Asset Allocation

[ecowtent]

I am working on asset allocation. This is a concept I struggle with understanding. I can do the basic math, but don't quite know how to factor in DH pension as part of our allocation. Any suggestions on how to include? Would you carry less bonds to offset the pension as your % of bonds?



The purpose of a strategy is to back into % of growth needed to cover annual budget for estimated life-correct?

 

[COcheesehead]

For any pension or pension like assets, I use the present value of that asset and include it as a bond.

 

[fgtayl01]

As Cocheesehead does it.


The pension provider often purchases an annuity to cover your pension payment.



You can go to one of basic annuity charts or calculators. Schwab has one.

Find out how much you'd have to invest to get the return that your pension provides.
For instance, investing $200,000 in an annuity would get a single payer about $1000/month for life.


Consider the amount($200k in the example) as a safe bond in your total allocation.



That'll get you close.

 

[fgtayl01]

As Cocheesehead does it.


The pension provider often purchases an annuity to cover your pension payment.



You can go to one of basic annuity charts or calculators. Schwab has one.

Find out how much you'd have to invest to get the return that your pension provides.
For instance, investing $200,000 in an annuity would get a single payer about $1000/month for life.


Consider the amount($200k in the example) as a safe bond in your total allocation.



That'll get you close.

I should add that you could also consider it cash in a portfolio. Also you can treat your SSN income like another pension in a portfolio allocation.


The other way it's commonly treated is just reduce your required income by the amount of the pension(s) and build a portfolio that meets the income needs you have left if your goal is to allocate for retirement.

 

[Mdlerth]

The same reasoning also applies to SS income

I've seen different approaches to this question. One suggestion is to compute an annuity value for the pension and lump it into the "fixed" portion of the AA. While this is probably the strategy most logically consistent with the AA philosophy, it can blow up mathematically since it isn't at all fungible.

For example, consider a million dollar portfolio with a target AA of 75/25. Suppose you are eligible for a pension of 30k; you check the annuity value and find your pension is worth 500k. That's double what your fixed fraction should be, but it's not practical to "sell off" half of the pension and move it into equities.

That's why I'm approaching from a different direction. DW and I will have some modest pension income, but I don't figure it into our portfolio at all. It simply offsets a piece of our expenses, with the remainder being how much the portfolio needs to cover.

 

[COcheesehead]

Don't confuse liquidity with asset allocation.

 

[bingybear]

The purpose of a strategy is to back into % of growth needed to cover annual budget for estimated life-correct?

Another way to handle a pension is to model it as an income stream.

So if you need 100k /yr to cover the budget and you have a pension providing 25k/yr, then you are trying to make your assets provide 75k/yr.

 

[capjak]

I count it as income that reduces my gap between expense and needed income sources in the future. I do not count as Fixed income asset, I wouldn't feel comfortable going higher in equities as a result of having a pension.

 

[jebmke]

I just subtract my pension from my expenses to arrive at net expense.

I should add that you could also consider it cash in a portfolio.

Unless the pension can be rolled over and liquidated, it shares practically none of the characteristics of cash. I can convert cash to food in 1-2 business days. No way could I do that with my pension.

 

[friar1610]

That's why I'm approaching from a different direction. DW and I will have some modest pension income, but I don't figure it into our portfolio at all. It simply offsets a piece of our expenses, with the remainder being how much the portfolio needs to cover.

^ This is tha approach that's always made the most sense to me. If I computed the "bond" value of my pension and then applied a 45-50% stock allocation to my pension + portfolio, I would be much heavier in equities than I'm comfortable with.

 

[COcheesehead]

^ This is tha approach that's always made the most sense to me. If I computed the "bond" value of my pension and then applied a 45-50% stock allocation to my pension + portfolio, I would be much heavier in equities than I'm comfortable with.

Just run your whole numbers through a calculator like Firecalc and then determine your equity allocation based on what your needs are, not an arbitrary allocation percentage that may or may not work.

 

[pb4uski]

.... That's why I'm approaching from a different direction. DW and I will have some modest pension income, but I don't figure it into our portfolio at all. It simply offsets a piece of our expenses, with the remainder being how much the portfolio needs to cover.

+1 So if I have a $1 million retirement portfolio and a $30k joint life pension and spending is $75k a year then my WR is 4.5% [($75k spending - $30k pension)/$1 million portfolio].

No need for valuing the pension.

The reason for using this approach is that you are looking at $45k of withdrawals and SORR only applies to withdrawals and AA addresses SORR.

 

[mrfeh]

That's why I'm approaching from a different direction. DW and I will have some modest pension income, but I don't figure it into our portfolio at all. It simply offsets a piece of our expenses, with the remainder being how much the portfolio needs to cover.

No pension here, and not drawing SS, but this is how I would approach it.

 

[ecowtent]

Thank you all! Very helpful. Deducting from the budgeted expense and backing into the difference makes the most sense to me.

 

[HI Bill]

+1 So if I have a $1 million retirement portfolio and a $30k joint life pension and spending is $75k a year then my WR is 4.5% [($75k spending - $30k pension)/$1 million portfolio].

No need for valuing the pension.

The reason for using this approach is that you are looking at $45k of withdrawals and SORR only applies to withdrawals and AA addresses SORR.

+1. Using the cash value of a pension, annuity, and/or SS will give you an incorrect evaluation of the SORR for the remainder of your portfolio, and should not be done, IMHO.

 

[38Chevy454]

+1 So if I have a $1 million retirement portfolio and a $30k joint life pension and spending is $75k a year then my WR is 4.5% [($75k spending - $30k pension)/$1 million portfolio].

No need for valuing the pension.

The reason for using this approach is that you are looking at $45k of withdrawals and SORR only applies to withdrawals and AA addresses SORR.

As an engineer, this is the logical way I also view pension. Also view SS as similar. Any incoming cash each month is subtracted from my monthly budget need. The remaining amount is what I need to get from my savings. Because I have the incoming pension or SS money separate from my portfolio savings, I tend to carry a higher amount of equities than some do, I target 70/30, although currently it's closer to 75/25. So in effect I *kinda* give some fixed income credit to the pension or SS money, even though I do not actually use it in my AA calculation. It just gives me more of a good feeling to stay with higher equities percentage.


I do agree that if you wanted to figure out an equivalent amount of money needed to receive that pension money, you can do the back calculated annuity purchase required as suggested by previous replies.