Calculating Deferred vs SS vs Cash vs Pension vs Nest Egg Income.

[ShokWaveRider]

I noticed in a post someone types that they has 61% of their Retirement Nest Egg was in IRA/401k (Deferred) type investments/funds.

I was curious how one calculated where SS fit in?

Say a retired household has (single or joint):

$2m in IRA/401k/other Deferred vehicles
$2m in After Tax Investments (Cash)

$5k per month in total household SS income

What percentage does one calculate SS income to be? I feel one HAS to count SS and/or Pensions even though one may be inclined not to. SS Haircut and increases Speculation Notwithstanding.

If one has a Pension, does one calculate that the same as SS assuming it is Monthly or Annually?

Based on above one could say they have 50% of their Nest Egg in After Tax Cash (even if it is invested) and 50% in Deferred 401k/IRA etc. Funds.

My guess would be to take the SS (or Pension) income multiply it by life expectancy (Say 25 Years) Come up with a lump sum and factor it into the mix.

In the Above example, that would make the totals roughly: 36.25%, 36.25% and 27.5% respectively.

 

[Sunset]

I view SS or any other secure pension as a reduction in expenses.

Don't see any value to the percentage as it's not an allocation we can change much.

If we expect to spend $100K per year (made up numbers) and our SS is $40K, then our expenses coming from savings are $60K.

Where our savings is located doesn't enter into much of anything as we don't have control of it. When working we blindly saved into 401K's and IRA's and what was left over went into After Tax savings.

We have since moved some IRA money to Roth via Conversions, but only because it was a good idea for us, and has nothing to do with the % of money in IRA.

I feel any IRA with over $200K is ripe for Roth Conversion IF it can be done at a zero or low tax rate compared to what will be paid when age 72 and collecting SS + RMD + dividends + interest.

 

[pb4uski]

+1 SS is an income stream and not an asset. If I'm alive then I get the income, if not then I don't... same as my pension, except SS is COLAed and my pension isn't .

 

[RunningBum]

What is the purpose of this classification? What action are you taking based on the answer?

 

[ShokWaveRider]

What is the purpose of this classification? What action are you taking based on the answer?

Not sure what or who you are asking.

But If I get 5k from SS and $10k from Nest Egg per month. It gives me a good idea how long the Nest Egg will last. If it last 40 years, we are all good.

 

[RunningBum]

Not sure what or who you are asking.

But If I get 5k from SS and $10k from Nest Egg per month. It gives me a good idea how long the Nest Egg will last. If it last 40 years, we are all good.

Never mind, OP just said it was out of curiosity. I have no input on that.

 

[oldtimer]

Do you increase the current portfolio balances for the same 25 years of SS income? For what practical purpose? Instead look at your portfolio withdrawal amount as x% of your expenses and your SS income is Y% of your expenses, together they equal 100% of your expenses, not a % of your total "nest egg" sources throughout your retirement.

 

[Bigdawg]

"What is the purpose of this classification? What action are you taking based on the answer?"-Runningbum. He was asking you Shockwave

These are your questions: "I was curious how one calculated where SS fit in?"

My answer: I treat it like my pension. Both are COLA for me.

"What percentage does one calculate SS income to be?" Mine is forecasted to be (DW & I combined) 60K. Our other pensions are 100k so do the math (not that the math matters as a %).

"If one has a Pension, does one calculate that the same as SS assuming it is Monthly or Annually?" Yes, monthly and/or annually. Doesn't matter. I could even break it down to 52 weeks of 365 days. Irrelevant.

I am with runningbum. What will this answer change for you? Are there potential actions you will take depending on the/your answer?

 

[ShokWaveRider]

I am with runningbum. What will this answer change for you? Are there potential actions you will take depending on the/your answer?

A: Nothing Just curiosity, what folks do. We are allowed to be curious I hope.
B: None.

Everything one posts does not have to be analyzed so deeply.

 

[Dtail]

+1 SS is an income stream and not an asset. If I'm alive then I get the income, if not then I don't... same as my pension, except SS is COLAed and my pension isn't .

+2

 

[Dtail]

A: Nothing Just curiosity, what folks do. We are allowed to be curious I hope.
B: None.

Everything one posts does not have to be analyzed so deeply.

Agree. It is just conversation in the end.

 

[RetireAge50]

It is fun to think about all the parts. For us it is easier to think of SS and pensions as sources of money to spend (not as part of our portfolio). So when I talk about % of tax deferred it is only referring to our investment portfolio.
The pensions and SS are definitely valuable as they will provide at least 50% of our retirement income.

 

[ShokWaveRider]

I agree it is a source of income as opposed to an asset. Notice I did not include our home in the asset category either.

Again, I was just curious on how folks viewed SS, not that I even classify it as an asset either. But, to me our nest egg is also a source of income, as we are fully retired with no other income.

So if one extrapolates SS to be a % of income, as are the withdrawals from one's nest egg, does it not really amount to the same thing?

....... wait for it.

 

[racy]

During my accumulation phase I never multiplied my salary by my expected years of employment. Now during my decumulation phase I won't do similar with Social Security. Both salary and SS are income, not part of my investment portfolio.

 

[mrfeh]

SS is an income stream. It is not part of one's portfolio.

 

[chassis]

I noticed in a post someone types that they has 61% of their Retirement Nest Egg was in IRA/401k (Deferred) type investments/funds.

I was curious how one calculated where SS fit in?

Say a retired household has (single or joint):

$2m in IRA/401k/other Deferred vehicles
$2m in After Tax Investments (Cash)

$5k per month in total household SS income

What percentage does one calculate SS income to be? I feel one HAS to count SS and/or Pensions even though one may be inclined not to. SS Haircut and increases Speculation Notwithstanding.

If one has a Pension, does one calculate that the same as SS assuming it is Monthly or Annually?

Based on above one could say they have 50% of their Nest Egg in After Tax Cash (even if it is invested) and 50% in Deferred 401k/IRA etc. Funds.

My guess would be to take the SS (or Pension) income multiply it by life expectancy (Say 25 Years) Come up with a lump sum and factor it into the mix.

In the Above example, that would make the totals roughly: 36.25%, 36.25% and 27.5% respectively.

@ShokWaveRider

Calculate the present value any guaranteed income steam, and look at it as a bond position within your total portfolio. When doing this you may come to the conclusion, as many other have, that all investable assets should be in equities, and none in bonds. The reason for this is that SS and pension "have your back" in that it fulfills bond portion of the portfolio. Furthermore, bonds are rubbish in this market.

Play around with discount factors so you understand their effect on the present value calculation. The risk free rate makes sense to me: 2 yr Treasury yield. There is zero risk in SS payments and slightly higher, but low, risk in pension payments.

 

[Doingitwrong]

I calculate a PV for DW military pension, VA disability, and social security to show her that her lack of savings has significant value to us (+$60K per year).
I'd never include it in a personal financial statement, but you can find accountants that will. And they aren't wrong.

The Financial Accounting Standards Board hasn't worked to clear up the issue.

Future Interests
903.15 Future interests are nonforfeitable rights to receive future sums. According to
FASB ASC274-10-35-11, the estimated current value of a future interest should be included in personal financial statements only if it has all of the following characteristics:
a. The right is for a fixed or determinable amount.
b. The right is not contingent on the holder's life expectancy or the occurrence of a particular event, such as disability or death.
c. The right does not require future performance of service by the holder.

903.16 Some accountants have questioned the meaning of “contingent on the holder's life expectancy.” Does this phrase mean that a right to receive an annuity over the remainder of the beneficiary's life is contingent on the holder's life expectancy, and thus should not be included? The authors believe the answer is no. They believe that including a future interest based on a holder's life expectancy is appropriate. However, the life expectancy of the holder is used to determine the amount at which such an interest is included. In contrast, a future interest that is receivable upon attaining a certain age or upon being alive at the time of someone else's death are contingent events and should not be recorded.

Social Security Benefits
903.17 According to nonauthoritative AICPA Technical Q&A 1600.03, social security benefits to be received based on the future life expectancy of an individual should not qualify as an asset in personal financial statements. Both FASB ASC 274-10-35-11, which is discussed at paragraph903.15, and Q&A 1600.03 state that the right to future income which is contingent on the holder's life expectancy or the occurrence of a particular event do not qualify as a recognizable asset for the personal financial statements. The situation discussed in paragraph 903.16 describes when the income is being received currently and the life expectancy is used to determine the value of the income stream. This is analogous to when an individual is drawing social security and the right to the income is no longer contingent on the holder's life expectancy and requires no future performance on the individual's part. Instead, the life expectancy is used only to determine the value of the future income stream. However, if the individual is not yet drawing social security, the amount would not be included in personal financial statements. In that situation, the amount is not determinable, as (a) the amount would vary depending upon which retirement age the individual chooses, (b) rights to social security are contingent on the individual reaching a specific retirement age, and (c) social security may require future performance if the individual has not yet earned retirement benefits.

 

[COcheesehead]

SS is an income stream. It is not part of one's portfolio.

You can calculate a net present value of an income stream and then it can become a lump sum number.

On my financial dashboard I calculate the number of years worth of assets I have to cover my budget both with and without the present value of social security.

 

[mrfeh]

You can calculate a net present value of an income stream and then it can become a lump sum number.

Nope. You don't know how long you'll be collecting SS, unless you know the date of your death.

It is simply a number that can be subtracted from expenses.

 

[MarieIG]

We don't calculate the value of pension or SS; although they are a consideration when considering IRA or taxable account withdrawals.

 

[RunningBum]

Nope. You don't know how long you'll be collecting SS, unless you know the date of your death.

It is simply a number that can be subtracted from expenses.

Sure you can. Opensocialsecurity.com can calculate it for you. And insurance companies don't balk at selling you an annuity just because they don't know the date of your death. They put a lump sum $ amount on the income stream they are giving you.

 

[COcheesehead]

Nope. You don't know how long you'll be collecting SS, unless you know the date of your death.

It is simply a number that can be subtracted from expenses.

Financial planning is filled with assumptions. The date of your death is one of them, at least for me. Having a present value for SS is beneficial for me.

 

[ShokWaveRider]

Our SS "will" contribute 30% towards our total annual income when I am 70. When one of us dies that will be recalculated at that time.

Till then it will be 30% of our income. Not 30% of our Nest Egg. BUT our total Nest Egg does not really matter, it is the income it provides that does.

 

[chassis]

PV of guaranteed income should indeed be calculated and counted as part of one's current net worth.

Of course no one knows how long he/she will live. We all could die tomorrow, right?

 

[TheWizard]

In my ninth year of retirement, I don't calculate anything from my two income streams: pension/annuities + SS.

What I do is invest the excess income in stock index funds. My nest egg keeps growing IOW. Does that answer the question?