How Pensions and Change Your Asset Allocation

[macav933]

I have about 300k that in a DB Plan that will come available in 4 years. At that time I will either take the montly anunity or a lump sum. How should I treat this when designing my AA? My past advisor had it listed as bonds. The DB plan is very well funded and I have no doubts it is safe and sound going forward. I am currently collection another small DB Pension and have a strong SS record that will kick in 6 years from now. My current thought is to keep the 300k listed as Bonds and invest the remainder of my portfolio 800k in low cost ETF Index Funds from Vanguard. Your thoughts?

 

[2B]

This has been beaten around before. My opinion which others will disagree with is that the DB payments simply reduce the amount of money you need from your portfolio. I wouldn't readjust my AA by calling this cash flow a bond. You can't "sell" your pension like you would a bond so it's effectively illiquid. If I had a significant amount of pension income, I might be tempted to be more aggressive with my equities.

 

[Hermit]

I found it interesting that if I include the annuity value of my non-cola pension in my SWR calculations, the fixed amount I withdraw is close to 4%. If I ignore it and just treat it as a reduced amount of money needed from the portfolio, my withdrawal is closer to 2%. If I don't include the pension as part of the portfolio, I am ignoring inflation associated with the pension and its impact on SWR.

 

[Chuckanut]

I will agree with 2B.

The Pension is a phantom asset that is hard to evaluate since one can never trade it in for a pile of cash, and it disappears at death leaving nothing for the heirs (other than survivor benefits if that is chosen).

And, phantoms can be spooky so one should never bet the farm on such a creature.

 

[macav933]

It's a phantom asset for now....in 4 years I can take control of the lump and roll it over. At that time I will see what is the better deal...lump or anunity.

 

[Independent]

The first question is "Why do you care about your asset allocation?"

One possible reason for people who post here is that they are looking at SWR studies and they are targeting some "best" allocation that allows the pattern of withdrawals and safety they want. In this case, the AA is input into some historical or Monte Carlo analysis. For this purpose, it seems that the pension is not included in your AA because it doesn't fit as input for those number crunchers.

It would be included in your view of what you're going to do with your investment withdrawals - a higher pension may mean that your withdrawals are mostly for luxuries, rather than necessities. This might make you more willing to accept a more volatile withdrawal pattern or investment return. But, that consideration doesn't lend itself to something as mechanical as an asset allocation.

 

[audreyh1]

How much do you need each year from the invested funds apart from your pension, and how much volatility can you live with? That's what determines your AA. And it's independent of your pension. Your pension will cover X amount of your living expenses. You may need to tap into your investments for the rest, and that is what drives the design.

 

[clifp]

This has been beaten around before. My opinion which others will disagree with is that the DB payments simply reduce the amount of money you need from your portfolio. I wouldn't readjust my AA by calling this cash flow a bond. You can't "sell" your pension like you would a bond so it's effectively illiquid. If I had a significant amount of pension income, I might be tempted to be more aggressive with my equities.

Other might disagree, but they would be wrong. If it's a COLA pension you can treat exactly like social security.

A suppose for modeling purposes it isn't bad to treat it as bond allocation, but only if you actually think you'll take it as lump sum. 'But once you decide to take an annuity it reduces your cost of living just as 2B says and is no longer a bond.

 

[Hermit]

How much do you need each year from the invested funds apart from your pension, and how much volatility can you love with? That's what determines your AA. And it's independent of your pension. Your pension will cover X amount of your living expenses. You may need to tap into your investments for the rest, and that is what drives the design.

I'm having a hard time getting my arms around the volatile lover

 

[audreyh1]

I'm having a hard time getting my arms around the volatile lover

Yeah ,e too I'm having ng a terrible time with my iPad typing and weird "corrections".

 

[nun]

DB pensions and SS are just like a paycheck and if they cover your expenses I think you can be as aggressive as someone starting out to save for retirement. So rather than going with Jack Bogle's "age as the percentage of bonds in your AA" you might go with "age as the percentage of equities in your AA". Personally, I have my income needs covered by DB and rental income so I'm going with an 80/20 AA.

 

[pb4uski]

This has been beaten around before. My opinion which others will disagree with is that the DB payments simply reduce the amount of money you need from your portfolio. I wouldn't readjust my AA by calling this cash flow a bond. You can't "sell" your pension like you would a bond so it's effectively illiquid. If I had a significant amount of pension income, I might be tempted to be more aggressive with my equities.

I can't believe it, but I totally agree with 2B.