Bogle on Soc Sec/Fixed Income and Asset Allocation

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby IlliniDave » Thu May 23, 2013 7:36 am

A while back I was watching an interview with Mr. Bogle where he was discussing asset allocation. He said a person should consider the present value of things such as Social Security and pensions as part of their portfolio's bond allocation when making asset allocation decisions. He provided an example of a 55-year-old future SS recipient who had $150,000 to invest (no other investments). With the present value of the Social Security being "some $300,000", Bogle said he didn't see any reason why the person wouldn't invest the entire $150,000 in stocks. I wasn't able to immediately find the video again or else I'd try to link it.

That really set my way of thinking on it's head as prior to that I looked at my retirement/investment accounts essentially in isolation (except I kept in the back of my mind that the nest egg would ony have to provide a portion of my retirement income). I'm realtively risk tolerant/aggressive and still being under 50 (barely) I had been working towards a ~70/30 stock/bond portfolio. But given that, as it stands today, I've got both SS and a non-contributory retirement annuity in my future, if I employ Mr Bogles advice my "allocation" is reversed essentially.

Setting aside the discussion of whether the annuity or even SS will actually come to fruition (for the sake of argument assume they both do), this has me in a bit of a dilemma. Part of me says just forge onward as I have been and consider only the assets I have under my control and keep a reasonable/commensurate bond position there. But part of me wonders if I'm doing myself and my heirs a disservice by not leaning even more heavily towards stocks in my self-managed accounts. I don't loose any sleep over this, but it does creep into my morning-cup-of-coffee time on quiet days when nothing pressing is going on.

What consideration, if any, does the Boglehead community give to this nuance?

I'm not looking for specific advice, and this post is long enough without me dumping all my personal data on top (I'll save that one for another day :) ). Just looking at the philosophical side of this for now.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby Call_Me_Op » Thu May 23, 2013 7:44 am

I like to allocate without consideration to Social Security. If it comes to fruition, it will be treated as found money. That is the conservative approach.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Call_Me_Op
 
Posts: 4823
Joined: Mon Sep 07, 2009 3:57 pm
Location: Milky Way

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby JW Nearly Retired » Thu May 23, 2013 8:22 am

IlliniDave wrote:That really set my way of thinking on it's head as prior to that I looked at my retirement/investment accounts essentially in isolation (except I kept in the back of my mind that the nest egg would only have to provide a portion of my retirement income). I'm relatively risk tolerant/aggressive and still being under 50 (barely) I had been working towards a ~70/30 stock/bond portfolio. But given that, as it stands today, I've got both SS and a non-contributory retirement annuity in my future, if I employ Mr Bogles advice my "allocation" is reversed essentially.

Reversed? You are doing something wrong then. Your AA is something you choose as suitable for you. Unless you are blindly applying some age related rule of thumb formula, the AA you get should be roughly the same using any method. Whatever AA selection process you use must somehow take account of your entire financial situation in retirement. Obviously, you should not just ignore a major part of those finances. It's basically impossible to erase it from your mind anyway.

Personally, I will have a largish pension and age 70 delayed SS. Whatever way I look at the problem I still get an investible assets AA of around 60/40.
JW
Last edited by JW Nearly Retired on Thu May 23, 2013 8:27 am, edited 1 time in total.
Retired Summer 2013
JW Nearly Retired
 
Posts: 4058
Joined: Sun Dec 16, 2007 1:25 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby IlliniDave » Thu May 23, 2013 8:25 am

Call_Me_Op wrote:I like to allocate without consideration to Social Security. If it comes to fruition, it will be treated as found money. That is the conservative approach.


That's largely been my past approach, and quite likely where I'll end back up. Hearing someone who I perceive as pretty conservative regarding investing as Bogle viewing it differently has caused me to reflect though. I guess maybe he's a bit more of an optimist regarding the government and institutional finance than I am.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby Iorek » Thu May 23, 2013 8:30 am

This idea has been discussed before-- you can do some searching for "pension as bond."

I agree it's a very intriguing idea, but in the end I think I agree with the approach that treats pensions/social security as reducing the amount you'll need to withdraw from your investments, rather than as part of your investments.

Personally, I think the idea that social security will not be there for anyone is working today is a myth, generated by right wingers in order to make it possible to end social security. Social security has consistently, for the last 30-40 years, been 30-40 years away from insolvency. Plus, even in the worst case scenario, it will still pay out some 70-80% of expected benefits.
Iorek
 
Posts: 626
Joined: Fri Mar 08, 2013 10:38 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby IlliniDave » Thu May 23, 2013 8:42 am

JW Nearly Retired wrote:
IlliniDave wrote:That really set my way of thinking on it's head as prior to that I looked at my retirement/investment accounts essentially in isolation (except I kept in the back of my mind that the nest egg would only have to provide a portion of my retirement income). I'm relatively risk tolerant/aggressive and still being under 50 (barely) I had been working towards a ~70/30 stock/bond portfolio. But given that, as it stands today, I've got both SS and a non-contributory retirement annuity in my future, if I employ Mr Bogles advice my "allocation" is reversed essentially.

Reversed? You are doing something wrong then. Your AA is something you choose as a suitable for you. Unless you are blindly applying some age related rule of thumb formula, the AA you get should be roughly the same using any method. Whatever AA selection process you use must somehow take account of your entire financial situation in retirement. Obviously, you should not just ignore a major part of those finances. It's basically impossible to erase it from your mind anyway.

Personally, I will have a largish pension and age 70 delayed SS. Whatever way I look at the problem I still get an investible assets AA of around 60/40.
JW


Here's what I mean. If I add up the fixed income from the outside sources I'll get when I retire (which are completely independent of my retirement/investment accounts), then estimate what it would cost to buy an annuity that replicates that monthly income stream, the resulting present value of those future incomes is roughly twice the total of my current retirement/investment account balances. So even if my self-managed accounts were 100% stock, I'd have an "effective" allocation of about 2/3 bonds, 1/3 stocks if I employ Bogle's idea of counting the future fixed income sources (present value) as an additional facet of the bond allocation of my portfolio.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby IlliniDave » Thu May 23, 2013 8:55 am

Iorek wrote:This idea has been discussed before-- you can do some searching for "pension as bond."

I agree it's a very intriguing idea, but in the end I think I agree with the approach that treats pensions/social security as reducing the amount you'll need to withdraw from your investments, rather than as part of your investments.

Personally, I think the idea that social security will not be there for anyone is working today is a myth, generated by right wingers in order to make it possible to end social security. Social security has consistently, for the last 30-40 years, been 30-40 years away from insolvency. Plus, even in the worst case scenario, it will still pay out some 70-80% of expected benefits.


Thanks, I expected maybe it was, but I don't know my way around too well yet. Maybe I should just be more patient and "listen" for a while!

I am relieved that I didn't get a chorus of, "Well, duuh! Where have you been?! We all do that, of course." :)

That approach is the one that resonates best with my intuition--just setting the targets for income needed from the portfolio a little lower and handling it in isolation. I do set the target so that the invested assets could at least provide the essentials, leaving the other sources as uppers to standard of living, or providing additional flexibility for gifts and legacies.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby MnD » Thu May 23, 2013 9:04 am

I absolutely consider these when making current AA and anticipated retirement income and lifestyle decisions.
I have multiple anticipated income streams and cash flow in a spreadsheet I'm developing by year (work income until retirement, hobby income after retirement, my smallish pension, our SS's, our annual withdrawal from various investment pots, real estate sales and purchases......).

I'm OK with taking considerable risk in the investment portion which is now 75/25 just 5 years prior to retirement and which is on a glide path that won't reach 60/40 for 15 more years where it will become fixed. I also plan to use a dynamic withdrawal system from the investment side - something with withdrawal based on prior December 31 balance and life expectancy. Certainly not X percent increasing every year regardless. I hope we can work things out so our core retirement costs can be covered with the sum of income excluding investment income withdrawal.

And most importantly it comes down to individual financial situation and personality. If you must have a very steady and increasing stream of income from investments to "make it", you are likely going to be more much more conservative in your AA. Likewise if you have the strong belief that all streams of income other than what you can generate from your own investments are going to be severely compromised. And then you have the personality split where some people want to take less investment risk as their overall balance sheet improves when approaching retirement while some feel justified in taking more risk or keeping risk constant.
MnD
 
Posts: 2270
Joined: Mon Jan 14, 2008 1:41 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby Bacchus01 » Thu May 23, 2013 9:24 am

I include my pension, but not SS at this time.

I will probably change that in the future.
Bacchus01
 
Posts: 425
Joined: Mon Dec 24, 2012 10:35 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby ourbrooks » Thu May 23, 2013 9:26 am

Here's a link to an earlier thread. [url][url]http://www.bogleheads.org/forum/viewtopic.php?t=99826&f=10[/url][/url]

Yup, he really does say to include the present value of Social Security and pensions.

Of course, now that interest rates are lower, Social Security is worth more. Using data from immediateannuities.com, my calculation is that a $20,000 primary benefit for a couple, both reaching full retirement age at 66, is worth about $610,000.
ourbrooks
 
Posts: 1174
Joined: Fri Nov 13, 2009 5:56 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby ourbrooks » Thu May 23, 2013 9:30 am

By the way, except for John Bogle saying it, there's absolutely no other evidence that "age in bonds" or any other glidepath makes you safer!!
If you look at the "safe withdrawal rate" studies in the Wiki, you achieve the highest safe withdrawal rates with between 30% and 70% stocks. If you hold more than 70% bonds, you're more likely to run out of money than if you held more stocks.
ourbrooks
 
Posts: 1174
Joined: Fri Nov 13, 2009 5:56 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby deci02 » Thu May 23, 2013 11:37 am

ourbrooks wrote:Here's a link to an earlier thread. [url][url]http://www.bogleheads.org/forum/viewtopic.php?t=99826&f=10[/url][/url]

Yup, he really does say to include the present value of Social Security and pensions.

Of course, now that interest rates are lower, Social Security is worth more. Using data from immediateannuities.com, my calculation is that a $20,000 primary benefit for a couple, both reaching full retirement age at 66, is worth about $610,000.


Here's an updated link to the Scott Burn's Bogle interview referenced on that older Boglehead thread you've cited. Link on that thread redirects to a different Burns article than the one posters were referring to at the time.

http://assetbuilder.com/scott_burns/bogle_to_retirees_don%E2%80%98t_do_something_just_stand_there!

Personally I'm too cautious to use changing interest rates, especially as they go lower, as the denominator in phantom asset calculations for social security and pensions. When I figure phantom I use Bogle's conservative 14 times annual social security/pension income. It stops me from getting too grandiose with the estimate and thus going too deep into risk assets. I think the 14 figure is maybe derived more from expected average mortality after retirement rather than annual ss/pension income divided by a 7% interest rate yield for instance.

I'd be comfortable with the suggested calculations from this post from the earlier discussion you cited.

viewtopic.php?f=10&t=99826&start=50#p1445602
deci02
 
Posts: 173
Joined: Mon Apr 02, 2007 11:19 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby The Wizard » Thu May 23, 2013 11:46 am

Try rebalancing out of your Social Security present value amount to buy more stock funds when they fall by 20% or more.
It can't be done.
Hence, treat SS as a safety net or whatever, but don't confuse it with your owned investments...
Attempted new signature...
The Wizard
 
Posts: 6491
Joined: Tue Mar 23, 2010 2:45 pm
Location: Reading, MA

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby frugaltype » Thu May 23, 2013 11:51 am

Iorek wrote:This idea has been discussed before-- you can do some searching for "pension as bond."

I agree it's a very intriguing idea, but in the end I think I agree with the approach that treats pensions/social security as reducing the amount you'll need to withdraw from your investments, rather than as part of your investments.

Personally, I think the idea that social security will not be there for anyone is working today is a myth, generated by right wingers in order to make it possible to end social security. Social security has consistently, for the last 30-40 years, been 30-40 years away from insolvency. Plus, even in the worst case scenario, it will still pay out some 70-80% of expected benefits.


I haven't taken Social Security into account as a part of my investments. I do think it will be here during my lifetime (it's apparently solvent through 2032 with no changes, and solvent for much much longer than that if the salary cap is lifted.) But you never know what the government will do. Who knew they'd keep interest rates at darn near 0% ad infinitum, not me. (I know the Fed isn't actually the government, but they're all the same ilk.)
User avatar
frugaltype
 
Posts: 1952
Joined: Wed Apr 24, 2013 10:07 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby The Wizard » Thu May 23, 2013 11:56 am

I think that knowing your SS entitlement amount helps you INFORMALLY adjust your risk tolerance a bit, such that you can maintain a higher allocation to equities than you otherwise might as you approach and go into retirement.
The take-it-off-the-table-when-you-hit-your-number crowd likely won't agree with this, of course...
Attempted new signature...
The Wizard
 
Posts: 6491
Joined: Tue Mar 23, 2010 2:45 pm
Location: Reading, MA

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby Browser » Thu May 23, 2013 12:10 pm

One can use a Total Return model to determine asset allocation, in which everything is considered to be an actual or equivalent investment "asset." That's what Bogle is doing when he treats SS as a bond-equivalent asset and advocating that one's nestegg portfolio might be be entirely invested in equities. The other approach, which makes more sense to me, is to categorize one's economic assets as either "liability-matching" assets or "total return" assets. Ideal liability-matching assets provide a known income stream that can be applied toward known current and future spending liabilities, such as housing costs, food, etc. The most desirable liability-matching assets incorporate some degree of inflation-adjustment and include social security, pensions, inflation-adjusted annuities, TIPS and I-Bonds. Using this model, a retiree would first try to secure basic needs with liability-matching assets. If this can be done without requiring all of one's savings nestegg, then the remainder can be invested according to one's preferred allocation strategy - taking into consideration the need, ability, and willingness to assume investment risk. The allocation to risky assets such as stocks can be as much as 100% based on the investor's desires. Bogle's advice is a rather crude way of getting there. It does not explicitly consider liability-matching needs and whether social security and other similar economic assets actually do meet those needs. It assumes that it is safe to invest a large percentage of one's investable assets in equities without taking into consideration what percentage of those assets ought to be used to purchase liability-matching assets such as annuities, TIPS, I-Bonds. And it does not consider ones' need, ability, and willingness to assume equity risk after one's basic living needs have been addressed per a liability-matching strategy.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
Browser
 
Posts: 3080
Joined: Wed Sep 05, 2012 5:54 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby TomatoTomahto » Thu May 23, 2013 12:15 pm

The Wizard wrote:I think that knowing your SS entitlement amount helps you INFORMALLY adjust your risk tolerance a bit, such that you can maintain a higher allocation to equities than you otherwise might as you approach and go into retirement.
The take-it-off-the-table-when-you-hit-your-number crowd likely won't agree with this, of course...
Agree. If it weren't for SS and pensions, we'd probably be between 50-60% bonds. Instead, we're around 45% bonds, and I'd be willing to go as low as 30-35% bonds.
User avatar
TomatoTomahto
 
Posts: 2894
Joined: Mon Apr 11, 2011 2:48 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby JW Nearly Retired » Thu May 23, 2013 3:20 pm

IlliniDave wrote:
JW Nearly Retired wrote:Reversed? You are doing something wrong then. Your AA is something you choose as a suitable for you. Unless you are blindly applying some age related rule of thumb formula, the AA you get should be roughly the same using any method. Whatever AA selection process you use must somehow take account of your entire financial situation in retirement. Obviously, you should not just ignore a major part of those finances. It's basically impossible to erase it from your mind anyway.

Personally, I will have a largish pension and age 70 delayed SS. Whatever way I look at the problem I still get an investible assets AA of around 60/40.
JW

Here's what I mean. If I add up the fixed income from the outside sources I'll get when I retire (which are completely independent of my retirement/investment accounts), then estimate what it would cost to buy an annuity that replicates that monthly income stream, the resulting present value of those future incomes is roughly twice the total of my current retirement/investment account balances. So even if my self-managed accounts were 100% stock, I'd have an "effective" allocation of about 2/3 bonds, 1/3 stocks if I employ Bogle's idea of counting the future fixed income sources (present value) as an additional facet of the bond allocation of my portfolio.

Yes, is there some problem with that? You would have that "effective" allocation if you pick 100% stocks in the self-managed accounts. Even if you were to actually pick 100% stocks, you would still have a far lower risk retirement income stream than someone who has to rely on a nest egg only. What now? You have yet to make use of this piece of data and decide what AA you want in these self-managed accounts. Are you going to blindly follow "effective" age-in-bonds and stay at 100% stocks until you retire? ..... doubtful many would. Personally, I make this sort of calculation and use the similar result to yours to up my stock allocation to roughly my kids age in bonds without worrying about it.

I could get to the same thing by saying I will get only a third of my retirement income from the nest egg so I have great ability to take risk with it. I will therefore save mostly for my heirs and pick an AA = 60/40.
JW
Retired Summer 2013
JW Nearly Retired
 
Posts: 4058
Joined: Sun Dec 16, 2007 1:25 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby The Wizard » Thu May 23, 2013 4:30 pm

TomatoTomahto wrote:
The Wizard wrote:I think that knowing your SS entitlement amount helps you INFORMALLY adjust your risk tolerance a bit, such that you can maintain a higher allocation to equities than you otherwise might as you approach and go into retirement.
The take-it-off-the-table-when-you-hit-your-number crowd likely won't agree with this, of course...
Agree. If it weren't for SS and pensions, we'd probably be between 50-60% bonds. Instead, we're around 45% bonds, and I'd be willing to go as low as 30-35% bonds.

Sounds good because one of the few areas where we allow and respect(?) individual variation here is Risk Tolerance. It's a psychological comfort thing that may not really become known for a person until he/she has slept well (or not!) through a major stock market decline...
Attempted new signature...
The Wizard
 
Posts: 6491
Joined: Tue Mar 23, 2010 2:45 pm
Location: Reading, MA

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby btenny » Thu May 23, 2013 4:38 pm

I wonder if this new comment by Mr. Bogle is a tactic for him to get some of us older people to invest more in stocks and less in bonds to reduce our risk due to raising interest rates? Just a thought on my part as we all know he has talked a lot in recent times about making sure we had as much as possible invested in stocks rather than gov't bonds.

Bill
btenny
 
Posts: 2217
Joined: Sun Oct 07, 2007 7:47 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby IlliniDave » Thu May 23, 2013 4:55 pm

JW Nearly Retired wrote:
IlliniDave wrote:
JW Nearly Retired wrote:Reversed? You are doing something wrong then. Your AA is something you choose as a suitable for you. Unless you are blindly applying some age related rule of thumb formula, the AA you get should be roughly the same using any method. Whatever AA selection process you use must somehow take account of your entire financial situation in retirement. Obviously, you should not just ignore a major part of those finances. It's basically impossible to erase it from your mind anyway.

Personally, I will have a largish pension and age 70 delayed SS. Whatever way I look at the problem I still get an investible assets AA of around 60/40.
JW

Here's what I mean. If I add up the fixed income from the outside sources I'll get when I retire (which are completely independent of my retirement/investment accounts), then estimate what it would cost to buy an annuity that replicates that monthly income stream, the resulting present value of those future incomes is roughly twice the total of my current retirement/investment account balances. So even if my self-managed accounts were 100% stock, I'd have an "effective" allocation of about 2/3 bonds, 1/3 stocks if I employ Bogle's idea of counting the future fixed income sources (present value) as an additional facet of the bond allocation of my portfolio.

Yes, is there some problem with that? You would have that "effective" allocation if you pick 100% stocks in the self-managed accounts. Even if you were to actually pick 100% stocks, you would still have a far lower risk retirement income stream than someone who has to rely on a nest egg only. What now? You have yet to make use of this piece of data and decide what AA you want in these self-managed accounts. Are you going to blindly follow "effective" age-in-bonds and stay at 100% stocks until you retire? ..... doubtful many would. Personally, I make this sort of calculation and use the similar result to yours to up my stock allocation to roughly my kids age in bonds without worrying about it.

I could get to the same thing by saying I will get only a third of my retirement income from the nest egg so I have great ability to take risk with it. I will therefore save mostly for my heirs and pick an AA = 60/40.
JW


I don't know if there's a "problem" or not. Probably not. More likely a good thing. It's just a vastly different way of thinking about things than I had been...that my "70/30" ("picked") allocation, examined using Bogle's way of thinking is a much more conservative "30/70" allocation (when including outside income sources the way he suggests). Like I said in my original post, it's not something I lose any sleep over. In part I brought it up because, being new here, when the average boglehead says he/she has a "50/50" allocation, I was unsure if they were talking about including future outside fixed income as an asset ala Bogle or not.

Intuitively it makes sense that having a fixed income base allows for some opportunity to be more aggressive in investment accounts, and likely it was a subconscious contributor to my approach to risk/reward decisions in determining an asset allocation. Certainly after the discussion on here today and hearing other people's thoughts I'm more comfortable with leaning a bit towards the aggressive side with holding 70% stocks in my investment accounts at my age.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby IlliniDave » Thu May 23, 2013 5:06 pm

The Wizard wrote:Try rebalancing out of your Social Security present value amount to buy more stock funds when they fall by 20% or more.
It can't be done.
Hence, treat SS as a safety net or whatever, but don't confuse it with your owned investments...


I couldn't even rebalance into 70% stocks/30% bonds if stock fund values went up 20%! :happy
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby Ged » Thu May 23, 2013 5:14 pm

I'm 63 at the moment, with about 50% in bonds. If I adopted this scheme my liquid asset accounts would be 90% equities. No, I don't think I could sleep with that.

I've thought about going to 120-age in equities. that would be about 57%. Maybe, but there was an awful lot of financial news today.
What do we want? Evidence driven change. | When do we want it? After peer review.
User avatar
Ged
 
Posts: 2090
Joined: Mon May 13, 2013 2:48 pm
Location: Roke

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby IlliniDave » Thu May 23, 2013 5:17 pm

MnD wrote:I absolutely consider these when making current AA and anticipated retirement income and lifestyle decisions.
I have multiple anticipated income streams and cash flow in a spreadsheet I'm developing by year (work income until retirement, hobby income after retirement, my smallish pension, our SS's, our annual withdrawal from various investment pots, real estate sales and purchases......).

I'm OK with taking considerable risk in the investment portion which is now 75/25 just 5 years prior to retirement and which is on a glide path that won't reach 60/40 for 15 more years where it will become fixed. I also plan to use a dynamic withdrawal system from the investment side - something with withdrawal based on prior December 31 balance and life expectancy. Certainly not X percent increasing every year regardless. I hope we can work things out so our core retirement costs can be covered with the sum of income excluding investment income withdrawal.

And most importantly it comes down to individual financial situation and personality. If you must have a very steady and increasing stream of income from investments to "make it", you are likely going to be more much more conservative in your AA. Likewise if you have the strong belief that all streams of income other than what you can generate from your own investments are going to be severely compromised. And then you have the personality split where some people want to take less investment risk as their overall balance sheet improves when approaching retirement while some feel justified in taking more risk or keeping risk constant.


Sounds like we have similar approaches. I too have a spreadsheet I've nicknamed "The Borg" because it's scope is expanding to an ever broader portion of my existence. I haven't yet integrated it seamlessly with the computer simulation I wrote for the rest of my life. Yet. :) It's a relief to know I'm not the only one...

One of my "tasks" for this year is to take a look at dynamic/flexible withdrawals. I'm hoping to semi-retire and work on an variable/occasional part-time basis outside of my "profession" for a decade or so before full retirement. For me something like adhering to a 4% rule won't make sense, so I'm trying to come up with sort of a "rebalancing" scheme where my pocket is one of allocation categories.

Good luck in your pursuits!
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby larmewar » Thu May 23, 2013 7:12 pm

I also count SS and pensions as reducing the costs my investments have to cover, but let's follow the original example through to a conclusion. Example was SS as $300K bond and $150K in equities. Now let's say the target allocation is 50% equities. So that means my $150K for equities needs to be invested with 2X leverage. IMO, that is a strategy designed to create a disaster rather than successful investing.

Lar
larmewar
 
Posts: 308
Joined: Sat Mar 03, 2007 8:45 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby JW Nearly Retired » Thu May 23, 2013 8:00 pm

IlliniDave wrote: In part I brought it up because, being new here, when the average boglehead says he/she has a "50/50" allocation, I was unsure if they were talking about including future outside fixed income as an asset ala Bogle or not.

I'm 99% certain in all cases we are talking about just the investible assets portfolio when we mention our AA. We just don't have any consensus formulaic approach on how to choose what that personal AA ratio ought to be.
JW
Retired Summer 2013
JW Nearly Retired
 
Posts: 4058
Joined: Sun Dec 16, 2007 1:25 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby linguini » Fri May 24, 2013 2:29 pm

The Wizard wrote:I think that knowing your SS entitlement amount helps you INFORMALLY adjust your risk tolerance a bit, such that you can maintain a higher allocation to equities than you otherwise might as you approach and go into retirement.
The take-it-off-the-table-when-you-hit-your-number crowd likely won't agree with this, of course...


I agree with this approach. If I thought social security would not exist for me in retirement, I would probably become more risk averse with my savings and keep more as cash and treasury bonds to make up for the lack of guaranteed income.
linguini
 
Posts: 242
Joined: Tue Oct 16, 2012 3:49 pm

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby YDNAL » Fri May 24, 2013 3:32 pm

IlliniDave wrote:A while back I was watching an interview with Mr. Bogle where he was discussing asset allocation. He said a person should consider the present value of things such as Social Security and pensions as part of their portfolio's bond allocation when making asset allocation decisions. He provided an example of a 55-year-old future SS recipient who had $150,000 to invest (no other investments). With the present value of the Social Security being "some $300,000", Bogle said he didn't see any reason why the person wouldn't invest the entire $150,000 in stocks. I wasn't able to immediately find the video again or else I'd try to link it.

Here's how I see this:
1. For a 55yo, a $150K portfolio may withstand a $6K annual withdrawal for 3 or 4 decades. Perhaps more, perhaps less, much unknown.
2. If Social Security does NOT provide the remainder needed to cover retirement expenses, then one has MORE important decisions than what's in the quote.
3. The options are:
    a) Work much longer.
    b) Save much more.
    c) Reduce expenses.
4. Taking additional Equity risk guarantees NOTHING.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13699
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay

Re: Bogle on Soc Sec/Fixed Income and Asset Allocation

Postby IlliniDave » Fri May 24, 2013 5:09 pm

YDNAL wrote:
IlliniDave wrote:A while back I was watching an interview with Mr. Bogle where he was discussing asset allocation. He said a person should consider the present value of things such as Social Security and pensions as part of their portfolio's bond allocation when making asset allocation decisions. He provided an example of a 55-year-old future SS recipient who had $150,000 to invest (no other investments). With the present value of the Social Security being "some $300,000", Bogle said he didn't see any reason why the person wouldn't invest the entire $150,000 in stocks. I wasn't able to immediately find the video again or else I'd try to link it.

Here's how I see this:
1. For a 55yo, a $150K portfolio may withstand a $6K annual withdrawal for 3 or 4 decades. Perhaps more, perhaps less, much unknown.
2. If Social Security does NOT provide the remainder needed to cover retirement expenses, then one has MORE important decisions than what's in the quote.
3. The options are:
    a) Work much longer.
    b) Save much more.
    c) Reduce expenses.
4. Taking additional Equity risk guarantees NOTHING.


Fundamentally, I agree. I think it's implicit in anything Bogle says on the topic of investing that there are no guarantees regarding returns, especially regarding stocks, and that ongoing saving is a priority (the example investor would probably anticipate working another 12-15 years). As I've thought about this I think it might be significant Bogle chose a modest nest egg at the age he did for the example. Many (certainly not all) dedicated long-term investors are fortunate to be in a position where SS is treated as an add-on to retirement. In this example it's pretty clear the investor in question will be relying on SS for the lion's share of retirement subsistence, which doesn't leave a lot of wiggle room. I wonder if the thought is that over the total potential investment horizon of say up to 35 years the person might reasonably anticipate (no guarantees) enough growth that he'd be able to more robustly supplement SS by angling for a bit more long term real growth, and lower the overall risk of shortfall. Perhaps the strategy would involve gliding to a more stable allocation later, he didn't say.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1368
Joined: Fri May 17, 2013 8:09 am


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: anil686, bertilak, Chan_va, dratkinson, retiredjg, Yahoo [Bot] and 56 guests