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Deferred compensation and asset allocation
Old 07-07-2017, 02:53 PM   #1
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Deferred compensation and asset allocation


I'm seeking some thoughts on how to handle deferred compensation in my asset allocation. Some background:
  • I'm recently retired and have about 2 years cash on hand for expenses.
  • I've excluded cash from the allocation.
  • Deferred compensation is currently about 18% of my over all invested money.
  • My deferred compensation consists of 4 guaranteed interest rate funds that comes to a 6.75% blended rate.
  • I start to draw down from this asset June of 2020 over 11 years unless there is a change of control and then I receive a lump sum and all the tax "fun" that comes with it.

My question is since this is a guaranteed rate should I treat it as a bond in my asset allocation or should I exclude it completely? I'm working towards a 50/50 allocation over the next few years.

Asset allocation with deferred comp as a bond is 53.4% stock and 46.6% bonds
Asset allocation with out deferred comp is 61.8% stock and 38.2% bond

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Old 07-07-2017, 03:40 PM   #2
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I would treat it as income, not an asset. You can't sell it, you can't re-balance in or out. It is like a 11-year certain annuity.
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Old 07-07-2017, 04:07 PM   #3
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I'd treat it like a bond or cash as long as you feel it will reliably be there for you. Otherwise I'd probably exclude it. I would also treat an annuity like a bond/cash. Maybe that's just me. It would feel like part of my portfolio value, and it's not stock.
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Old 07-07-2017, 04:19 PM   #4
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I would also treat it as a bond (a really nice 10 - 15 year bond with that interest rate). Unless there's a risk of loss somewhere it should definitely be considered in your portfolio and will give you lots of protection if we have an extended market downturn. Your 18% in this asset is 4 or 5 years of required income if you are using a 3 - 4 % withdrawal rate. I'd cut back on my cash holdings with those deferred comp funds available.

My closest analog is ~ 7% of my portfolio paying a guaranteed 4.5% and I thought I was doing pretty well with that bond-like component.
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Old 07-07-2017, 07:40 PM   #5
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+1 I would view it as a bond.... actually better since it is interest sensitive.... and hope that there is no change in control.
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