AA with a pension

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macman_65
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AA with a pension

Post by macman_65 » Fri Jun 16, 2017 8:49 am

Should a pension at retirement impact a current AA decision?

I have a pension (400K) that will be account for about 20% of my funds when I retire in 10 years or so.
Aside from the pension my current 401k, Roth and other investments are at a 90/10 AA.
I was thinking to balance to a 70/30 AA but was wondering if the pension should be a factor.
Perhaps with the guaranteed pension a 80/20 split could be reasonable.

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whaleknives
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Re: AA with a pension

Post by whaleknives » Fri Jun 16, 2017 10:21 am

macman_65 wrote:Should a pension at retirement impact a current AA decision? . . .

Are you estimating future withdrawals with anything like FIRECalc? If so, the more common recommendation here is to use pensions and Social Security to reduce withdrawals, rather than leverage your asset allocation.

But this has been discussed by folks like John Bogle, Paul Merriman, and Mike Piper with varying opinions.
Last edited by whaleknives on Fri Jun 16, 2017 2:31 pm, edited 1 time in total.
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dbr
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Re: AA with a pension

Post by dbr » Fri Jun 16, 2017 11:06 am

I think there are at least two other active threads on this topic even as we speak. It is a question that pops up a couple dozen times a year. All of the discussions have seemed to be more or less identical so one could read any one of them to contemplate the issues.

This Forum has arrived at a decision that it will not have pages filled with "stickies" to maintain ongoing discussion of common questions. It might be this pension as asset question would be a good candidate for that if it were allowed. There is not an article in the Wiki on this. Our Wiki is a very well prepared set of articles but it has depended on some very unselfish people working hard to make it so. As one who has not stepped forward too much to help with the Wiki, I am not going to suggest this question should have an article there.

Admiral
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Re: AA with a pension

Post by Admiral » Fri Jun 16, 2017 11:22 am

macman_65 wrote:Should a pension at retirement impact a current AA decision?

I have a pension (400K) that will be account for about 20% of my funds when I retire in 10 years or so.
Aside from the pension my current 401k, Roth and other investments are at a 90/10 AA.
I was thinking to balance to a 70/30 AA but was wondering if the pension should be a factor.
Perhaps with the guaranteed pension a 80/20 split could be reasonable.


Welcome!

When you say you have a "$400k" pension, what do you mean? Pensions pay out yearly, indexed (or not) to inflation/COLA. How are you calculating this 400k? Is this the present value of your future payments over x number of years?

Are you already collecting payments now, even though you note you are not retired?

Typically if a pension is guaranteed (a loaded term) then you would use it to account for some of your bond/fixed income allocation, similar to how you would consider social security.

dbr
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Re: AA with a pension

Post by dbr » Fri Jun 16, 2017 11:25 am

Admiral wrote:
macman_65 wrote:Should a pension at retirement impact a current AA decision?

I have a pension (400K) that will be account for about 20% of my funds when I retire in 10 years or so.
Aside from the pension my current 401k, Roth and other investments are at a 90/10 AA.
I was thinking to balance to a 70/30 AA but was wondering if the pension should be a factor.
Perhaps with the guaranteed pension a 80/20 split could be reasonable.


Welcome!

When you say you have a "$400k" pension, what do you mean? Pensions pay out yearly, indexed (or not) to inflation/COLA. How are you calculating this 400k? Is this the present value of your future payments over x number of years?

Are you already collecting payments now, even though you note you are not retired?

Typically if a pension is guaranteed (a loaded term) then you would use it to account for some of your bond/fixed income allocation, similar to how you would consider social security.


Yes, it is possible the "pension" means a form or retirement savings where the retiree will actually get the assets. In that case it is part of assets. That nuance is included in the paradigm discussion. There is another thread even today where the poster may have such a pension.

Trakl
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Re: AA with a pension

Post by Trakl » Fri Jun 16, 2017 12:53 pm

You've asked about the same question I did yesterday, only much more succinctly!

viewtopic.php?f=1&t=221203

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Nearing_Destination
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Re: AA with a "pension" (... cash value retirement account)

Post by Nearing_Destination » Fri Jun 16, 2017 1:30 pm

I suspect that those posting have a "cash value retirement account " and NOT a true "pension" A cash value account can be either converted to an annuity or be taken out as direct payments until the account is depleted (which is distinct from a true pension which doesn't have a termination until that of the direct beneficiary (and subsequent beneficiaries, if in the plan).

For a true pension, as noted in MANY threads, this simply is part of income, like SS. The other savings-- be it taxable accounts, IRA's, etc -- are then used to supplement income needed: SWR's are for those parts since (nominally, unless the provider goes bankrupt or the like) the pension/SS payments are for life.


{some companies say they have a "pension" but in reality they are a cash balance retirement account-- with payments by the company into the account with vesting provisions and restrictions on the earliest that they can be accessed} posters should only use the term pension for the traditional form and use the term cash value retirement account for the latter.

retire57
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Re: AA with a pension

Post by retire57 » Fri Jun 16, 2017 1:54 pm

Will health insurance be deducted from your penion income until you are eligible for SS? Ours is - and the premiums are 60% of DH's net. And we are taxed by the feds for the entire amount.

heyyou
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Re: AA with a pension

Post by heyyou » Fri Jun 16, 2017 5:52 pm

Not recommending this, but I considered my pension credits as my fixed income allocation during my early-mid work years.

You know to not sell out during a crash, which is the purpose of owning bonds for those without pensions. As usual, your allocation should be tailored to your acceptable level of risk (the risk of selling out of stocks during a crash), so the answer is more about what suits you, and less about what others have done in the same situation. See how the risk is pervasive, there is not some secret path to avoid having to face it. Some day the market will drop far enough to make you want to sell out, in order for you to save what's left.

Consider a sliding scale of no bonds until you have $50K saved, then 5% bonds on further savings to $100K. Your earliest savings need to be in stocks to help boost long term returns. Also, you could progressively boost your bond allocation higher on future contributions without backing up to change what you have already saved.

macman_65
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Re: AA with a pension

Post by macman_65 » Mon Jun 19, 2017 7:46 am

When I elect to retire and begin collecting the pension I will have multiple options.
I can receive it as a lump sum or as an annuity payable in monthly installments.
There are variations on the type of annuity and I can split between lump sum and annuity in 25% increments (ie 25% lump sum, 75% annuity)

Since I don't know what my situation will be in 10 years, when I retire, I am wondering how I should account for the pension in my current AA.

aristotelian
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Re: AA with a pension

Post by aristotelian » Mon Jun 19, 2017 8:10 am

Absolutely, you need to consider pension and SS to determine allocation and withdrawal plan. However, what you decide to do may vary according to the individual. Some may see the pension as taking the place of bonds, allowing them to be more aggressive. Some may see the pension as reducing the need for risk, so they can sleep at night with the pension and a high bond allocation.

dbr
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Re: AA with a pension

Post by dbr » Mon Jun 19, 2017 8:40 am

macman_65 wrote:When I elect to retire and begin collecting the pension I will have multiple options.
I can receive it as a lump sum or as an annuity payable in monthly installments.
There are variations on the type of annuity and I can split between lump sum and annuity in 25% increments (ie 25% lump sum, 75% annuity)

Since I don't know what my situation will be in 10 years, when I retire, I am wondering how I should account for the pension in my current AA.


My answer to this sort of thing is that you have options among different plans that can be taken account in different ways and compared. I favor income streams to be inserted as such on the schedule when they become available. If you might choose a whole or partial lump sum, then your plan includes a step-up in your wealth at a point in time. Pretty much any of the retirement planning applications out there has provision for entering income streams and lump sum changes to your assets and then the consequences of that are worked out. In each of these different scenarios you can run variations of your asset allocation and see if the different plans would come out better or worse with different AA during saving years.

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ruralavalon
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Re: AA with a pension

Post by ruralavalon » Mon Jun 19, 2017 10:33 am

macman_65 wrote:Should a pension at retirement impact a current AA decision?

I have a pension (400K) that will be account for about 20% of my funds when I retire in 10 years or so.
Aside from the pension my current 401k, Roth and other investments are at a 90/10 AA.
I was thinking to balance to a 70/30 AA but was wondering if the pension should be a factor.
Perhaps with the guaranteed pension a 80/20 split could be reasonable.

macman_65 wrote:When I elect to retire and begin collecting the pension I will have multiple options.
I can receive it as a lump sum or as an annuity payable in monthly installments.
There are variations on the type of annuity and I can split between lump sum and annuity in 25% increments (ie 25% lump sum, 75% annuity)

Since I don't know what my situation will be in 10 years, when I retire, I am wondering how I should account for the pension in my current AA.

What is your age? What is the approximate value of the rest of your retirement portfolio?

What is the current cash out value that you could receive as a lump sum if you left the company today?

In my opinion it would be reasonable to count that amount as a "bond" for purposes of setting your asset allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

macman_65
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Re: AA with a pension

Post by macman_65 » Mon Jun 19, 2017 2:37 pm

ruralavalon wrote:What is your age? What is the approximate value of the rest of your retirement portfolio?

What is the current cash out value that you could receive as a lump sum if you left the company today?

In my opinion it would be reasonable to count that amount as a "bond" for purposes of setting your asset allocation.


I am 52 - would like to work 10 more years.
The pension is vested and worth about 380K if I left today.
Realistically, this will be my last full time job - if the company downsized I would probably elect for at least semi-retiremnt.

My remaining assets consist of:
401K: 740K
Roth: 16K
Brokerage Accts: 114K - a mixture of stock and ETF's.
Cash: 10K

Current AA is about 80/20.
I have adjusted my current 401K contributions (24k annual) to go to a Fidelity 2020 target fund.
My thinking is that this will lower the 80/20 gradually over the next 10 years.

nbseer
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Re: AA with a pension

Post by nbseer » Mon Jun 19, 2017 6:20 pm

I am retired age 65, will wait until 70 to start taking my multi-employer pension since it increases about 9% every year I wait.
I would consider it as fixed income, but am very conservative and have most of my tIRA in CDs. Have already started taking SS so DW can get spousal benefit, and use that SS $ to pay taxes on Roth conversions.

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ruralavalon
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Re: AA with a pension

Post by ruralavalon » Tue Jun 20, 2017 11:56 am

macman_65 wrote:
ruralavalon wrote:What is your age? What is the approximate value of the rest of your retirement portfolio?

What is the current cash out value that you could receive as a lump sum if you left the company today?

In my opinion it would be reasonable to count that amount as a "bond" for purposes of setting your asset allocation.


I am 52 - would like to work 10 more years.
The pension is vested and worth about 380K if I left today.
Realistically, this will be my last full time job - if the company downsized I would probably elect for at least semi-retiremnt.

My remaining assets consist of:
401K: 740K
Roth: 16K
Brokerage Accts: 114K - a mixture of stock and ETF's.
Cash: 10K

Current AA is about 80/20.
I have adjusted my current 401K contributions (24k annual) to go to a Fidelity 2020 target fund.
My thinking is that this will lower the 80/20 gradually over the next 10 years.

Your retirement assets total $1,260k.

At age 52 and 10 years to retirement, an overall asset allocation of around 60/40 stocks/bonds might be reasonable. I will use that for purposes of illustration. You have not said what you want your overall asset allocation to be.

Your cash out value of the pension at $380k = 30% of retirement assets. Another 10% bonds = $ 127k. The rest of your retirement assets are $880k. (127/880 = 14%) Therefore an asset allocation in the rest of your retirement portfolio of about 85/15 would give you about 60/40 overall. So your current 80/20 is about right, if you want a target asset allocation of 60/40 overall.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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