Pension in your asset allocation

[target2019]

I calculate my AA both with and without pensions, and simply keep things in between those two levels. Simpleminded, but works for me.

I do similar, in AA spreadsheet calculation. If I wish to exclude, I add a minus calculation.

Our thinking on this aspect changes year-to-year, as confidence in the employer diminishes.

 

[jerryo]

Asset allocation in retirement seems as much subjective as objective, depending very much on one's risk tolerance and the size of one's secure income streams versus (subjectively defined) income needs. My DW and I (59 & 67) have or will have DB pensions (indexed for inflation) & SS that way more than meet our essential expenses. We also have investments that throw off nearly as much income again at "safe" withdrawal rates. So, like Mulligan, it really doesn't matter that much how we allocate our investments. That said, again like Mulligan, we tend to be fairly conservative. While we have about 40-50% of our investments in stock, we also have about 15-20% each in cash, bonds and real estate. I imagine that many others with substantial pensions find themselves in similar situations.

 

[Big_Hitter]

what one normally does is think of the present value of the annuity as a fixed-income stream of payments (i.e. fixed income part of your portfolio)

the subjective part is how to calculate the present value

several assumptions are necessary: discount rate, mortality table, future COLAs (if any), joint life mortality (if any)

 

[Danmar]

what one normally does is think of the present value of the annuity as a fixed-income stream of payments (i.e. fixed income part of your portfolio)

the subjective part is how to calculate the present value

several assumptions are necessary: discount rate, mortality table, future COLAs (if any), joint life mortality (if any)

Agree. Alternatively you can price out an annuity that pays the same amount as your pension. This will tend to increase the value as this figure will include the insurance co profit and sales commissions if any. Again it isn't too important if your estimate of the PV is off by a bit.

 

[pb4uski]

what one normally does is think of the present value of the annuity as a fixed-income stream of payments (i.e. fixed income part of your portfolio)....

While that is one approach for life-contingent pension and annuity benefits, the other... more common approach.... is to consider the pension or annuity benefits as income or a reduction in spending rather than to use the imputed value as a fixed income instrument as you suggest.

While I see the benefits both approaches, I have come to prefer the latter due to its simplicity... IOW, your AA and withdrawals are to cover the gap between spending and income. Also, if you include the imputed value of DB pension benefits or SPIAs as a fixed income instrument, then to be consistent US people should also include SS and for married couples the calculation of the value is not simple, particularly for married couples.

 

[Pilot2013]

Since my pension is a cash value that earns a determined interest each year (determined at the beginning of each year) that I can take as an annuity or lump sum at 65, I have estimated the future value when reviewing my retirement "income" at 65. Until then, I take the YE cash value each year and include it in my AA. Maybe that makes me heavier stocks, but I am ok with that.

 

[Koolau]

I receive a pension and DW and I both receive SS. Conventional wisdom suggests that since we get such a significant proportion of our monthly needs we can take on more risk (aka hold more equities.) We look at it in the reverse. Since we have "enough" income (and assets) why take the extra risk. True, we could end up with more (eventually spend more) with more equities. But we just don't seem to need more. If we can cover inflation with our relatively low equity position, we are happy. YMMV

 

[Perryinva]

That is the way DW views it. Pensions & SS will cover our non discretionary expenses and then some. So why risk the savings. I am more the other way. That is totally discretionary money for fun things, or LTC if our income doesn't cover it. Neither pensions are COLA, and will be around $68k (at my age 62, currently only $55k) plus total SS will be around $60k if I collect at FRA. If it grows enough, it could be used for a vacation home or such. She is already ERed and I am 32 months away (at most), unless I go part time. Which boosts the non DC pension $33/mo per month I work. There is a small lump sum option that is based on non contributing 2% of salary that is invested in 20year Ts. It may only be 55k added to the 401k when I retire at 62. So while I delay filing for SS, and draw the equivalent out, I may be more conservative in equities, but once collecting, and especially when RMDs take effect, 50% equities seems about right for the tax deferred accounts, but I will be higher in my Roth, which should be about $200k at 62. That needs to be used for flexible money to avoid bracket jump if needed.

Nice thread, I actually hadn't thought of simply subtracting the pensions from expenses, and running it that way, because I thought thats what Firecalc ALREADY did accounting for the non COLA aspect of thr pensions with the inflationary aspect of the expenses. Now I have to try it that way...

 

[pb4uski]

That is what Firecalc does... withdrawals are spending less pension (and SS and other income sources).

 

[brett]

For asset allocation purposes we take the estimated NPV of my DB plan and include it as part of our allocation.

 

[gerntz]

What's a pension?

 

[pacergal]

I never included our pension in our asset allocation. It was one leg of our three legged stool: SS, pension, investments.
I included the pension, based on the pension boards estimated calculator amount, in looking at spending needs to determine when we had saved enough to retire.

 

[kcowan]

I use the NPV of all 5 pensions and our RE to doublecheck our AA and to assess how rich we really are! The only direct result of that calculation is that our allocation to equities is higher because the % looks so low!

 

[W2R]

I never included our pension in our asset allocation. It was one leg of our three legged stool: SS, pension, investments.
I included the pension, based on the pension boards estimated calculator amount, in looking at spending needs to determine when we had saved enough to retire.

+1

My pension is pretty tiny, and my SS is not huge. I just subtract both from my spending needs and go from there, without including either in my AA.

 

[supernova72]

I have gone back and forth on this one given I also have a pension (non-COLA). I have chosen to be a bit more aggressive in my 401K AA at 70/30 than the typical "60/40" due to the pension covering 80% of my expenses.

With input from others (including this forum) I'm willing to roll the dice a bit on the 401K. If I don't go back to PT work I'll need to withdraw about 2% annually starting in 2018 to cover taxes and insurance, vacation stuff. Still adjusting to the ER Phase II of my "career". Ha.

 

[Fedup]

I don't think I used Firecalc correctly.

 

[W2R]

I never included our pension in our asset allocation. It was one leg of our three legged stool: SS, pension, investments.
I included the pension, based on the pension boards estimated calculator amount, in looking at spending needs to determine when we had saved enough to retire.

+1

My pension is pretty tiny, and my SS is not huge. I just subtract both from my spending needs and go from there, without including either in my AA.

So I understand what you're saying.......

You choose not to let FireCalc do that automatically? That is, you don't enter your pension + SS and you enter a spending number reduced by those amounts? Is that it?

EEK!!! Where in heaven's name did you get that idea? The topic of the thread is "Pension in your Asset Allocation", not "Pension in FIRECalc".

OF COURSE I enter my pension and SS into FIRECalc. But I thought this thread was about asset allocation.