OK, I'm dumb. With a poll.

[SecondCor521]

Hi all,

I'm FIREd 4 years, 51M, with about a 1% net WR.

My AA for the past several years has been to take my actual expenses, multiply that by 25 to get a portfolio number, then set my AA to that which provided a maximum safe WR% historically according to FIREcalc. Whatever was leftover was invested in stocks, since I expected my kids to inherit that part.

For example, let's say I have $2M and spent $40K a year. I'd take that $40K, multiply by 25 to get $1M. I'd then look at FIREcalc with my 40 year time frame and decide that 90/10 was the historically "safest". So I'd put $900K in stocks for me, $100K in bonds for me, and the remaining $1M in stocks for my kids. Which of course is actually a 95% stock AA.

But just the other day I had a duh moment.

I calculate an NPV for my SS benefits as follows: I take my age 70 benefit amount from the SS website and inflate that on a monthly basis by CPI (so I'm doing everything in future nominal dollars). I then assume I'll collect 60% of that amount (to account for possible future benefit reductions) from age 70 to age 85. I then do an NPV calculation on the sum of those future reduced benefit amounts, using CPI again as the discount rate.

Anyway, I get NPV for my SS benefits. This SS NPV is about six times the amount I currently have in bonds - so say $640K or so - and I'm currently ignoring it for AA purposes.

So, poll options:

A. I am dumb and should have been counting my SS NPV as part of my asset allocation and therefore sell the $100K bonds I have and use the $640K SS NPV as more than covering the bond portion of my portfolio.

B. I am smart and should totally ignore the SS NPV and keep my non-SS portfolio the way it is and keep my $100K in bonds.

I usually leave stuff out, so feel free to ask questions if I've forgotten anything.

P.S. - Numbers aren't real, they're just for illustration.

 

[Midpack]

I don’t, but it doesn’t hurt to count it for your own purposes. Most calculators allow us to enter SS as income, so it’s not necessary to work up SS NPV.

 

[RunningBum]

I picked A (Yes), have been doing that for years. My SS NPV doesn't cover all of my bond allocation, so I still have bonds. I don't think I'd have 0% bonds/cash outside of SS. In fact I know I wouldn't.

 

[Dtail]

I don’t, but it doesn’t hurt to count it for your own purposes. Most calculators allow us to enter SS as income, so it’s not necessary to work up SS NPV.

Yes, every retirement calculator I have used has included SS as a separate input.
Some calculators will even take a haircut for you if you wish.

 

[Palmtree]

For others, I think "NPV" stands for Net Present Value.
( I had to look it up) Carry on.

 

[Dtail]

For others, I think "NPV" stands for Net Present Value.
( I had to look it up) Carry on.

Correct.

 

[MichaelB]

Poll option C. You’re smart, but overthinking this. Go with the allocation that lets you sleep soundly.

 

[COcheesehead]

I don’t include it as part of my AA, but I do include it as part of my FIRE pool which also includes real estate I plan to sell, not my home, and a highly assumed inheritance.

 

[CardsFan]

I thought I could vote that you were dumb .

So I voted bacon with MichaelB. You are over thinking.

Seriously, I have only looked at the NPV of SS once, just to get a calibration.

I don't use it for anything. SS is a potential revenue stream.

I would never be 95% stocks, nor would I ever be 95% fixed.

Just me. your choice.

 

[HI Bill]

B. I am smart and should totally ignore the SS NPV and keep my non-SS portfolio the way it is and keep my $100K in bonds.

I would not count the present value of SS, as it's not in your account right now. Your AA needs to mitigate your SORR from your current age, to the age at which you begin SS payments. Counting the NPV of SS would result in an AA that is too heavily stock-weighted, and you'd have a significant SORR from your current age of 51 to age 70 (19 years), when you begin SS distributions. If you're using FIRECALC, input SS benefits on the SS input section. If you have any failure lines (most likely with a 4% or greater WR), they usually cross the $0 line 15-20 years after you start tapping the investments. However, since your WR is so low, does it really matter?

 

[RunningBum]

I can't speak for anyone else, but I only sleep well at night in these decisions if I have a sound, well-thought out basis for my decision.

 

[stepford]

If we don't include SS in our AA then by the same logic we shouldn't include any pension income either - and in fact I include neither. That said, doing so makes my nominally kinda conservative 50/50 AA REEEALLY conservative.

 

[RunningBum]

If we don't include SS in our AA then by the same logic we shouldn't include any pension income either - and in fact I include neither. That said, doing so makes my nominally kinda conservative 50/50 AA REEEALLY conservative.

Yes, pension should be treated the same. I include both. My pension is pretty small.

 

[pb4uski]

I do not include the NPV of pension or SS in assets. I include pension and SS as a reduction of spending, as is conventional.

If I were to include the NPV of SS in my assets, I would use opensocialsecurity.com to do the calculation since it factors in both mortality (the probabilities that you'll be alive to collect your benefit) and the time value of money. It can also include a future SS haircut if desired.

 

[rodi]

You mention you're using firecalc as part of your analysis... I believe firecalc has SS separate from the AA allocation (different page on the inputs.) I could be wrong.

I don't use SS NPV in my calcs. I input SS on the page for SS and pensions. I input my asset allocation on that page.

Another thought on this... SS is unlikely to be taken away - but might be modified or discounted in the future... It's different than bonds.

 

[Splash]

I voted no.

I don't include NPV of SS in my assets. I think of it as a revenue stream beginning at 70. I include NPV of my pension in my assets because I am leaning toward rolling it into an IRA as a lump sum at some point.

 

[2017ish]

...

Another thought on this... SS is unlikely to be taken away - but might be modified or discounted in the future... It's different than bonds.

Yep. That's my approach. Am not counting on it as it is not guaranteed to be there. We still have 10 & 11 years until age 70 and a lot can change.

 

[Kwirk]

I don't calculate NPV but the fact that government pensions and SS easily cover our necessary expenses (and lots more) certainly plays a role in how I allocate other assets (probably for the benefit of our heirs).

 

[RunningBum]

Another thought on this... SS is unlikely to be taken away - but might be modified or discounted in the future... It's different than bonds.

OP discounted SS by 40%. I discounted it by 25%. So we aren't ignoring this.

 

[SecondCor521]

Poll option C. You’re smart, but overthinking this. Go with the allocation that lets you sleep soundly.

Thanks. Good advice.

Really I'm just doing whatever the financial equivalent is of figuring out how many angels can dance on the head of a pin, I think.

I do sleep soundly, and when I don't it's because of my mattress or caffeine, not because of my finances.

I just like to try to optimize when I can.

I would not count the present value of SS, as it's not in your account right now. Your AA needs to mitigate your SORR from your current age, to the age at which you begin SS payments. Counting the NPV of SS would result in an AA that is too heavily stock-weighted, and you'd have a significant SORR from your current age of 51 to age 70 (19 years), when you begin SS distributions. If you're using FIRECALC, input SS benefits on the SS input section. If you have any failure lines (most likely with a 4% or greater WR), they usually cross the $0 line 15-20 years after you start tapping the investments. However, since your WR is so low, does it really matter?

With a net WR of 1%, it doesn't really matter, and I don't have any failures in FIREcalc with my data, and haven't had any for six years now.

I do not include the NPV of pension or SS in assets. I include pension and SS as a reduction of spending, as is conventional.

If I were to include the NPV of SS in my assets, I would use opensocialsecurity.com to do the calculation since it factors in both mortality (the probabilities that you'll be alive to collect your benefit) and the time value of money. It can also include a future SS haircut if desired.

Right. I like that website. The analysis I'm doing is assuming I'm alive through 85 or 90. If I don't make it the analysis is different and pretty simple.

You mention you're using firecalc as part of your analysis... I believe firecalc has SS separate from the AA allocation (different page on the inputs.) I could be wrong.

I don't use SS NPV in my calcs. I input SS on the page for SS and pensions. I input my asset allocation on that page.

Another thought on this... SS is unlikely to be taken away - but might be modified or discounted in the future... It's different than bonds.

Yeah, so this was a very good comment, because it made me realize when I do my FIREcalc analysis I believe I put in my unreduced SS already (on the offchart spending/income tab). With so many dials and accounts and income streams - oh my! - it can be easy to try to be too clever (which brings me right back to MichaelB's quote above). In fact, sometimes I just take my annual spending and multiply by 25 and make sure I have that much money somewhere just to be sure I'm not being too clever by half.

Not to turn this into an SS discussion, but the 40% haircut I give my future income stream is to account for the uncertainty. Again, probably trying to be too clever with all the future income stream and reduction and NPV stuff.

 

[DrRoy]

I don't count mine.

 

[foxfirev5]

If I can't turn it to cash by 4 PM today I don't count it.

 

[Amethyst]

In our case, if we didn't include pension income, our income would be rather small! (We are civil service retirees, who paid into pensions instead of SS).

I'm well aware that our pensions are "like a bond," so by the usual calculations, everything else but the emergency fund should be in stocks. But I've somehow never been comfortable with that.

If we don't include SS in our AA then by the same logic we shouldn't include any pension income either - and in fact I include neither. That said, doing so makes my nominally kinda conservative 50/50 AA REEEALLY conservative.

 

[FLSUnFIRE]

I don't and I don't count my pension benefit either but for different reasons. SS is a "promise" but not an asset... the government could easily change/eliminate/means test etc and I do not own it in any sense (to me SS is a liability as long as I have earned income and I'd opt out if I could-with refund of contributions me and my employers have paid in over my lift). My pension, I do have a legal right to (it is pretty darn secure), but I don't count it as it is not a value I can use/allocate. As a paper, "how much am I worth," exercise I'll occasionally discount the value just for fun and see how it would impact my WR -especially if I'm feeling pessimistic about w*rk and/or falling down the OMY line of thinking.


I do add my projected SS annuity as an income source a spreadsheet I use to project/plan withdrawals as I'll probably get something but won't count on it.

 

[target2019]

Bogle said it's ok.