Equity Allocation Consequence of Defined Benefit Pension

[Koolau]

So the more secure income you have, the higher your stock allocation can be.

And the lower it CAN be because you may not need the risk/reward that extra equities bring. Only you can decide which is best for you.

 

[TickTock]

It's certainly in the range of reasonable to do as OP is suggesting. It's the idea behind the bogleheads' excellent and free TPAW planner. The basic premise is to build your asset allocation safely - you secure minimal living expenses with something safe and invest the rest. So the more secure income you have, the higher your stock allocation can be.

Wade Pfau has a similar concept in his books, called the "Retirement Income Optimization Map".

 

[Texas Proud]

It is a traditional defined Benefit pension. I will receive a monthly check until I pass, and we will opt for a percentage of that as a survivor benefit for my sweetie.

OK.... I think I read it wrong... sorry for the confusion....

What I think you are asking is do you include a asset value for a DB pension in an asset allocation to use for the rest of your money.... IOW, if you have $100K PV pension and $200K of assets how do you count that 100K?

If I am now reading you right... I allocated 100% to stock for my sister... her DB pension PV was over 50% of her 'total'... so to even get a 50/50 allocation I needed 100% stock on what she was investing...

Another sister contacted me today and wants me to manage her funds... and she is even better off than my oldest sister... higher pension payments and higher SS... probably will be 100% stock on the rest...

 

[GBcycling]

Last question.

Define OP?

GOPacers!

 

[old medic]

Original Poster

 

[TheWizard]

OK.... I think I read it wrong... sorry for the confusion....

What I think you are asking is do you include a asset value for a DB pension in an asset allocation to use for the rest of your money.... IOW, if you have $100K PV pension and $200K of assets how do you count that 100K?

I don't think the OP is asking about computing Present Value of income streams.
You can reach a similar conclusion just looking at monthly cashflow, which I think is the better method.

So if your Secure Income exceeds your spending, on average, it hardly matters how you invest your portfolio, 100% stocks or 100% CDs.

In cases involving pensions and annuities, the use of Asset Allocation to manage risk can be mostly relevant in the five years prior to retirement along with several years after starting retirement.
Then once starting SS at FRA or 70, the situation changes and AA is no longer as important.
That's how it went with me...

 

[engineernerd]

You may have noticed that I'm a huge fan of FIRECalc. FWIW, I have thought of another way you could use it to decide on an optimal asset allocation, and that is to analyze two separate "retirements" in parallel, one for you and DW, the other for your child (children?).

The two starting portfolios should add up to your actual portfolio value today. You can either allocate all current and expected household expenses over your lifetime to the first portfolio and use the "Not Retired?" tab for the other, or split up the expenses as seems appropriate to you.

Your approach of converting your future series of payments to present value is quite valid and probably good enough, but it does introduce the assumption that your portfolio or some part of it will actually equal out to the same usable cash in the future as those benefits.

 

[target2019]

OP,
If you're investable assets are measured as 60% equity, that is that. When your pension and other income arrives, if you don't spend it all, you can invest a bit. You can maintain your AA at 60%, or take it to 65-70% after due dilligence performed.

The idea of an AA adjustment because of PV of SS or pension has been discussed many times. I think the key term is investable assets for most, including me.

 

[Koolau]

Last question.

Define OP?

GOPacers!

This might help on other acronyms:

* Acronyms, abbreviations and Slang Frequently Used on the Forum *

Standard Acronyms and Abbreviations You May Find on the Forum This list will only grow if you submit acronyms you use or that need defining. I will up date this message, adding new acronyms as they are submitted to the list. It is always better to use the full words, but we know how much...

www.early-retirement.org

 

[GBcycling]

This might help on other acronyms:

* Acronyms, abbreviations and Slang Frequently Used on the Forum *

Standard Acronyms and Abbreviations You May Find on the Forum This list will only grow if you submit acronyms you use or that need defining. I will up date this message, adding new acronyms as they are submitted to the list. It is always better to use the full words, but we know how much...

www.early-retirement.org

Thanks, that was helpful. OP was the first one I had not sorted out via context.

 

[imjustawarrior]

One issue with converting an income stream (e.g., pension, SS) into an asset using PV is that one does not know when one will die. Plus, an asset is something you own. You do not own your pension or SS. I point this out because they could change. This would affect the PV and change your asset allocation (AA). This would be too much for me.

I prefer to keep an income stream an income stream, which reduces WR from portfolio. I think that is the simplest, and tools like firecalc can model this scenario.

I agree with your desire to keep a high equity allocation for a long retirement. When I retired, I planned for 50 years. I chose 75% equities primarily based on The Safe Withdrawal Rate Series.

Personal finance means things are personal. Do what works for you.

Go Pacers! The underdogs have won me over.

 

[copyright1997reloaded]

It is a traditional defined Benefit pension. I will receive a monthly check until I pass, and we will opt for a percentage of that as a survivor benefit for my sweetie.

Since you mentioned a child - something to think about: I was able to have my child as 50% J&S on my pension (in lieu of listing a spouse). I did this back in 2009. At that time, I was relatively young (51) and interest rates middling (30 year about 5%) - the hit to my pension wasn't super bad (maybe 8-10% compared to no J&S and pretty close to 100 % J&S on a spouse near my same age). It's been so long I would have to look up my spreadsheets from the time (I did lots of analysis) to remember the actuals.

 

[GBcycling]

One issue with converting an income stream (e.g., pension, SS) into an asset using PV is that one does not know when one will die. Plus, an asset is something you own. You do not own your pension or SS. I point this out because they could change. This would affect the PV and change your asset allocation (AA). This would be too much for me.

I prefer to keep an income stream an income stream, which reduces WR from portfolio. I think that is the simplest, and tools like firecalc can model this scenario.

I agree with your desire to keep a high equity allocation for a long retirement. When I retired, I planned for 50 years. I chose 75% equities primarily based on The Safe Withdrawal Rate Series.

Personal finance means things are personal. Do what works for you.

Go Pacers! The underdogs have won me over.

Thanks, I have pulled up that site for investigation. Currently, we are spending less than 3.7% from the portfolio. Next year, a car loan falls off and pension starts with the resulting income need dropping to 1.9% it just continues to improve from there. DW and I will quickly get to the point of, "why are we still living the savings lifestyle". So thankful as I think about that for a moment.