Should having a pension affect our asset allocation?

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dsmil
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Should having a pension affect our asset allocation?

Post by dsmil » Mon Apr 01, 2013 8:03 am

Hello Bogleheads,

My wife and I are in our 20's and have been investing using the asset allocation below. For our stock/bond allocation, I've been using 115 - age. My wife is a teacher and her pension would replace about 50% of her gross income at retirement. Because of this, is there really any reason to invest in bonds? My gut is telling me that with the stability that the pension brings to the portfolio, I should throw the bonds out the window and stick to a more aggressive approach. Thoughts?

Here is our current allocation:

44% VTI (Total US)
20% VEU (Total Int'l)
10% VNQ (REIT)
10% BND (Bonds)
9% VBR (Small Cap Value)
7% VWO (Emerging Markets)

Thanks,
Last edited by dsmil on Mon Apr 01, 2013 9:12 am, edited 1 time in total.

finley
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Re: Should having a pension effect our asset allocation?

Post by finley » Mon Apr 01, 2013 8:14 am

Personally, I count my pension contributions in my asset allocation as bonds (for now). I am also young and I am not 100% sure I will make it the 28 years (currently have 4 years) I need to work at my current job to reach my pension. If I leave before 28 years, I can take my contributions with me, which is currently earning 4% interest. I do lose the employer contributions though. When I approach the 28 year point or become more positive I will stick it out with my current employer, I will stop counting it as a bond.

john94549
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Re: Should having a pension effect our asset allocation?

Post by john94549 » Mon Apr 01, 2013 8:17 am

There are many reasons to include bonds or other suitable fixed-income in one's AA. For example, should Mr. Market stumble badly, and a re-balancing band be triggered, it helps to have that bond fund around. As you age, bonds or other fixed-income act to buffer you from volatility in the market. Having a pension/Social Security expectation is a factor in your risk tolerance assessment. You might search for threads discussing "Does Social Security Count as a Bond?" or similar.

sschullo
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Re: Should having a pension effect our asset allocation?

Post by sschullo » Mon Apr 01, 2013 8:18 am

There are many threads here about your question: Here is one: http://www.bogleheads.org/forum/viewtopic.php?p=624052

I don't consider my pension in my AA for two reasons: 1. Cannot rebalance into a pension and 2. Even at a young age, it will benefit you to learn about the bond market.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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BL
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Re: Should having a pension effect our asset allocation?

Post by BL » Mon Apr 01, 2013 8:20 am

It seems like you are a little young to count on a pension 30-40 years out as so much can happen in that time: changes or elimination of pension, changing jobs, caring for your children, moving, etc. It sounds like you are quite aggressive already and the bonds give you a source for rebalancing as well.

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momar
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Re: Should having a pension effect our asset allocation?

Post by momar » Mon Apr 01, 2013 8:29 am

Dont count it as part of your allocation, but do use it to reduce the amount of income you need to generate from your portfolio.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

ourbrooks
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Re: Should having a pension effect our asset allocation?

Post by ourbrooks » Mon Apr 01, 2013 8:35 am

Based on historical returns, you already have the asset allocation which will yield the highest expected return going forward. Even with rebalancing, more bonds will mean lower returns.

There are two reasons for adding more bonds. One is that you think you might need to take out the money with less than 10 years notice. This might be to take advantage of a really good deal on a new house, etc.

The other is because you might panic when the market is down. Look at your balance today; imagine it was down 60% two years from now, 2007-2009 all over again. Would you really just shrug and say "buying opportunity?" What if the market was down AND you heard that the school district was cutting 25% of its positions? If you're at all doubtful, hold more bonds; getting out at the bottom is the worse thing you can do.

Gill
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Re: Should having a pension effect our asset allocation?

Post by Gill » Mon Apr 01, 2013 8:54 am

You might ask the teacher how it affects your asset allocation. :happy
Bruce

dsmil
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Re: Should having a pension effect our asset allocation?

Post by dsmil » Mon Apr 01, 2013 9:13 am

MBMiner wrote:You might ask the teacher how it affects your asset allocation. :happy
Bruce
Smart man, always ask the teacher first, change made

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kenyan
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Re: Should having a pension effect our asset allocation?

Post by kenyan » Mon Apr 01, 2013 9:23 am

momar wrote:Dont count it as part of your allocation, but do use it to reduce the amount of income you need to generate from your portfolio.
This is what I do and what I believe to be the best strategy. My pension is not really like a lump of bonds; it is extremely volatile in how much income it is going to produce, based upon what happens over the next 30 years (where I am employed, what my salary is in the intervening years, when I choose to retire, when I choose to begin drawing from the pension). It will replace anywhere from <1% to 15% or so of my income. I only consider it in my planning when I try to define my income needs based upon a particular scenario, because only then will I have any idea how much income it will provide.

Someone with a government pension and a stable job might have a better idea (as well as a better pension) of how much income their pension will provide, but probably should hedge their bets based upon the mountain of unfunded liabilities these pensions have.
Retirement investing is a marathon.

Calm Man
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Re: Should having a pension affect our asset allocation?

Post by Calm Man » Mon Apr 01, 2013 9:43 am

OP, as the father of a daughter your age, I would give you a slap on the head if you were my son!!!! You are in the 20s and have no idea about the stability of your marriage (50% failure rate) or your wife's health or job stability for that matter with regard to even getting to the point of receiving her teacher's pension. And unless you do not read the newspapers or forums like this, there is little or no possibility that the pensions for somebody just starting in the system will ever be paid at the current rate. No pension, whether private or public today, is stable and I do not understand how you could make such a statement. Nor is any job stable. Young teachers are losing their jobs every year now. It could get better or worse; we don't know. I am not trying to be a killjoy but trying to explain to you that plans at vest are murky and are even more murky when assumptions are not realistic. Good luck.

anonenigma
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Re: Should having a pension effect our asset allocation?

Post by anonenigma » Mon Apr 01, 2013 9:58 am

finley wrote: I can take my contributions with me, which is currently earning 4% interest. I do lose the employer contributions though.
Should you become vested and decide to leave, see whether you can stay in the system and draw the pension when you reach retirement age. It won't be as large a pension as if you stayed for a full career, but you won't lose the employer contributions and the income stream will probably be worth more than what you could do with your returned contributions. Just a thought.

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sometimesinvestor
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Re: Should having a pension affect our asset allocation?

Post by sometimesinvestor » Mon Apr 01, 2013 10:27 am

think your allocation is fine for now but as several have pointed out things change.Keep with 115-age for at least the next few years and the situation may be clearer with regard to family obligations job security etc.For example you may have children and your wife may decide to take off a few years and that may mean get a house and may mean her pension will be less.

I did not notice any reference to an emergency fund, life insurance (if you have kids) etc. Those are other things to think about.

larmewar
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Re: Should having a pension affect our asset allocation?

Post by larmewar » Tue Apr 02, 2013 6:31 pm

If your wife and the school system she works do not pay into social security, remember her pension will be partly offset by reduced social security.

Lar

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Re: Should having a pension affect our asset allocation?

Post by Professor Emeritus » Tue Apr 02, 2013 8:40 pm

larmewar wrote:If your wife and the school system she works do not pay into social security, remember her pension will be partly offset by reduced social security.

Lar
I suspect you have it backwards or at least confusing . Her spousal social security will be reduced by the pension for a non SS worker.

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Duckie
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Re: Should having a pension affect our asset allocation?

Post by Duckie » Tue Apr 02, 2013 11:26 pm

When I was working I ignored my pension for AA purposes because I had no control over it and could not use it for rebalancing purposes. Then I retired and started receiving my pension. I still ignore it for AA purposes because I consider it an income stream like social security. It lessens my need to withdraw as much from my actual portfolio. I have plenty of bonds.

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BHCadet
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Re: Should having a pension affect our asset allocation?

Post by BHCadet » Wed Apr 03, 2013 12:40 am

You're too young to consider pension.
So, for now, it should not affect your asset allocation at all.

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Doc
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Re: Should having a pension affect our asset allocation?

Post by Doc » Wed Apr 03, 2013 9:22 am

dsmil wrote:For our stock/bond allocation, I've been using 115 - age.
dsmil wrote:Because of this, is there really any reason to invest in bonds? My gut is telling me that with the stability that the pension brings to the portfolio, I should throw the bonds out the window and stick to a more aggressive approach. Thoughts?
You are falling into the numbers trap. You asset allocation should be based on you need and ability to take risk. If both you and your wife had pensions covering your entire retirement needs you would have no need to take any risk so you would be in all bonds. On the other hand you would have great ability to take on more risk so you should be in all stocks. :? Unfortunately most of us don't have the luxury of this dilemma.

Probably the most common way to address asset allocation for retirement is to treat SS, pensions, annuities and taxes as "fixed" cash flow streams. After netting these cash flow streams against your needs your investments have to provide for any balance. Detemine how much you can save and then determine your AA to provide the balance you will need. This is not fixed in stone. It can be revised as your situation changes.

Good luck,

Doc

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Taylor Larimore
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Bonds can increase return.

Post by Taylor Larimore » Wed Apr 03, 2013 9:53 am

dsmil:
I should throw the bonds out the window and stick to a more aggressive approach. Thoughts?
In my opinion, nearly everyone should own bonds for safety and income in a portfolio. There is also evidence that bonds increase a portfolio's return. See Lesson #3 in the article below:

Coping with Market Volatility

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Grt2bOutdoors
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Re: Should having a pension affect our asset allocation?

Post by Grt2bOutdoors » Wed Apr 03, 2013 10:17 am

Duckie wrote:When I was working I ignored my pension for AA purposes because I had no control over it and could not use it for rebalancing purposes. Then I retired and started receiving my pension. I still ignore it for AA purposes because I consider it an income stream like social security. It lessens my need to withdraw as much from my actual portfolio. I have plenty of bonds.
+1 Sound advice.

When I started working, had no pension, so I opened an IRA ($2K was the limit back then) and saved what I could in taxable. The next job brought a very lousy 401k plan, so I stuck with the IRA and taxable investing. The next job brought a generous 401k plan and I made full use of it. My current employer had a pension plan, but I correctly ignored it while my co-workers banked all their marbles on it and spent frivously - used the IRA and taxable investment plan until the employer froze the pension and opened a 401k plan, which I then maximized. The point I'm trying to make is to control what you can - savings,expenses and asset allocation. Everything else, is fraught with risk that you can not control or influence. If it all goes to hell in a hand basket at least you can say you did what you could to the best of your ability. My co-workers, most of them are in denial - don't be that person.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

finley
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Re: Should having a pension effect our asset allocation?

Post by finley » Thu Apr 04, 2013 4:49 am

anonenigma wrote:
finley wrote: I can take my contributions with me, which is currently earning 4% interest. I do lose the employer contributions though.
Should you become vested and decide to leave, see whether you can stay in the system and draw the pension when you reach retirement age. It won't be as large a pension as if you stayed for a full career, but you won't lose the employer contributions and the income stream will probably be worth more than what you could do with your returned contributions. Just a thought.
I agree completely, but it is so far off that I have not given it too much thought. Will cross that bridge if I decide to leave.

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ofcmetz
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Re: Should having a pension affect our asset allocation?

Post by ofcmetz » Thu Apr 04, 2013 8:04 am

I'm 33 and am vested in a pension that if I leave now will pay over 40% of my base pay. At age 45 I can walk away with 80% of my base pay. My wife only has social security and a 401K. We only count the pension as some that reduces the need for future income from our portfolio, not as something that allows us to invest more aggressively. See allocation below.

Just like Calm man, I'd add that there is a ton of time between now and then when the terms of the pension or life situation might change. I'd hold a reasonable percentage in bonds or a stable value type fund.
Never underestimate the power of the force of low cost index funds.

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ruralavalon
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Re: Should having a pension affect our asset allocation?

Post by ruralavalon » Thu Apr 04, 2013 8:18 am

dsmil wrote:My wife and I are in our 20's . . . . is there really any reason to invest in bonds? My gut is telling me that with the stability that the pension brings to the portfolio, I should throw the bonds out the window and stick to a more aggressive approach. Thoughts?

Here is our current allocation:
. . . .
10% BND (Bonds)
A pension is not a reason to eliminate bonds from your portfolio. At 10% bonds you are a little light in bonds anyway. You are in your 20s, so you do not really know what the pension will be like in 40, 50, or 60 years. The pension could be reduced or not even be available then. Its simply too early to start counting on it for any purpose, in my opinion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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BrandonBogle
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Re: Should having a pension affect our asset allocation?

Post by BrandonBogle » Thu Sep 19, 2013 12:11 pm

I am working on refining the investments I have set up for my mother and looking at using a SPIA to help her not outlive her money. Since she is in retirement and at about a 4.5% withdrawal rate of her portfolio (above SS income), my concern would be it will not last. One thought would be to take a portion of her holdings and put it into a SPIA. Covering half of her withdrawal with a SPIA will leave her withdrawing 3.3% of her remaining portfolio.

My question, is do I base her AA (40 stock/60 bond) on her portfolio before the purchase and take the SPIA money from the bond holdings, or base 40/60 on the remaining money after taking out the SPIA purchase. To me, this sounded the same as counting vs. not-counting a pension or SS. At first I thought I should base the split on the portfolio pre-purchase, but I also "hear" the thoughts that having the SPIA means she needs to take less risk with the remaining portfolio.

So where do us bogleheads stand on this debate?

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