26 AM   #2
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Sounds like a DC pension invested in MM type investments? If so consider it like cash?
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Old 10-28-2013, 09:34 AM   #3
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I think it depends on whether you plan to annuitize it or not. It the annuity option is attractive, then you could reduce your retirement living expenses for the annual annuity benefit in calculating required withdrawals and ignore the value in calculating the nest egg from which you will withdraw funds in retirement. If the lump sum option is more attractive, then you could assume that you will roll it into an IRA and invest the lump sum consistent with your target AA.
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Old 10-28-2013, 09:48 AM   #4
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It will be at least 5-10 years before we fully retire. Right now the annuity is very generous, but they have changed that several times over the years. Since it is currently earning a guaranteed fixed rate, and no plans to leave employer as soon as I would like, is the reason I was considering it on the fixed income side of my AA. Once we quit our jobs and decide to either annuitize or lump sump we could just make any necessary adjustments to AA at that time, right?
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Old 10-28-2013, 11:11 AM   #5
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Once we quit our jobs and decide to either annuitize or lump sump we could just make any necessary adjustments to AA at that time, right?
No right answer but I chose not to include the future annuity in my AA. I had the projected annuity income in the retirement calculations. I did something similar with our house. I never included the value of the house in the retirement savings until after we sold it and invested the proceeds. (At which point expenses were adjusted as well)
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Old 10-28-2013, 11:19 AM   #6
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The decision as to whether or not to include the present value of a pension is a personal one based on individual preferences. In general, most folks I've seen who have a pension (or annuity) that has a COLA kicker or has some tie to bond rates consider the present value of the pension as a bond allocation if they include it in their AA.
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Old 10-28-2013, 11:31 AM   #7
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We include the lump sum amount as a part of the fixed income allocation. I use a short term bond proxy when needed.

The decision whether to annuitize is about five years off.
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Old 10-28-2013, 12:00 PM   #8
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How can the annuity be very generous if the money is only earning 0.18% while you are working?
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Old 10-28-2013, 12:13 PM   #9
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How can the annuity be very generous if the money is only earning 0.18% while you are working?

The pension growth itself is not very generous. I have used the lump sum amount at retirement, and the non cola'd annuity quote through work was quite a bit more that some of the online fixed annuity quotes for the same amount. This would be for my wife who got grandfathered into the old annuity rates. I was not grandfathered with less years of service. My annuity quote from work would almost half of hers with the same lump same and age etc. Needless to say, I would probably take the lump sum for mine. I am hoping they do not change hers before retirement.
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Old 10-28-2013, 12:36 PM   #10
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I have a similar situation. In my retirement projections, I projected the growth of the account from now until when I expect to annuitize it (assuming the annuitization will not be changed) and then included the annuity amount in my projections as any other pension. While I include the account value in my net worth, I do not include the account value in my retirement assets since I intend to annuitize.

In your case for the lump sum, it would be a retirement asset. For your DW, I would include the projected pension benefit similar to a defined benefit pension benefit or SS.
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