Pension equate to bond allocation?

[RockyMtn]

I use a somewhat hybrid approach. I do count the NPV of my pension as part of my fixed income asset allocation. I do not count the NPV amount when determining withdrawal rate. Rather I subtract the yearly amount of the pension and come up with a WR % of the remaining assets.

In my case the pension doesn't really move the needle one way or another in terms of total assets so I am comfortable with this approach. YMMV!

[VanWinkle]

Quote:

Originally Posted by Fedup He is exceptional and so is Charlie Munger. I can’t believe drinking Coke helps, but apparently it does for these two guys. Maybe I should start drinking Coke.

I'll drink to that!!

VW

[gayl]

I am in the camp of only working with the difference between pension & wants. But then my pension fund is 91.2% funded. If I was Capers @ 74% then I'd rethink

[Huston55]

OP-

I suggest you first decide what ‘Retirement Camp’ you’re in; “SWR” or “Safety First.” The wording of your question implies “SWR” but, that might not be the case. Your answer to this one question will, I think, guide you to a good answer to your question in the OP. Check out this link & peruse Dirk Cotton’s blog; lots of good stuff in there.

The Retirement Café: A Retirement Plan Begins at the End

[gayl]

Quote:

Originally Posted by Huston55 OP- I suggest you first decide what ‘Retirement Camp’ you’re in; “SWR” or “Safety First.” The wording of your question implies “SWR” but, that might not be the case. Your answer to this one question will, I think, guide you to a good answer to your question in the OP. Check out this link & peruse Dirk Cotton’s blog; lots of good stuff in there. The Retirement Café: A Retirement Plan Begins at the End

"The first, explained by Zvi Bodie in The Theory of Life-Cycle Saving and Investing, is often referred to as the life-cycle approach, or sometimes the "safety first" approach. It is based on the principle that you should first secure your minimum acceptable lifestyle by investing in safe bonds, life annuities and the like, and only then risk what's left of your savings in the stock market in hopes of improving your lot." OMG that's me!! The 1st paragraph describes me completely and explains why I did the extra 21 months. It also explains why I don't mind being primarily stocks in retirement accounts while everyone else is bonds

[FI_RElater]

Quote:

Originally Posted by brewer12345 I have a cash balance pension that I count as fixed income at the withdrawal value. This is quite conservative valuation, but it is less than 5% of my total portfolio so it doesn't matter. Briane, if this pension is COLAd and secure, you are sitting pretty. How you count it doesn't matter in that case. Invest the assets as you see fit. If it were me, I would probably do some flavor of 60/40, but anything from 20/80 to 80/20 would probably work. If the pension isn't COLAd I might be inclined to own a bunch of TIPS and equities. If it isn't secure, I would view it as a junk bond.

a “cash value” account isn’t a pension .... (now i’ve got a real pension.... it goes on for my life and for my spouse if I predecease)

{rant} I wish people would use the better term... “cash value account “, then we could say that in the future that they could convert the value (at that time) into an annuity (single or joint life) or convert into IRA or taxable account...{end rant}

[dixonge]

"Social Security’s the greatest fixed income you’ll ever get." - John Bogle


Having said that, we likely won't ever budget our entire pension/SS income so we're completely comfortable going 100% equities w/ the rest of our investment money. By the time we may need that money (presuming inflation has gone haywire world-wide) we can then shift to a more conservative AA.

[Huston55]

OP-

Here’s another good paper on how to ‘incorporate’ your guaranteed income streams (pension, SS, etc.) into your W/D approach. The summary conclusion (which seems obvious but, isn’t always appropriately considered by retirees) is pasted below.

Conclusions
To better serve retirees and those saving for retirement, financial planners need to move beyond heuristic-based initial safe withdrawal rates. Results from this analysis suggest that optimal initial safe withdrawal rates varied significantly when guaranteed income was considered, from approximately 6 percent when 95 percent of wealth was in guaranteed income, versus approximately 2 percent when only 5 percent of wealth was in guaranteed income.

https://www.onefpa.org/journal/Pages...wal-Rates.aspx

[brewer12345]

Quote:

Originally Posted by FI_RElater a “cash value” account isn’t a pension .... (now i’ve got a real pension.... it goes on for my life and for my spouse if I predecease) {rant} I wish people would use the better term... “cash value account “, then we could say that in the future that they could convert the value (at that time) into an annuity (single or joint life) or convert into IRA or taxable account...{end rant}

Rant all you like, seems to be a popular choice these days. But the hybrid pension structure many sponsors went with before they killed them entirely is referred to as a cash balance pension.

[Mulligan]

I only spend about 60-65% of my monthly pension and its cola’d. So I invest my money the way I want to, as I really probably will never spend it anyways. Its part hobby to me.

[Splash]

At any time, I can take my non-cola pension as an annuity or roll the lump sum into an IRA. Because I haven't decided what to do or when, it is easier for me to track the lumpsum value as part of our fixed income assets. The lump sum is 10% of our total portfolio.

75% of our assets are tax deferred. We are 56/57 and planning to do Roth conversions while staying within the ACA MAGI limit. As a result, we will probably not draw my pension until I'm 65 or 70.

[FI_RElater]

Quote:

Originally Posted by brewer12345 Rant all you like, seems to be a popular choice these days. But the hybrid pension structure many sponsors went with before they killed them entirely is referred to as a cash balance pension.

nope.... not pensions [“ a sum of money paid regularly to a person who has retired “]

their were some that did have a true hybrid in earlier years.... minimal “true” pension and additional paid into cash balance funds ( usually related to bonuses or employee event, like employment anniversaries)....
but to call current cash value plans a “pension” is totally disingenuous

[brewer12345]

Quote:

Originally Posted by FI_RElater nope.... not pensions [“ a sum of money paid regularly to a person who has retired “] their were some that did have a true hybrid in earlier years.... minimal “true” pension and additional paid into cash balance funds ( usually related to bonuses or employee event, like employment anniversaries).... but to call current cash value plans a “pension” is totally disingenuous

Whatever you say, kemosabe.

[Brianeboatman]

It's a Nevada State pension

[Brianeboatman]

Quote:

Originally Posted by bada bing It might matter what type of pension you have. The term "pension" covers a pretty broad range of plans. Is it cash balance or defined benefit ? Is it cola'ed or not ? Is it lump sum'able on demand ? I have a cash balance plan that I can withdraw the lump on demand. It accrues the greater of 5% or 30 year treasury rates while in the plan. I count it as FI allocation and it is about 1/2 my 40% total FI allocation. If it was a defined benefit plan that I couldn't withdraw, I'd probably use the "gap" calculation posted by pb4uski instead. Another thought is if your pension is in lieu of SS, like a lot of government pensions are, I wouldn't count it as investment allocation. Allocation recommendations assume SS but don't count it as allocation. Same should hold with a pension in lieu of SS.

OP here. The Nevada State pension has a COLA.

[bada bing]

Quote:

Originally Posted by FI_RElater a “cash value” account isn’t a pension .... (now i’ve got a real pension.... it goes on for my life and for my spouse if I predecease) {rant} I wish people would use the better term... “cash value account “, then we could say that in the future that they could convert the value (at that time) into an annuity (single or joint life) or convert into IRA or taxable account...{end rant}

Except that rolling out a lump sum is no more guaranteed in a cash value pension than it is in a traditional defined benefit plan. In order to offer lump sum options, a cash balance plan has to be above 80% funded. The reason that cash balance plans almost always can offer lump sums and are generally much better funded than defined benefit plans is that both the risk and reward for changing market conditions go to the participants, not the company. For instance, my employer's cash balance pension is currently funded at 127% and has been as high as 150% in the last decade. If you see a private pension plan that is over 100% funded, it is almost certainly a cash balance plan. Just one observation I would have is that it appears that current market trends (rising interest rates) tend to favor being a participant in a cash balance plan over an equivalent defined benefit plan. My calculated annuity amount goes up with interest rates and my cash value increases with interest rate credits that track the 30 year treasury. I also have much better assurance I can withdraw the value if/when it looks like interest rates are on the decline.

I don't seem to be alone in considering my cash balance pension plan a real pension. My mega-corp has named their particular plan the RAPP (retirement accumulation pension plan). If you use google with a search string "cash balance pension", you will come up with millions of hits, with articles from US dept of labor, kiplinger and investopedia at the top of the list. The pdf on the USDoL site is particularly descriptive of the different pension types:
Cash Balance Pension Plans

[friar1610]

Quote:

Originally Posted by Ed B I went through this exercise and come around quickly to subtracting my pension from my total target spending and then ssettled on an AA to fund that smaller amount. But I abandoned the thought that my pension is a bond/fixed income surrogate from an investment point of view. In my case my pension and my wife's SSDI is $60k annually. We budget $80k so I only need my portfolio to provide $20k. Depending on the size of one's portfolio and what WR is required to provide the shortfall after pension, one may choose to be much more aggressive from an AA percentage perspective.

+1

I adopted this way of looking at things a long time ago and it has served me well.

[BeachOrCity]

Firecalc has this option in the second tab. You can choose cola or non cola. That is how I would do it. If the pension has a cash balance option then things are different and you can run an alternate scenario where it is currently part of your fixed income. But that would be an alternate. Be sure to select cola or non cola in firecalc as that will make a huge difference, esp if the pension is a large part of your spending.

[Perryinva]

I guess it all depends on what you consider the reasons for your definition of SWR with regards to AA. I never thought of SWR as defined by necessary income, mainly I guess, because I never had the chance to use FI as RE. Or I should say never had the balls to. To me, SWR is a rate that you COULD use and sustain for your chosen interval. I see people here all the time refer to their “actual SWR” vs a redundant “safe SWR”.

My route, because of the pensions and large SS was always once fixed income exceeded expected expenses, both required and discretionary, then I would retire and the investments would be for added fun money and unexpected costs, due to inflation and health which are basically uncontrollable.. In my feeble mind, it never occured to me until maybe 10 years ago that living off a SWR was any kind of option, so the vast majority was tax deferred. I had to decide WHAT my living and spending standards were going to be, then adjust my retirement date to occur when that income was met and exceeded by my safety margin. I always refer to income as net taxes, not gross. (And that was part of the problem. I never considered any tax advantaged investments. I didn’t even know they existed)

When I was in my 30s or even 40s I never planned to retire once I could generate “x” income from investing. There were just too many unknown variables. Too much faith had to be placed on uncontrollable factors. I knew I didn’t know what Inwould need or want as income in my 60s and beyond. Life had to happen first, or a crapload of money had to come my way!

So I guess I consider that there really are two different SWRs; one where you actually always take out that rate and actually spend it all as income, and one where you CAN take out that amount, but don’t, just keeping track of the running “SWR TOTAL” & tapping it whenever you want. I mean this sincerely. My current working income is income. I don’t add in 4% of what my investments are, and say that’s part of my income. It is still in accumulation mode. DW is already collecting her pensions and SS and it is simply income, of which 75 % of it is invested.

When my retirement rolls around, in 575 days, it is because at that point my pension and investments will/should have reached the point that both of our pensions plus SS (regardless of when I actually take it) easily exceed all types of planned expenses, now that I am at an age and lifestyle that I am satisfied with. I’m just glad that turned out to be under $150k in todays dollars and not something like $200-250k, that I would need to work until I was 70 to reach. I mean, isn’t reaching what ever “level” of income/success you want part of the decision as when to retire? Assuming of course that you actually earn and save enough to meet whatever level you really wanted. It is ludicrous for me to want to live a $500k/yr lifestyle. I never have, and the opportunity never presented itself. I would never be a VP or wall street wiz. But my income & lifestyle fairly exceeds what I and my strata are used to, so I am satisfied.

The major difference now is that the amount invested at my age, is at the point where it fast approaches that it makes no sense to purposely only add to it. The time has comes to withdraw whenever I want, but only at a sustainable average rate, depleting the principal as it makes sense to do based on age and circumstances. If I die before I expect, the amount left is still sustainable for the same number of years for DW, or goes to heirs. I’d be dead, so wouldn’t care. I lived as I wanted. If by, say 90, and much of the savings is gone, as I see fit, which is dependent on what the fixed incomes are compared to expenses at that time, then all is good. Probably way too conservative, but I guess it is so ingrained in me that it would take enormous investments (to me, like 5-10M, not 1-2M) before I could comfortably not care about other income sources as required.

I could never be 100% equities because the swings don’t warrant the miniscule average gains. 60/30/10 is about the most I could go.

[TuborgP]

Quote:

Originally Posted by Brianeboatman I have a question for all you smarter-than-me types. For those of you who have a pension, do you count your pension as a "fixed income" allocation? When I retire, I'm wondering how to handle my pension income as part of my overall asset allocation. My annual spending is about $75k. In retirement, my pension income will be approximately $60k. I'm thinking about keeping ALL my retirement savings in equities - yes, 100%. Does this sound crazy? I will have approximately $800,000 in my retirement savings at the time of my retirement. I guess the alternative would be to separate the two; pension and retirement savings. Do you keep an asset allocation in the retirement savings as, say, 80%/20%? I hope this all makes sense to you. Please reply!

Now retired just over ten years. Both wife and I have pensions. Debated this question for awhile and came to the conclusion NO. Fixed income is just that income and not a investment. This is especially true if your pension and SS income exceed your expenses and you are continuing to save. Staying 100 percent equity is a personal choice. We each stay in the 65-70% equity range for now. At age 70 our time horizon is shortening and the odds over that time of a regression to the mean are good.