Asset allocation, Social Security and other pensions
Asset allocation, Social Security and other pensions
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?
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?
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
The best place to start is by entering "SS in AA" in the Bogleheads search box.
EO
Re: Asset allocation, Social Security and other pensions
See Estimating the Value of Social Security Retirement Benefitshenrytow 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?
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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.
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.
Re: Asset allocation, Social Security and other pensions
It really depends. Try re-framing the problem as matching liabilities (essential expenses) to income sources. This chart is the short-version description: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.
Source: http://www.bobsfinancialwebsite.com/SaferPlan2.html
I have list (in need of updating) of inflation-indexed fixed annuity providers here: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?
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.
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".)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.
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?
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
Re: Asset allocation, Social Security and other pensions
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.
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.
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Re: Asset allocation, Social Security and other pensions
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Re: Asset allocation, Social Security and other pensions
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.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.
Will J G Wentworth take Social Security?
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Re: Asset allocation, Social Security and other pensions
Why are we resurrecting a 3+ year old thread to beat this dead-horse topic yet again?
Attempted new signature...
Re: Asset allocation, Social Security and other pensions
This thread is from October 2010.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.
1. No, you never read a simple answer that you want to hear.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...
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 |
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Re: Asset allocation, Social Security and other pensions
Maybe we haven't been beating it properly?The Wizard wrote:Why are we resurrecting a 3+ year old thread to beat this dead-horse topic yet again?
http://www.zdnet.com/blog/projectfailur ... jects/4116
In theory, theory and practice are identical. In practice, they often differ.