Thinking of SS as a fixed income portion of portfolio

[dtbach]

Here is a snippet from an article on FIDO:


Some financial advisers say retirement investors should consider the value of their Social Security benefits as a piece of their fixed-income investments.

Generally, adopting that strategy would mean shifting a big portion of your investible assets out of bonds and into stocks.

For example, if you’ve got $300,000 worth of Social Security benefits and a $700,000 investment portfolio, then your total portfolio is worth $1 million. If you wanted 50% of that portfolio, or $500,000, allocated to fixed-income investments, then just $200,000 of your investment portfolio would be in bonds, while $500,000 would be in equities.




I think this is quite valid. I also view my military retirement pay as part of my fixed-income investments. Doing this makes my portfolio about 50/50. But I have had to argue with some of my investment advisors about this in that they feel I am too heavily weighted in securities (75/25 just looking at the portfolio)


Curious as to how others might look at this.




full story here: https://news.fidelity.com/news/arti...ity-portfolio-2013&topic=living-in-retirement

 

[2B]

The original article appeared on Market Watch. Paul Merriman had a rebuttal the next week. Here's the link (if favored by the ER Forum gods). I do not include my future SS and pensions in my asset allocation.

Social Security is not an asset - MarketWatch

 

[pb4uski]

I look at it as a reduction of my withdrawals in calculating my withdrawal rate.

I'm somewhat surprised that Wall Street hasn't promoted the idea of imputing the value as a fixed income instrument more heavily to get more people to buy stocks.

 

[walkinwood]

I agree with pb4uski. SS & pensions area reduction in the amount you need to withdraw from your portfolio.

Your portfolio should be constructed to give you the withdrawals you need (after pensions and SS) for your estimated lifetime. That's the important consideration.

 

[Mike Piper]

Recent related discussion from the Bogleheads:
Bogleheads • View topic - "Social Security is not an asset"

 

[Chuckanut]

I have three sources of retirement income: SS (when I hit 70), pension, and personal investments. My goal is to be able to survive on any two of them. I think I have succeeded in that, though my life style would take a hit if I had to do so. IMHO, putting SS in to the investment mix would put the the investment leg of my retirement stool at greater risk than necessary. Far better to protect it, since I don't have the time to earn it back.

 

[Animorph]

Can't rebalance SS. Can't sell only SS while stocks take a few years to recover. That screws up any optimum withdrawal strategy you might create in FIRECalc assuming SS was part of the bond allocation. So for determining SWR the present value of SS is fairly irrelevant.

 

[panacea]

I used to consider Social Security as part of a person's overall asset allocation because it does represent a fixed income equivalent. However, I've changed my tune mostly because what really matters to me (and I think most investors) is the potential decline in value of the portfolio in a market downturn. If I'm 90% in stocks because my Social Security benefits are significant, I'm not going to be very happy in another 2008 scenario. I prefer to maintain an asset allocation that I can live with in good times and bad.

 

[pb4uski]

Recent related discussion from the Bogleheads:
Bogleheads • View topic - "Social Security is not an asset"

Interesting discussion. In many ways, SS dances on the edge of being an asset since it is a right to a cash flow as a result of past SS withholding, but IMO, it is not an asset.

To my knowledge under the professional accounting standards for personal financial statements, SS would NOT be an asset. Ditto for pensions.

Theoretically SS is a contingent asset, since you need to be living on the first of the month in order to receive that month's benefit. It would become an asset when you are entitled to receive it (a receivable) and the other side is a gain (income).

 

[Chuckanut]

I have heard pensions and SS referred to as 'phantom' assets. It's hard to quantify them unless one has the ability to see phantoms. Alas, I do not.

 

[dtbach]

I look at it as a reduction of my withdrawals in calculating my withdrawal rate.

I'm somewhat surprised that Wall Street hasn't promoted the idea of imputing the value as a fixed income instrument more heavily to get more people to buy stocks.

After reviewing the comments, I tend to agree that SS is not a "real" asset, just an income stream until you die. I can see it to allow a bit more aggressiveness in a portfolio but not very much.

 

[teejayevans]

I invest based on the time horizon when I need the money.
Any $ I won't need for 10+ years I invest in stocks, everything else is either in balance funds or bond funds, so when SS becomes a factor, it will probably mean less money for the balance/bond funds, but until I start receiving it, I ignore it.

 

[haha]

SS is an entitlement, in some ways better than an asset, in some worse. But it is not an asset. It cannot be used as collateral, it cannot be traded-I don't even think that the late night buyers of annuities can monetize it for you. When the equity market falls, you cannot peel off a little SS and rebalance into equities. But by far the biggest reason to not capitalize it into your fixed allocation is that it is insurance against panic. If you have the SS stream coming in, and you have a normal fixed allocation, when equities fall out of bed, you tend to get less frightened. Times like today, when nothing scary is happening, most of us are not frightened. But the fear will come again, count on it.

We are all supersavers, and to some extent portfolio balance fixated. So if we have all stocks and we lose 50% in our retirement portfolio, few of us are cool. But if we are 50:50-it's no fun to lose 25%, but it sure beats 50%.

Caveat- at todays rates and curve, I believe what I have said above is only valid if you use high quality fixed assets, and keep maturities and durations pretty short. Some FA writings seem to assume that bond prices and equity prices are negatively correlated. Sometimes they are, sometimes they are not. Nothing to rely on. This makes the hypothetical long bonds: equities teeter-totter very risky, as it may break in the middle anddjump both ends to the ground.

Ha

 

[RetireAge50]

Subtract SS, pensions, and work from the income I need for the next 10 years. Put this into cash and bonds. Remainder is 100% stocks.

If desired the AA is just a calculation from there (but it is not an input to the strategy).

 

[Ed_The_Gypsy]

SS is most of my after-w*rking income stream for several years after retirement. (I am a grasshopper, not an ant. ) For me, SS is an annuity. I categorize it as fixed income of a sort. It will allow me to keep most of my assets [for the immediate future] 100% in equities. (I plan to take SS at 70 or 71, depending on other things.)

I hold Paul Merriman in high regard, by the way. My equities are 50/50 US/international in part due to his research.

 

[gcgang]

Of course it is an asset. While it is not a traditional financial asset, in that it can't be pledged or sold, it has value and should be considered in reviewing your financial situation.
I'd think that figuring out how much you'd need to invest in a fixed income asset to generate that amount of income, and counting that as fixed income, makes the most sense.
Compare two people, one with a pension (similar to SS-btw, anyone know what percent of non union or governmental employees actually have a pension nowadays?), one without. If they have equal FINANCIAL assets, would you argue that they should invest with the same allocation, or that they could spend the same amount?
In like vein, you could even count your home, if you own it, as fixed income asset, in that it eliminates the need to generate income to cover rent or mortgage expense.
Just goes to show that financial management is as much art as science, and that attempts to get black box simple answers aren't always that easy.

 

[veremchuka]

If you adjust your AA based upon SS as FI you are making a big mistake. This is money you get monthly it is not in your control. You can't rebalance or reallocate those dollars. You will have a much more risky AA if you treat SS as FI cuz you'll be allocating more of your actual assets you do control in equities to create your AA. I don't treat my pension or SS as anything more than income I get once a month and the pension could disappear. SS could be reduced by congress. Neither are part of your AA but they may determine how you adjust your AA based upon your need for more or less income in retirement.

 

[W2R]

To me it makes more sense to just lower my expenses by the amount of SS and pension. If one thinks of SS as a portfolio increase, though, then I suppose thinking of regular mortgage payments as a portfolio decrease would be required (if one has a mortgage). And then, what about other expenses? After all, I spend about the same every year overall. What a headache. For me it is so much easier to just lower projected expenses by the amount of SS and/or pension.

 

[rmark]

Assuming your goal is inflation adjusted spending, a true fixed pension should be included in your allocation since part of your portfolio growth will be used to offset inflation losses. It's nominal income.

SS is not fixed income, it's COLA'd. SS ( or any COLA'd pension) provides inflation protection without resorting to your portfolio growth. It's real income.

Real income you can just spend off the top, nominal income you adjust for inflation expectations before spending. The attributes of pensions define how they are treated.

 

[imoldernu]

Isn't this a matter of words?
We're retired. Receiving $25,00/yr equiv. in SS since 1998 = Income
We count our house as an asset, since we'll sell when we go to CCRC. Value divided by life expectancy = Income
Ibonds total divided by life expectancy = Income
Other stocks, annuities and convertible assets total divided by life expectancy = Income

I know this is aggravating to most, but this is the way we figure how much we can spend...
The number of years it will last is our guide to spending. So far, so good.

 

[rmark]

'Isn't this a matter of words?'

yes, but words have meaning.

However in your post you've mixed together real income from SS, life expectancy withdrawals from a home, life expectancy withdrawals from Ibonds, and life expectancy withdrawals from other financial assets.

Income is the cash flow from a asset - dividends, bond payments, annuity payments -and is a component of the total return of that asset. That cash flow may or may not match your withdrawal rate. (personally I also plan on life expectancy based withdrawals).

 

[RunningBum]

I understand the arguments against treating it as fixed income but since I don't plan on taking SS for another 18 years I find it easier to try to assign a future value to it rather than figure out my SWR given current expenses that become reduced much later down the line. I calculate my AA both with and without my SS and pension. I used to base it without, and in the last year I've switched to with. I realize this has more risk, but also a greater chance of reward, so I wouldn't call this a big mistake.

 

[ERD50]

On one hand, I say it does not matter. Consider this:

Person A: Plans to spend $40,000, inflation adjusted each year. He gets $20,000 from COLA'd Pension/SS. He draws an initial 3.5% from his portfolio (of ~ $570,000) for the other $20,000.

Person B: Plans to spend $40,000, inflation adjusted each year. He has no Pension/SS. He draws an initial 3.5% from his portfolio (of ~ $1,140,000) for the full $40,000.

A 3.5% WR from a portfolio is a 3.5% WR - period. The historical optimum AA has to be the same for each, how can it be different?

-ERD50

 

[RobLJ]

'Isn't this a matter of words?'

yes, but words have meaning.

However in your post you've mixed together real income from SS, life expectancy withdrawals from a home, life expectancy withdrawals from Ibonds, and life expectancy withdrawals from other financial assets.

Income is the cash flow from a asset - dividends, bond payments, annuity payments -and is a component of the total return of that asset. That cash flow may or may not match your withdrawal rate. (personally I also plan on life expectancy based withdrawals).

Words do matter, to some. So I understand the accountant contingent who object to asset, but on the other hand SS is an assured cash flow, like a pension. No doubt you should discount it. I would say it is similar to a bond or dividend stock assuming you were a dividend income investor but you can't sell, as you all object. And there are contingencies--increased taxes, reduced inflation adjustments, Wackedoff Congress, etc. It is a hybrid with strong bond/income characteristics.

Bottom line is if you qualify to draw, then you could prudently increase your stock allocation, if you are in a position where you can draw less than 3-5% for your needs. I figure SS at about 60% of the current estimated benefit. If I retire early, and live long enough to qualify at the full rate, we will probably re-adjust the stock allocation prudently upward, perhaps by 5%, assuming we would be at a 4% withdrawal rate or below of the portfolio for the remaining. I think we will be, barring a market collapse of 30% in the next 5 years. I'm still working on that strategy, but I've got 11 years to figure that piece out of whether to readjust stock allocation up after qualifying and drawing the income stream.

 

[donheff]

On one hand, I say it does not matter. Consider this:

Person A: Plans to spend $40,000, inflation adjusted each year. He gets $20,000 from COLA'd Pension/SS. He draws an initial 3.5% from his portfolio (of ~ $570,000) for the other $20,000.

Person B: Plans to spend $40,000, inflation adjusted each year. He has no Pension/SS. He draws an initial 3.5% from his portfolio (of ~ $1,140,000) for the full $40,000.

A 3.5% WR from a portfolio is a 3.5% WR - period. The historical optimum AA has to be the same for each, how can it be different?

-ERD50

+1 This is how I look at it too. We had a lot of discussions about valuing pension present values as bond equivalents in portfolios a number of years ago and several of us who viewed it that way were up in the 90% range in equities. After a lot of discussion and reading about optimal portfolio construction to support SWR I concluded that (for me) the better approach was to view my remaining expenses after pensions/SS as the expenses my portfolio has to address. I reduced the equity component accordingly.