Asset allocation, Social Security and other pensions

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henrytow
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Asset allocation, Social Security and other pensions

Post by henrytow »

I am new to Bogleheads and apologize if I am going over already plowed land. But I am reasonably sophisticated (CFA, Ph.D. economics) and have never seen the following idea discussed or analyzed with any rigor:

Virtually everyone reading this either has or expects to have a pension from Social Security. Many have or will also have a pension, perhaps indexed from the government, and the same thoughts apply here as well.

My Social Security pension is equivalent to an inflation-indexed fixed annuity and should be valued and considered as such in my asset allocation. The higher my Social Security pension, the lower need be my allocation to conventional fixed income securities.

One thing I don't know: What is the capitalized value of my Social Security? Does anyone sell an inflation-indexed fixed annuity that would be comparable?
earlyout
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Post by earlyout »

There has been a lot of discussion about how one should consider their future SS benefit in their AA. Not everyone agrees with your assumption that it should be included in your AA because including your potential SS benefit as a fixed income asset can lead to everything else in your portfolio being equities.

The best place to start is by entering "SS in AA" in the Bogleheads search box.

EO
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alec
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Re: Asset allocation, Social Security and other pensions

Post by alec »

henrytow wrote:I am new to Bogleheads and apologize if I am going over already plowed land. But I am reasonably sophisticated (CFA, Ph.D. economics) and have never seen the following idea discussed or analyzed with any rigor:

Virtually everyone reading this either has or expects to have a pension from Social Security. Many have or will also have a pension, perhaps indexed from the government, and the same thoughts apply here as well.

My Social Security pension is equivalent to an inflation-indexed fixed annuity and should be valued and considered as such in my asset allocation. The higher my Social Security pension, the lower need be my allocation to conventional fixed income securities.

One thing I don't know: What is the capitalized value of my Social Security? Does anyone sell an inflation-indexed fixed annuity that would be comparable?
See Estimating the Value of Social Security Retirement Benefits
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
dbr
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Post by dbr »

What is your proposal for how to value and consider an inflation indexed fixed annuity in your AA.? You have succeeded at the famous tactic of mathematical proof of reducing an easier question to a harder question.

The serious answer to your question is to try to search the forum for previous discussion. Hopefully you will eventually convince yourself that annuities do not behave like investments and are therefore not commensurable. A better answer is that the presence of an annuity affects the investors evaluation of the need, ability, and willingness to take risk with a portfolio of liquid assets. However, it does not do so in a reasonable way by being considered as a fixed income investment. The actual answer to how your asset allocation might change between ignoring the existence of an annuity and taking the existence of the annuity into account, is that the change could be anything depending on your personal objectives and circumstances and how those factors result in need, ability, and willingness to take risk with your liquid assets.

A different risk assessment is the question of how risky is your retirement? That question is larger than the question of how much at risk your liquid investments are and is evaluated according to different parameters. Specifically the risk at question is the risk to income stream rather than the risk to asset value. The presence of annuities in that calculation is so important that persons who have no annuities almost certainly should annuitize some assets.
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bob90245
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Re: Asset allocation, Social Security and other pensions

Post by bob90245 »

henrytow wrote:I am new to Bogleheads and apologize if I am going over already plowed land. But I am reasonably sophisticated (CFA, Ph.D. economics) and have never seen the following idea discussed or analyzed with any rigor:

Virtually everyone reading this either has or expects to have a pension from Social Security. Many have or will also have a pension, perhaps indexed from the government, and the same thoughts apply here as well.

My Social Security pension is equivalent to an inflation-indexed fixed annuity and should be valued and considered as such in my asset allocation. The higher my Social Security pension, the lower need be my allocation to conventional fixed income securities.
It really depends. Try re-framing the problem as matching liabilities (essential expenses) to income sources. This chart is the short-version description:

Image
Source: http://www.bobsfinancialwebsite.com/SaferPlan2.html
henrytow wrote:One thing I don't know: What is the capitalized value of my Social Security? Does anyone sell an inflation-indexed fixed annuity that would be comparable?
I have list (in need of updating) of inflation-indexed fixed annuity providers here:

http://www.bobsfinancialwebsite.com/Saf ... tml#note_5
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
Harold
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Post by Harold »

henrytow wrote:My Social Security pension is equivalent to an inflation-indexed fixed annuity and should be valued and considered as such in my asset allocation.
A statement stated as an obvious fact, yet one which many would consider wrong. (Or at least an indicator that anyone seeing it as an obvious fact might benefit from thinking through the purpose of "asset allocation".)

Setting everything else aside, here's a question for you:

You know (subject to assumed income between now and retirement, and potential Social Security defined benefit changes) what the Social Security annuity is. If you can use that piece of information in retirement planning (which you can), why would you then take that number and do a mathematical calculation which you know without a doubt will be wrong (because of the assumptions you'll need to make) to produce a new number to use in retirement planning?
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joe8d
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Post by joe8d »

I simply consider SS and Pension as inflows into my bank checking account along with my P/T job earnings.All are direct deposited. All my outflows are either automatically withdrawn or are Debit Card transactions on the same checking account. So far (6.5 years in retirement) inflows have exceed outflows. I call my bank checking account my "Spending Pail " which along with my "Income Bucket" (bonds) and "Growth Bucket"(stocks) make up my current portfolio structure.
All the Best, | Joe
fanofjack
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Re: Asset allocation, Social Security and other pensions

Post by fanofjack »

I have asked the question of how to value Social Security and have never heard or read a simple answer...so I came up with my own calculation...

I subscribe to the theory that a 60/40 balanced account will yield 4% throughout my withdrawal period and its growth will adjust for inflation. So, I look at Social Security in the same manner. It is as if I have a 60/40 account yielding 4% per annum (e.g. $500,000.00 x 4% per annum = $20,000.00 per year.) This makes the $20,000.00 per year Social Security revenue stream have a capitalized value (phantom money) of $500,000.00 in a 60/40 balanced mutual fund. It is a projection, but it is as good as any and I feel comfortable with it.

:)
pastafarian
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Re: Asset allocation, Social Security and other pensions

Post by pastafarian »

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Last edited by pastafarian on Mon Feb 24, 2014 7:55 pm, edited 1 time in total.
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TheTimeLord
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Re: Asset allocation, Social Security and other pensions

Post by TheTimeLord »

henrytow wrote:My Social Security pension is equivalent to an inflation-indexed fixed annuity and should be valued and considered as such in my asset allocation.
I only do that to amuse myself and make myself feel like I have a bigger pile. For me it is only indirectly related to determining my AA, not part of it. But I am sure you will find a broad spectrum of opinions on the subject.

Will J G Wentworth take Social Security?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
The Wizard
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Re: Asset allocation, Social Security and other pensions

Post by The Wizard »

Why are we resurrecting a 3+ year old thread to beat this dead-horse topic yet again?
Attempted new signature...
YDNAL
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Re: Asset allocation, Social Security and other pensions

Post by YDNAL »

henrytow (OP) » Thu Oct 07, 2010 2:51 pm wrote:My Social Security pension is equivalent to an inflation-indexed fixed annuity and should be valued and considered as such in my asset allocation. The higher my Social Security pension, the lower need be my allocation to conventional fixed income securities.
This thread is from October 2010.
fanofjack » Tue Jan 28, 2014 10:21 pm wrote:I have asked the question of how to value Social Security and have never heard or read a simple answer...
1. No, you never read a simple answer that you want to hear.
2. SS benefits lower one's NEED to take risk, which is 100% the opposite of: "lower need to conventional fixed income securities" as stated in OP.
3. The simple answer is that projected SS annual benefit reduces the annual amount you need to take out of your savings to pay bills.
4. You are beating a dead horse.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
technovelist
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Re: Asset allocation, Social Security and other pensions

Post by technovelist »

The Wizard wrote:Why are we resurrecting a 3+ year old thread to beat this dead-horse topic yet again?
Maybe we haven't been beating it properly?
http://www.zdnet.com/blog/projectfailur ... jects/4116
In theory, theory and practice are identical. In practice, they often differ.
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