Phantom Bonds Redux

[Gone4Good]

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Originally Posted by MasterBlaster It should be noted that when interest rates fall (during a recession) the net present value of your SS and pension income streams also rise.

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Originally Posted by DJRR Except you can't reallocate a "phantom" capital gain. You need a real one to have the money.

As long as you don't replace 100% of your fixed income allocation this way, rebalancing shouldn't be much of a problem. You simply sell the actual bonds you have to buy stock.

[Bikerdude]

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Originally Posted by W2R Wouldn't it be easier to just subtract the monthly pension income from your required expenses? For example, if your minimum expenses are $3K/month, and your pension is $1K/month, then your remaining expenses are $24K/year. If all of your income is pension and portfolio earnings, then you need $24K from your portfolio to meet your minimum expenses. As you point out, a pension doesn't behave like a bond.

Well I sorta agree with W2R on this. In my case my "phantom bond" allocation is more than my total current bond allocation but not enough to live on. So I think I will just subtract from expenses and produce an allocation to deal with the remainder.

[WilliamG]

I have to agree with those who don't appreciate the utility of "phantom" bonds. To me asset allocation is all about the allocation of assets which you actually have some control over; i.e., that are at least somewhat liquid so that you can re-allocate as necessary as well as liquidate. Income streams like SS certainly affect your projected cash flows as to what your needs from portfolio are, and that is how it makes sense (at least to me) to use them.

[freebird5825]

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Originally Posted by Nords It places asset allocation in perspective, including the effect of survivor benefits. When the market dives off a cliff again, you'll take great solace in being able to consider your equity asset allocation a much smaller part of the equivalent cash value of your total portfolio. http://www.early-retirement.org/foru...rth-44560.html Spouse and I keep our ER portfolio invested >90% equities, but overall it's only about 10-15% of our equivalent asset allocation.

Ah, NOW I understand. HUGE Light Bulb!
I do not need as large of a principal in a retirement portfolio (stocks/bonds/cash investment assets) as a non-pensioned retiree would because of the guaranteed-for-life income of my survivor pension.
Being naturally thick-headed, I still see the pension as a cash asset, not a bond asset.
Go ahead and correct me on this post if necessary.
Sometimes I need a brick thrown in my direction. No pain will be incurred.

[Nords]

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Originally Posted by freebird5825 Being naturally thick-headed, I still see the pension as a cash asset, not a bond asset. Go ahead and correct me on this post if necessary. Sometimes I need a brick thrown in my direction. No pain will be incurred.

Some kinds of "cash" are better than others.

I think you'd have more faith in a pension coming from the U.S. govt ("more" faith, not necessarily "absolute" faith) than you would for a pension coming from the City of San Diego or from General Motors... or in an annuity purchased from AIG.

If I was a retired airlines pilot then I'd have no more faith in my pension than the amount that's "guaranteed" by the PBGC. Or at least whatever PBGC guarantees are good for.

No matter how quantitatively one figures out their asset allocation, using all available Vulcan logic, there's still an emotional component. People have to be able to sleep at night with their asset allocations-- or else it just doesn't matter whether a portfolio is evaluated as real assets or as phantom bonds.

When our ER portfolio started dropping in 2008, I could say reassuring things like "We keep two years' expenses in cash for just this sort of volatility" and "Hey, we can cut back our spending to live on my pension" or "We still have rental income from the tenants". But when the drop kept dropping (it eventually bottomed out at -58% off the peak) I felt pretty silly saying "Did you know that the present value of our future Social Security benefits is more valuable than our current ER portfolio?" I was rationally correct in my logical assessment of the situation, but it didn't exactly go over like a bedtime lullaby.

So now that we've climbed back out of the recession's hole, whenever our ER portfolio has an exceptional month we're likely to take a little off the table to help satisfy the emotional side of asset allocation.

[haha]

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Originally Posted by MasterBlaster Well I suspect that periodically (yearly ??) one could re-assess the real and phantom values and re-allocate at that time. There is no reason that dynamic asset allocation could not be done. One could also up the (real and phantom) bond allocation with the age based model. So no I don't see an issue with dynamic asset allocation.

True. What I meant by "dynamic asset allocation" was valutaion sensitive asset allocation.

Ha