Do you include SS [Social Sec] in your AA [Asset Allocation]

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stemikger
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Do you include SS [Social Sec] in your AA [Asset Allocation]

Post by stemikger »

I'm 48 years old and was wondering if anyone my age should look at what they will get in Social Security and make it part of their overall Asset Allocation.

I do not do that, but I was wondering if I should. The reason I do not do it is because I'm really not sure what changes will occur to social security when it comes to someone my age.

What are your thoughts on this.
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MN Finance
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Re: Do you include SS in your AA

Post by MN Finance »

My guess it that you will have two equally valid ways of looking at this.

If you include the present value of SS or another pension, then that would lead to a more aggressive portfolio which may exceed your willingness to take risk.

If you do not include it, then it goes to reduce your need to take risk of your present portfolio based on a lower needed income base from your retirement.
dad2000
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Re: Do you include SS in your AA

Post by dad2000 »

I do not. I only use it to reduce my estimates of required income in retirement.

I also assume that my benefits will only be 75% of what is currently estimated due to likely program changes.
ResNullius
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Re: Do you include SS in your AA

Post by ResNullius »

No, I don't. I think the conservative thing to do is to not include it. This said, you also shouldn't ignore it when it comes to projecting their income stream for future years.
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Re: Do you include SS in your AA

Post by The Wizard »

I'm almost 63 and on the CUSP of quitting employment.
I don't include SS in my AA, but I do include it in my income projections starting at age 70.
My AA is presently 52% equities and I may drop down to 50% soon, but that's it...
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dbr
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Re: Do you include SS in your AA

Post by dbr »

MN Finance wrote:My guess it that you will have two equally valid ways of looking at this.

If you include the present value of SS or another pension, then that would lead to a more aggressive portfolio which may exceed your willingness to take risk.

If you do not include it, then it goes to reduce your need to take risk of your present portfolio based on a lower needed income base from your retirement.
All equally valid ways of looking at future income needs, risk, and return should produce the same number of actual dollars invested in each possible actual asset (SS is either income or a virtual asset in this case). If that does not happen, then the method of determining asset allocation is faulty in one, the other, or both cases. In most of these questions it would seem the issue hinges on the question of how an asset allocation should be determined. Personally I think it is much more straightforward to place things that look like income with income and things that look like assets with assets and proceed to apply judgement and preference to determining an asset allocation. How to use imputed capital, such as the worth of an income stream, as an asset is too confusing for me.

PS This question is discussed several times a year on this forum.
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Tim_in_GA
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Re: Do you include SS in your AA

Post by Tim_in_GA »

dad2000 wrote:I do not. I only use it to reduce my estimates of required income in retirement.

I also assume that my benefits will only be 75% of what is currently estimated due to likely program changes.
Exactly the same here.
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Re: Do you include SS in your AA

Post by NYBoglehead »

I would not include it as part of your AA. Instead, use it to estimate what % of your desired retirement income SS will provide, and use the deficit left after SS to determine what your portfolio will have to provide.

Being much younger, I prefer to act as if it will not be there at all. I am sure it will exist in some form, so whatever benefit is around will be icing on the cake.
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stemikger
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Re: Do you include SS in your AA

Post by stemikger »

The Wizard wrote:I'm almost 63 and on the CUSP of quitting employment.
I don't include SS in my AA, but I do include it in my income projections starting at age 70.
My AA is presently 52% equities and I may drop down to 50% soon, but that's it...
Wizard, I'm curious will you stay at 50% equities going forward all through retirement. I'm just asking becasue I like that number in retirement becaue you stand a better chance of out pacing inflation and I personally think 30% that the Vanguard Retirement Income fund has is too little.
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Re: Do you include SS in your AA

Post by EternalOptimist »

I am retired and do not include SS$ as part of AA. I do of course include it as part of my annual income.
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Re: Do you include SS in your AA

Post by The Wizard »

stemikger wrote:
The Wizard wrote:I'm almost 63 and on the CUSP of quitting employment.
I don't include SS in my AA, but I do include it in my income projections starting at age 70.
My AA is presently 52% equities and I may drop down to 50% soon, but that's it...
Wizard, I'm curious will you stay at 50% equities going forward all through retirement. I'm just asking becasue I like that number in retirement becaue you stand a better chance of out pacing inflation and I personally think 30% that the Vanguard Retirement Income fund has is too little.
Hard to say.
I'll be annuitizing a portion of my TIAA-CREF funds as a Variable Annuity with only a modest portion in stocks. I expect to see my "paycheck" from this source have a small increase most months.
The unannuitized portion, yes, I'll keep at 50% equities at least to start with...
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Dandy
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Re: Do you include SS in your AA

Post by Dandy »

Having the benefit of future social security income or pension income puts you in a much better position than if you didn't have it (them). It allows you to take more risk (or less risk) in your portfolio if you wish since you will need less drawdown of your portfolio when you retire.
I think social security should be viewed as income not counted as part of your allocation.
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Re: Do you include SS in your AA

Post by Sunny Sarkar »

I'm in the mid accumulation phase, and I do not include social security in my AA. I hope to be financually stable in retirement without social security. If ss gives me extra income in the golden days, that's gravy.
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Re: Do you include SS in your AA

Post by chaz »

I do not.
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Re: Do you include SS in your AA

Post by FNK »

I treat SS as insurance, so I don't include it in anything. Will revisit in a decade or two.
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Re: Do you include SS in your AA

Post by JW-Retired »

Yes I do. If I attempt to imagine that I didn't have SS/pension I'm pretty certain I would choose a different investible assets AA. I feel it would be nuts for me not to.

I actually think everybody includes all their financial facts into coming up with an AA. They certainly should and I don't see how anyone can put them out of their minds even if they try. However, it's impossible to prove anyone did or didn't "include" them, given that the Boglehead AA choice process is nebulous and highly mallable by each investor's thoughts about their needs and risk tolerance.
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Re: Do you include SS in your AA

Post by lloydbraun »

Yes I include Social Security in my AA. I'm not saying that everyone needs to follow everything Bogle advises but I find it interesting that investors on a site called Bogleheads.org disregard Bogle's advice to include SS in your AA.
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Re: Do you include SS in your AA

Post by The Wizard »

lloydbraun wrote:Yes I include Social Security in my AA. I'm not saying that everyone needs to follow everything Bogle advises but I find it interesting that investors on a site called Bogleheads.org disregard Bogle's advice to include SS in your AA.
Bogleheads are not only a contrary bunch, but have widely varying financial situations.
So, while we all face East for the sunrise each morning, that's about the extent of uniformity in our thinking...
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Re: Do you include SS in your AA

Post by EternalOptimist »

The Wizard wrote:
lloydbraun wrote:Yes I include Social Security in my AA. I'm not saying that everyone needs to follow everything Bogle advises but I find it interesting that investors on a site called Bogleheads.org disregard Bogle's advice to include SS in your AA.
Bogleheads are not only a contrary bunch, but have widely varying financial situations.
So, while we all face East for the sunrise each morning, that's about the extent of uniformity in our thinking...

Amen, "follow the path less traveled" :D
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Re: Do you include SS in your AA

Post by lloydbraun »

People can talk about the road less travelled and being contrarian as if these two things are inherently good. They're only good when everyone else is wrong. Bogle hasn't been correct because he's been a contrarian, he's been correct because he applied academic research to the world of investing to create the world's first index fund. I once had a student who told me that he was a critical thinker, which meant that he didn't believe anything. I explained that a critical thinker is not someone who refuses to believe anything, but rather someone who evaluates all of the available data to reach a well informed conclusion. I don't care if people don't include SS in their AAs but I would hope that instead of lauding contrarians we could celebrate critical thinking. The reason Bogle advises individuals to include SS in their AAs is so that they take the necessary amount of risk to reach their retirement goals. If your goal is to save enough to be able to draw 2K per month from your savings starting at age 67 (let's keep inflation out of this just to keep it simple) while expecting to receive 2k per month from SS, then it would be foolish not to include SS in your AA as it represents half of your expected post-retirrement income. This doesn't mean that you need to only be in stocks, in fact having SS may induce you to take less risk, but in any case I agree with Bogle that, unlike insurance, it should be included in your AA. Again, he's right because he's right, not because he took the road less travelled.
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Re: Do you include SS in your AA

Post by tc101 »

I am 62 and retired. My allocation is 45% stock, 55% fixed income. I have additional investments in real estate.

I do not include SS in AA. I also don't include it when calculating my income stream, just because I don't need to. I am currently comfortable living on a 4% withdrawel rate, plus the rental income from real estate. I don't think spending more money would make me happier.

I think of SS as my ace in the hole in case there is some big unexpected financial disaster in my life. I have not decided yet when to take it, but will probably wait until I am 70.
I actually think everybody includes all their financial facts into coming up with an AA.
I think that is correct. Knowing SS is there causes me to be more relaxed. I'm haven't used it in calculations but I'm sure it effects me subconsciously. I'm not sure how I would invest differently if I didn't have the SS ace in the hole.
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Re: Do you include SS in your AA

Post by LadyGeek »

Here's a summary of the disagreements: Fixed income
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Re: Do you include SS in your AA

Post by The Wizard »

lloydbraun wrote:...in any case I agree with Bogle that, unlike insurance, it should be included in your AA. Again, he's right because he's right, not because he took the road less travelled.
Well if he's right BY DEFINITION, then I guess we really have nothing to discuss.
Or we could morph the discussion into what the proper AA is as a function of age...
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Re: Do you include SS in your AA

Post by lloydbraun »

Yeah I didn't mean for it to come across as right by definition, however I do agree with him and I do think that the better conversation is AA, with SS included, by age.
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Re: Do you include SS in your AA

Post by bertilak »

No, I do not count SS income as an asset. Here is my thinking ...

An asset allocation is an allocation of invested assets. (A tautology?) I see two reasons to invest:
  1. Have a legacy to pass on.

    SS can't be used as a legacy to pass on so it is meaningless as an asset from this perspective.
  2. Supply the income needed to support one's chosen lifestyle.

    This is all about cash flow. SS income is *already* a cash flow so simply treating it that way is more direct than first converting it to an asset, mixing it in with other, straightforward, assets, and then project a cash flow from that. Since we *started* with SS as a cash flow this "SS as an asset that contributes to a cash flow" exercise is just thrashing about without any value-add.

    Quite the converse: Both the conversion steps, cash-flow-to-asset and asset-back-to-cash-flow require estimates and assumptions that are imprecise resulting in a fuzzier outcome (estimate) then simply treating SS as the cash flow that it already is.
Last edited by bertilak on Wed Jan 02, 2013 12:32 pm, edited 1 time in total.
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Re: Do you include SS in your AA

Post by pennstater2005 »

NYBoglehead wrote:I would not include it as part of your AA. Instead, use it to estimate what % of your desired retirement income SS will provide, and use the deficit left after SS to determine what your portfolio will have to provide.

Being much younger, I prefer to act as if it will not be there at all. I am sure it will exist in some form, so whatever benefit is around will be icing on the cake.
I feel the same. I invest with no consideration of it being around when I retire and if it is, fantastic.
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Re: Do you include SS in your AA

Post by The Wizard »

I actually did go through the exercise of "monetizing" my predicted SS payout a few years back to see what it does for my AA.
But it's not that simple to do. My SS statement gives me $1935 a month at age 62 (11 months ago) or $3383/month at age 70 (7+ years from now). So which one do I choose?
And I should probably use an SPIA payout percentage (6% or 7%) rather than 4% SWR since there will be no principal left over when I croak.
Perhaps whichever payout age I pick, I should get the same "Present Value" of my SS "investment", since it's supposed to be actuarially neutral, right?
No time right now to run the numbers myself, but would be good if someone could...
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Re: Do you include SS in your AA

Post by ddunca1944 »

EternalOptimist wrote:I am retired and do not include SS$ as part of AA. I do of course include it as part of my annual income.
+1

If I were not already drawing it, I would certainly not even consider including it as part of my AA. It seems like counting chickens before they are hatched and all.

I also do not count my pension or home equity as part of my AA. Because of them, however, I do have a more aggressive AA than recommended for retirees my age.
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Re: Do you include SS in your AA

Post by Default User BR »

stemikger wrote:I'm 48 years old and was wondering if anyone my age should look at what they will get in Social Security and make it part of their overall Asset Allocation.
I don't. You can't buy, sell, exchange, or otherwise rebalance it. I don't include the MyMegaCorp pension either. I consider it a future income stream to be used in retirement planning.


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Re: Do you include SS in your AA

Post by JW-Retired »

ddunca1944 wrote: I also do not count my pension or home equity as part of my AA. Because of them, however, I do have a more aggressive AA than recommended for retirees my age.
Exactly my point. You are treating these assets as having a bondlike charcter and increasing your equities because of them. If you didn't have these assets you would use a different investible assets AA.

Perhaps there is confusion because we are interpreting the OP question, "Do you include SS in your AA", differently. I interpret it as do I consider my SS/pension in arriving at what my investible assets AA should be. I think that is what he/she meant so I said yes. Others may be interpreting it as "when you say your AA is XX/YY are you counting SS in that?" My answer to that question would be no, I only count up the investible assets.
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Re: Do you include SS in your AA

Post by BTDT »

The Wizard wrote:
lloydbraun wrote:Yes I include Social Security in my AA. I'm not saying that everyone needs to follow everything Bogle advises but I find it interesting that investors on a site called Bogleheads.org disregard Bogle's advice to include SS in your AA.
Bogleheads are not only a contrary bunch, but have widely varying financial situations.
So, while we all face East for the sunrise each morning, that's about the extent of uniformity in our thinking...
Well said ............and plus 1 for me. Given my 'guvmint' pension and SS @ 70, I chose 60/40 (stocks/bonds) @ 66 because it 'feels good' to me.
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