Pension equate to bond allocation?

[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!

 

[pb4uski]

I do not count my pension as part of my fixed income allocation. In your situation, commonly one would look at the 'gap' of $15k.... spending not covered by SS or pensions... in relation to what you have to fund it.

100% equities where your pension is 80% of your spending doesn't sound crazy to me especially where your gap of $15k is only a 1.9% withdrawal ratio.

Is the pension well funded? Covered by the PBGC? COLAed? Do you have SS as well?

 

[Exrook]

I count the lump sum that I could take in lieu of the annuity as part of my fixed income allocation. I haven't decided yet which I will take when the time comes, but for now this works for me.

 

[pb4uski]

Whether or not to include is an interesting exercise.

Let's take the OP as an example. If you exclude as I suggest in post #2, his WR is 1.9% [($75 spending -$60k pension)/$800k nestegg].

Let's say for discussion purposes that his $60k pension is fixed and is worth $1 million. Now his WR is 4.2% ($75k spending/$1,800k nestegg).

Also, I would suggest that the second calculation is flawed in that the $60k pension is (presumably) fixed and not COLAed and that assuming that the pension is well funded and covered by the PBGC that 1.9% WR is a better measure of the OPs retirement preparedness than 4.2%.

 

[Fedup]

In theory I could be 100% in equities because I have more in income vs expense. Psychological scar? Maybe. I’m unsure of how I would feel if the market tanks 20%. I did buy every dips since I’ve retired but who knows how I feel in 10 years, 20 years when I’m 70 or 80. Feeble mind comes to mind. Not making good decision in old ages.

 

[pb4uski]

I dunno.... here is an 88 yo guy who seems to still make pretty good investing decisions.

 

[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.

 

[TwoByFour]

DW has a pension and it plays no part in how we count assets allocated. It is a cash flow, and really has nothing to do with investments. It does affect our withdrawals though since our withdrawal amount = (budgeted amount) - (total cash flows: SS + pension).

 

[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.

 

[mickeyd]

This is often asked question here over the years. Most folks here do not count a pension as a bond. The amount of the pension (income stream) can easily be deducted from the amount of money any person (you?) requires to live. For example say you need $5,000 to live on each month, but have a $3,000 monthly pension. You only need to look for an added $2000 income source rather than $5000.

 

[RunningBum]

I count my pension as non-equity in my AA but it's about 10% the value of the OP's, so it's not a significant part of anything. I am 56, and find that assigning a cash value to it and my SS benefit is an easier way to determine my withdrawal based on VPW than figuring out how to model spending with the pension at 65, and SS anywhere between 62 and 70. Once I did that, I threw it in with my AA. I calculate my AA with and without, and try to keep it between the two, but close to with them included.

 

[Independent]

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?

This question kind of assumes there is some target asset allocation that is "best" for everyone. I don't think there is.

I'd plug my unique numbers into FireCalc and do a series of runs with different asset allocations. Then see which results look best to me.

 

[Chuckanut]

I consider my modest pension to be a 'phantom' asset. It's real, it's affects me, but I can't touch it. It's value depends upon how long I live.

I do not count it in my AA. But, having it does help me sleep better.

While it is reasonably secure, I have run FireCalc with my benefit reduced by 20% and the modest COLA zeroed out. I survive, but will have to skip hosting you all on my yacht as is my usual practice every May.

 

[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.

 

[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.

 

[gcgang]

I think it's very reasonable to count some kind of NPV of the pension income as a bond allocation. You could even do the same w Social Security. That would allow for much more aggressive investing with other funds.

Lot of different ways to skin a cat.

 

[DrRoy]

My pension covers about 1/3 of our spending. My investment equity AA is 60% leaving the pension out, and 50% if I count it as non-equity.

 

[Oz investor]

I dunno.... here is an 88 yo guy who seems to still make pretty good investing decisions.

he still makes a few bad ones though , and that should be a lesson to us all

( no-one gets it right 100% of the time )

 

[pb4uski]

^^^ perceptive glimpse of the obvious

 

[pacergal]

No, we have our asset allocation separate from our pension. However, having the pension income stream does allow me to have the equity portion a bit higher on our retirement accounts than I would if we didn't have it.

 

[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]

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]

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