Pensions and AA

[donheff]

When I first ERd and came on this board I remember some discussions on this topic. At the time I adopted the view of the pension (COLA'd CSRS) as a bond substitute so I was close to 100% equities in our portfolio. But the pension covers basic living, not fun -- we need the portfolio for that. I changed my thinking to separate the two domains. I now view the pension as covering X expenses (housing food, taxes, etc) and the portfolio as covering Y expenses and estate (travel, cars, restaurants, etc). I want to be able to have my Y and eat my cake (leave an estate) so I became more conservative in the portfolio. I ended up with several years of cash to cover Y expenses in a downturn and some bonds to reduce the bumps further. The downturn has reallocated me to about 60/40 and I will try to stay there as (if) the market turns back up.

 

[utrecht]

When I first ERd and came on this board I remember some discussions on this topic. At the time I adopted the view of the pension (COLA'd CSRS) as a bond substitute so I was close to 100% equities in our portfolio. But the pension covers basic living, not fun -- we need the portfolio for that. I changed my thinking to separate the two domains. I now view the pension as covering X expenses (housing food, taxes, etc) and the portfolio as covering Y expenses and estate (travel, cars, restaurants, etc). I want to be able to have my Y and eat my cake (leave an estate) so I became more conservative in the portfolio. I ended up with several years of cash to cover Y expenses in a downturn and some bonds to reduce the bumps further. The downturn has reallocated me to about 60/40 and I will try to stay there as (if) the market turns back up.

This is exactly what I was getting at when I started the thread. My pension will cover all of our expenses if we wanted to retire in our current house and live our current lifestyle. However, thats not what we want. We want to move to S.Florida where the cost of living is much higher and we want to travel alot. We want to be stop worrying about budgets and buy what we want (although Im sure that will be harder to do than I imagine since we've been savers for so long). If I set a new expanded budget and have 100% stocks, then the market takes a big hit like this year, we might have to cut way back closer to how we live now as the 100% stock portfolio takes a big hit. I think I would rather keep our assets seperate from our pensions and stick with a 60/40 type split so I know we will continue to our pensions plus 4% of our retirements assets forever and not have to worry about market fluctuations all that much.

 

[FinanceDude]

A federal govt pension might be considered the equivalent of I bonds while a GM pension might be considered the equivalent of C- junk bonds.

Looks that way for now.......

Flippant answers aside, what's the correct way of thinking?

I was being facetious, not flippant.......

If a COLA pension can be replicated by a Vanguard annuity (depending on who's backing it these days) then how would an annuity affect an asset allocation?

I wonder if Vanguard is going to dump AIG. I doubt Bogle is happy with his VAs being underwritten by AIG these days..........

While I agree that Bernstein has found that 10-20% bonds have reduced volatility and raised returns along the efficient frontier, that study doesn't include foreign investments (both equities & bonds) or just the dividend-paying stock sector. It doesn't include commodities or REITs or rental real estate. Personally I'd like to see an equivalent study that sets bonds at zero and substitutes cash for the 10-20%. I suspect that recency and changing correlations may have affected all of our "studies", and that none of the old stuff is valid alongside the market's added recent performance.

I have kept international stocks at 15% of my portfolios for 10 years. In the last 5 years, I have been between 5 and 10% in international bonds. I hope the studies will be updated to show how those assets help or hurt investment returns........

 

[yakers]

At retirement I will have a government COLAd pension that will take care of my expenses. In the near future I will create a balanced (60/40) taxable portfolio set up to supplement my spending money and also add in the expense of rolling over my 401k monies to a Roth IRA. I will then yearly take 4-5% of the taxable account balance. I'm thinking of taking the easy way out and put all of this taxable $ in the Vanguard Star fund and take dividends and capital gains in cash then just sell shares when needed to make my 4-5% target.

Sounds like my plan. I have a COLAd pension my 401k type (Govt TSP) is in a target retirement fund, DWs is in Vanguard Wellesley. Then we have a few $$ in a Roth and a very few, declining few ( did I mention a small, decreasing amount?) in a trading account. DW retired a couple years ago I I did in March of this year (great timing!). We have 2008 covered and I sold one stock that plus pensions will cover 2009. Starting in 2010 I expect to draw 4% or so off our deferred income. Our pensions cover all our basic expenses the other income sources cover travel, entertainment, home improvement and the like.

 

[rickier55]

I've been retired about 3.5 years with a COLA'd pension which covers about 90% of our expenses (total). (and this is before my DW's pension + SS kicks in). So I kept our allocation at around 80% Equities and 20% government bonds. I've done some minor reallocating in the prior 3 years moving money from stocks to bonds to keep us in that 80% +/-.

My allocation now is about 70 - 30. And I don't think I'll rebalance to the 80 - 20. we will be fine regardless, but I think I'd feel better after this turmoil with the lower allocation. Watching what I thought would be a nice bequest to our children dwindle down was unpleasant. (though certainly not as devestating if I had to rely on it for my living expenses).

Rick

 

[MasterBlaster]

The flip side of a pension is debt. A mortgage or other debt could be called deficit bonds or "bonds-in-the-hole".

If you have some debt then perhaps you should decrease your equity allocation and have more bonds in your asset allocation. Or better yet consider selling some of those equities to pay off that debt.

 

[jIMOh]

This is exactly what I was getting at when I started the thread. My pension will cover all of our expenses if we wanted to retire in our current house and live our current lifestyle. However, thats not what we want. We want to move to S.Florida where the cost of living is much higher and we want to travel alot. We want to be stop worrying about budgets and buy what we want (although Im sure that will be harder to do than I imagine since we've been savers for so long). If I set a new expanded budget and have 100% stocks, then the market takes a big hit like this year, we might have to cut way back closer to how we live now as the 100% stock portfolio takes a big hit. I think I would rather keep our assets seperate from our pensions and stick with a 60/40 type split so I know we will continue to our pensions plus 4% of our retirements assets forever and not have to worry about market fluctuations all that much.

I think the pension=bonds camp misses the mark, and your situation is the reason why.

That 100% equity is money you do not need. Yet if you see it lose 40% in a year, that is cause for your own concern.

My thoughts would be this- in this market, this is a great time to buy equities, so I would be directing around 80% of new contributions to equities and keeping 20% in cash. If you have no contributions (because you are retired) then I would do nothing- stay 100% equities and live off the pension.

As the market trends upward I would move slowly to a 60-40 portfolio. For example find a point (maybe 10% higher than todays closing) and when the market hits that point, sell 1% and move it to bonds. Each time market goes up X% from the pre-defined point (maybe 4%) then sell 1% and move it to bonds.

Even if you do not need the money, I would expect a portfolio of 60-40 or 75-25 will do much better for risk tolerance than 100% equity- even if pension covers all or most of the needed expenses.

 

[NW-Bound]

As we do not have any pension, this is just an intellectual exercise for me.

Suppose I have a COLA pension that covers most of my basic expenses, and my portfolio is just for fun. Now, as I am the "delayed gratification" type, I can postpone expensive travels or that new car for a year or two during bad times, and splurge during good years. Since I do not need to draw constantly on my portfolio, I do not have to worry about it ever running out. I would tend towards a more aggressive equity position. One still should not do 100% equities. Still need some cash in order to "buy low/sell high", aka rebalance. So maybe 50%/50%?

The only way I could lose all my money was if I put it all on Enron, or recently Bear Stearns. So, what's there to worry about?

My point is that FireCalc is used to simulate the survivability of the portfolio under a constant, mandatory, and time-inflated withdrawal schedule. When you have the freedom to suspend or make sporadic large withdrawals, it's a totally different game. Nice situation to be in. Am I missing something?