Question about pension and risk

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Monster99
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Question about pension and risk

Post by Monster99 » Fri Sep 01, 2017 9:27 am

I recently retired from a large Corp with a reasonable pension and was evaluating how it affects risk tolerance. I have 2M investable assets with ~ 45/55 stock/bond AA and was wondering if I should be more aggressive with the AA since there is a steady stream of income.
When both the spouse and myself start SS in a few years we will have more than enough to cover our expenses and lifestyle.

JBTX
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Re: Question about pension and risk

Post by JBTX » Fri Sep 01, 2017 9:31 am

Monster99 wrote:
Fri Sep 01, 2017 9:27 am
I recently retired from a large Corp with a reasonable pension and was evaluating how it affects risk tolerance. I have 2M investable assets with ~ 45/55 stock/bond AA and was wondering if I should be more aggressive with the AA since there is a steady stream of income.
When both the spouse and myself start SS in a few years we will have more than enough to cover our expenses and lifestyle.
Hard to know without specifics but it is certainly reasonable to include pension as part of a bond portfolio and allow you to put more in stocks. Now whether you should depends on a lot of individual specifics which you haven't discussed.

Nate79
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Re: Question about pension and risk

Post by Nate79 » Fri Sep 01, 2017 9:32 am

Why do you want to take more risk than required?

JBTX
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Re: Question about pension and risk

Post by JBTX » Fri Sep 01, 2017 9:33 am

If you want to get the broadest and most thorough discussion of your situation follow this.

viewtopic.php?f=1&t=6212

alex_686
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Re: Question about pension and risk

Post by alex_686 » Fri Sep 01, 2017 9:36 am

Yes, you can take more risk. It is common practice to treat your pension as a bond like asset to determine your AA.

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FiveK
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Re: Question about pension and risk

Post by FiveK » Fri Sep 01, 2017 9:38 am

Two schools of thought in your situation:
1) You have more than you need, thus no need to take risks with your investments. Relax, be conservative, and enjoy.
2) You have more than you need, thus you can take risks with your investments. Relax, be aggressive, and enjoy.

Take your pick.... :wink:

dbr
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Re: Question about pension and risk

Post by dbr » Fri Sep 01, 2017 9:44 am

I would follow the need/ability/willingness process to decide how much risk to take with invested assets.

That is the concept published by Larry Swedroe to which he has added the comment that low need and high ability should be settled in the direction of taking no more risk than necessary. He argues that the marginal utility of increasing wealth declines with wealth and that people tend to underestimate the risk of markets.

Note that counting the pension as a bond has the automatic effect of increasing the stock allocation over what it would have otherwise been, even to more than 100% in the hypothetical case. I think a decision like this should be more thoughtful than that. One part of thoughtful is to consider what one really wants to do with one's money including investing for legacy purposes and not just for retirement.

jebmke
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Re: Question about pension and risk

Post by jebmke » Fri Sep 01, 2017 9:59 am

I have a similar situation coming up. Pension starts next year. Investment+ Pension cash flow will exceed our total expenses.

We originally set out allocation at 40/60 to weather the first 10 years before pension started. At this point, at a minimum, I will allow the equity allocation to drift up if markets rise rather than make taxable re-balancing moves to retain 40/60. I have to evaluate possibly also investing some excess cash into equity if it doesn't rise on its own to push it up - maybe to 50/50.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Ron
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Re: Question about pension and risk

Post by Ron » Fri Sep 01, 2017 10:03 am

Would you take more risk when you start SS?

I have an SPIA - not a pension, but acts like a non-governmental pension (e.g. no COLA). I didn't change my 60/40 AA a decade ago when I started receiving payments.

In February, I'll start getting my monthly SS deposit. Even when that starts, I will not change my target AA from 60/40 even though my income risk will be further reduced.

I'm not suggesting what you should do; I'm just reflecting on what I have/will do with somewhat "guaranteed" income streams.

FWIW,

- Ron

alex_686
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Re: Question about pension and risk

Post by alex_686 » Fri Sep 01, 2017 10:10 am

Ron wrote:
Fri Sep 01, 2017 10:03 am
Would you take more risk when you start SS?
The counter to that argument is that you should have already accounted for SS in your AA. I do so and I am a good 20 years away from SS.

ThrustVectoring
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Re: Question about pension and risk

Post by ThrustVectoring » Fri Sep 01, 2017 10:30 am

What's your annual expenses? How willing and able are you to vary your expenses? Do you have "leaving an inheritance" as a high priority?

Lower expenses, more willingness to vary expenses, and desire to leave an inheritance all suggest using a somewhat higher equity percentage. At a low enough withdrawal rate, 100% equities works, but that's a little silly IMO. I'd cap at 60/40.

Oh also, did I read things correctly that pension + SS will cover your lifestyle? Yeah, you should be more aggressive, since the investments are mostly going to cover inheritance and optional expenses. I'd also do a lot of Roth conversions so you can keep assets tax-protected for much longer, RMDs are going to be a pain point for inheritance planning. It's that or donating your RMDs to charity to mitigate those taxes.

delamer
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Re: Question about pension and risk

Post by delamer » Fri Sep 01, 2017 10:39 am

FiveK wrote:
Fri Sep 01, 2017 9:38 am
Two schools of thought in your situation:
1) You have more than you need, thus no need to take risks with your investments. Relax, be conservative, and enjoy.
2) You have more than you need, thus you can take risks with your investments. Relax, be aggressive, and enjoy.

Take your pick.... :wink:
This is a good summary of your dilemma, which has been discussed in many other threads.

We are in the same position, and are going the more aggressive route. I think of our assets as bring invested for the benefit our our kids -- now in their 20's -- who will eventually inherit and/or be gifted the money. We also have long-term care insurance, which would give us 3 years to reallocate the portfolio if one of us needed to be in a facility for an extended period. That is the main reason that I can foresee us needing to spend down our savings -- high expenses for one of us in assisted living or a nursing home for a long period while the other needs our pension/Social Security income to live comfortably.

Hopefully it won't come to that, but I sleep well with our plan.

Admiral
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Re: Question about pension and risk

Post by Admiral » Fri Sep 01, 2017 10:44 am

Assuming that megacorp's pension plan is sound/insured (and note that "insured" does not mean that pensions can't/won't be reduced in the future) then 45/55 is probably overly conservative if your pension and SS cover your expenses.

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Earl Lemongrab
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Re: Question about pension and risk

Post by Earl Lemongrab » Fri Sep 01, 2017 12:15 pm

alex_686 wrote:
Fri Sep 01, 2017 9:36 am
Yes, you can take more risk. It is common practice to treat your pension as a bond like asset to determine your AA.
I don't doubt that some people do, but I question that it's common. Many are like me, and if you can't rebalance something then it's not part of your asset allocation. To me it's best to use it in determining your target requirements, but not the AA. Same with Social Security.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

Nate79
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Re: Question about pension and risk

Post by Nate79 » Fri Sep 01, 2017 12:45 pm

Sometimes I wonder if the recent bull market and also the fast recoveries of the past stock market drops have caused recency bias towards more risky asset allocations. If you have no reason to take extra risk do you understand that the stock market could drop 80% and not recover for 10 years? Would you be ok with this?

delamer
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Re: Question about pension and risk

Post by delamer » Fri Sep 01, 2017 1:11 pm

Nate79 wrote:
Fri Sep 01, 2017 12:45 pm
Sometimes I wonder if the recent bull market and also the fast recoveries of the past stock market drops have caused recency bias towards more risky asset allocations. If you have no reason to take extra risk do you understand that the stock market could drop 80% and not recover for 10 years? Would you be ok with this?
How would you define "extra risk?"

Nate79
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Re: Question about pension and risk

Post by Nate79 » Fri Sep 01, 2017 1:12 pm

delamer wrote:
Fri Sep 01, 2017 1:11 pm
Nate79 wrote:
Fri Sep 01, 2017 12:45 pm
Sometimes I wonder if the recent bull market and also the fast recoveries of the past stock market drops have caused recency bias towards more risky asset allocations. If you have no reason to take extra risk do you understand that the stock market could drop 80% and not recover for 10 years? Would you be ok with this?
How would you define "extra risk?"
Extra risk as defined by the OP is risk they do not need to take by changing their asset allocation.

Beehave
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Re: Question about pension and risk

Post by Beehave » Fri Sep 01, 2017 1:14 pm

Monster99 wrote:
Fri Sep 01, 2017 9:27 am
I recently retired from a large Corp with a reasonable pension and was evaluating how it affects risk tolerance. I have 2M investable assets with ~ 45/55 stock/bond AA and was wondering if I should be more aggressive with the AA since there is a steady stream of income.
When both the spouse and myself start SS in a few years we will have more than enough to cover our expenses and lifestyle.
If you were comfortable with the 45/55 allocation while you were working why would you be more comfortable with a (say) 55/45 allocation when you are not working?

Also, If you are below age 70.5 and you have not started seriously educating yourself about AGI, MAGI, RMDs, Medicare bracket levels, tax brackets, and Roth conversions, then my thought is that you'll do better for yourself to get those ducks in a row than you will by making big changes to allocations.

Don't mean to sound preachy. I left my allocations alone upon retirement (a bit more aggressive than yours) and am on the cusp of reducing allocations to stock a bit) but find that the RMD, tax, and Medicare cost issues are things I knew nothing about and wish I had understood earlier when I could have been much more proactive about them. Congratulations on your retirement and best wishes.

delamer
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Re: Question about pension and risk

Post by delamer » Fri Sep 01, 2017 1:28 pm

Nate79 wrote:
Fri Sep 01, 2017 1:12 pm
delamer wrote:
Fri Sep 01, 2017 1:11 pm
Nate79 wrote:
Fri Sep 01, 2017 12:45 pm
Sometimes I wonder if the recent bull market and also the fast recoveries of the past stock market drops have caused recency bias towards more risky asset allocations. If you have no reason to take extra risk do you understand that the stock market could drop 80% and not recover for 10 years? Would you be ok with this?
How would you define "extra risk?"
Extra risk as defined by the OP is risk they do not need to take by changing their asset allocation.
That seems too simple. Doesn't it assume that the current allocation is optimal, in terms of balancing risk and goals?

Admiral
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Re: Question about pension and risk

Post by Admiral » Fri Sep 01, 2017 1:57 pm

Nate79 wrote:
Fri Sep 01, 2017 12:45 pm
Sometimes I wonder if the recent bull market and also the fast recoveries of the past stock market drops have caused recency bias towards more risky asset allocations. If you have no reason to take extra risk do you understand that the stock market could drop 80% and not recover for 10 years? Would you be ok with this?
70/30 is certainly more risky than 45/55 but based on the OP's situation it's not especially risky because their entire cost of living is covered by guaranteed (that is, SS and pension) income. Their withdrawal rate, therefore, is likely to be low enough that their portfolio will not only survive but in all probability be much larger than where it started upon OP's demise regardless of market cycles. See:

https://www.kitces.com/blog/how-has-the ... al-crisis/

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Steelersfan
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Re: Question about pension and risk

Post by Steelersfan » Fri Sep 01, 2017 2:07 pm

I'm in a similar financial situation and decided, since I'm essentially investing for my heirs, to go with 60%/40%.

In practice I'm not sure the returns will be that much different than 40%/60%.

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friar1610
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Re: Question about pension and risk

Post by friar1610 » Fri Sep 01, 2017 2:17 pm

Monster99 wrote:
Fri Sep 01, 2017 9:27 am
I recently retired from a large Corp with a reasonable pension and was evaluating how it affects risk tolerance. I have 2M investable assets with ~ 45/55 stock/bond AA and was wondering if I should be more aggressive with the AA since there is a steady stream of income.
When both the spouse and myself start SS in a few years we will have more than enough to cover our expenses and lifestyle.
Reasonably similar situation although already taking SS and am old enough for RMDs. Live just fine on pension. Generally reinvest SS. Always reinvest RMDs. Have opted for the more conservative approach of staying in the 40/45% equity range. May either consciously move to 50% or let things drift to that level if the bull continues. But no plan to go higher because things are just fine as they are and don't want to lose a bunch that we don't need risk. I understand that others would come up with a different answer with the same set of facts but this feels right for me.
Friar1610

CnC
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Re: Question about pension and risk

Post by CnC » Fri Sep 01, 2017 2:35 pm

Monster99 wrote:
Fri Sep 01, 2017 9:27 am
I recently retired from a large Corp with a reasonable pension and was evaluating how it affects risk tolerance. I have 2M investable assets with ~ 45/55 stock/bond AA and was wondering if I should be more aggressive with the AA since there is a steady stream of income.
When both the spouse and myself start SS in a few years we will have more than enough to cover our expenses and lifestyle.
Do you have children/plan for leaving a legacy?

If so your time horizon is very long and a small amount in bonds would be your best bet.

I would definitely include your pension as part of your fixed assets.


Imo the best way to do this is to pretend you pension is an annuity and value it.

delamer
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Re: Question about pension and risk

Post by delamer » Fri Sep 01, 2017 3:04 pm

CnC wrote:
Fri Sep 01, 2017 2:35 pm
Monster99 wrote:
Fri Sep 01, 2017 9:27 am
I recently retired from a large Corp with a reasonable pension and was evaluating how it affects risk tolerance. I have 2M investable assets with ~ 45/55 stock/bond AA and was wondering if I should be more aggressive with the AA since there is a steady stream of income.
When both the spouse and myself start SS in a few years we will have more than enough to cover our expenses and lifestyle.
Do you have children/plan for leaving a legacy?

If so your time horizon is very long and a small amount in bonds would be your best bet.

I would definitely include your pension as part of your fixed assets.


Imo the best way to do this is to pretend you pension is an annuity and value it.
I agree with Earl Lemongrab's comment above. Take your pension into account when setting your risk level, but don't include it as part of your allocation.

carolinaman
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Re: Question about pension and risk

Post by carolinaman » Sat Sep 02, 2017 8:20 am

I am in a similar position where wife and I can live comfortably off pension and SS. You are in a good position and the decision is yours. You can be as aggressive as you feel comfortable. I am currently about 45% equity and 55% fixed. I probably should be more aggressive but am comfortable and satisfied where I am.

If you plan to leave some for your heirs, you can think about appropriate portfolio allocation for them. If they are much younger, you can allocate your portfolio to better align with their ages.

Bottomline: Allocate your portfolio to align with your objectives and comfort level. You should not have a portfolio that keeps you awake at night.

lynneny
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Re: Question about pension and risk

Post by lynneny » Sat Sep 02, 2017 11:18 pm

My position is somewhat different. I'm a couple years from retirement, and will be living entirely from savings (401(k) and taxable accounts) for the first few years. At 65, a small non-COLA pension will start, and will cover about 30% of expenses. At 70, I'll start Social Security, and that'll cover an additional 30%.

So I'm concerned about sequence of returns risk during the early years until pension + SS cover a significant portion of my expenses starting at 70.

I've had a 60/40 allocation, which I'm trying to get down to 50/50 by the time I retire. I'm wondering whether I should try to get it even lower for those early retirement years, and then increase the % in equities back to at least 50-50 at 70 when I'm less dependent on my portfolio.

Admiral
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Re: Question about pension and risk

Post by Admiral » Sun Sep 03, 2017 7:40 am

lynneny wrote:
Sat Sep 02, 2017 11:18 pm
My position is somewhat different. I'm a couple years from retirement, and will be living entirely from savings (401(k) and taxable accounts) for the first few years. At 65, a small non-COLA pension will start, and will cover about 30% of expenses. At 70, I'll start Social Security, and that'll cover an additional 30%.

So I'm concerned about sequence of returns risk during the early years until pension + SS cover a significant portion of my expenses starting at 70.

I've had a 60/40 allocation, which I'm trying to get down to 50/50 by the time I retire. I'm wondering whether I should try to get it even lower for those early retirement years, and then increase the % in equities back to at least 50-50 at 70 when I'm less dependent on my portfolio.
Have you run your numbers through i-orp? This should given you a general idea of the income your portfolio will produce and you can compare that to your expected expenses. Flexible Retirement Planner is also useful.

JW-Retired
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Re: Question about pension and risk

Post by JW-Retired » Sun Sep 03, 2017 8:06 am

Monster99 wrote:
Fri Sep 01, 2017 9:27 am
I recently retired from a large Corp with a reasonable pension and was evaluating how it affects risk tolerance. I have 2M investable assets with ~ 45/55 stock/bond AA and was wondering if I should be more aggressive with the AA since there is a steady stream of income.
When both the spouse and myself start SS in a few years we will have more than enough to cover our expenses and lifestyle.
Monster,
I couldn't guess if you should be more aggressive. What do you want to do with your 2M portfolio? How & why did you come up that AA=45/55 when you were choosing it originally?

DW and I are retired in a similar situation and we are just sticking with our old 60/40 investable assets target. We believe heirs will probably end up with a big portion of the portfolio, but anything can happen.
JW
Retired at Last

BogleBoogie
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Re: Question about pension and risk

Post by BogleBoogie » Sun Sep 03, 2017 10:31 am

Sounds like you have "won the game." In that regard, my personal advice would be not to take on additional [unnecessary] risk. I believe I will be in the same boat as you in a decade or 2. I have a very generous and secure pension and a good chunk of 401k building up. My plan is to be conservative. I'm mid 30's and I'm about 60/40 now. I can see 40/60 in retirement while in my 50's. I'm not risk averse, I just don't feel the need to take on additional risk with the pension.

delamer
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Re: Question about pension and risk

Post by delamer » Sun Sep 03, 2017 10:42 am

BogleBoogie wrote:
Sun Sep 03, 2017 10:31 am
Sounds like you have "won the game." In that regard, my personal advice would be not to take on additional [unnecessary] risk. I believe I will be in the same boat as you in a decade or 2. I have a very generous and secure pension and a good chunk of 401k building up. My plan is to be conservative. I'm mid 30's and I'm about 60/40 now. I can see 40/60 in retirement while in my 50's. I'm not risk averse, I just don't feel the need to take on additional risk with the pension.
I don't really understand what people mean by "unnecessary risk" in this context. If you really will not need the money, then isn't investing in anything other than cash, and maybe TIPS, unnecessary risk? Why is 40% stocks "necessary" but 60% stocks "unnecessary?"

delamer
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Re: Question about pension and risk

Post by delamer » Sun Sep 03, 2017 10:47 am

lynneny wrote:
Sat Sep 02, 2017 11:18 pm
My position is somewhat different. I'm a couple years from retirement, and will be living entirely from savings (401(k) and taxable accounts) for the first few years. At 65, a small non-COLA pension will start, and will cover about 30% of expenses. At 70, I'll start Social Security, and that'll cover an additional 30%.

So I'm concerned about sequence of returns risk during the early years until pension + SS cover a significant portion of my expenses starting at 70.

I've had a 60/40 allocation, which I'm trying to get down to 50/50 by the time I retire. I'm wondering whether I should try to get it even lower for those early retirement years, and then increase the % in equities back to at least 50-50 at 70 when I'm less dependent on my portfolio.

In your position, consider having two separate pots of money that are invested differently because they have different goals.

Pot #1 would be the money for your pre-pension/SS years, which is a relatively short, fixed time period. Pot #2 would be the money to make up the difference between your expenses and pension/SS, which is relatively longer, unknown time period.

BogleBoogie
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Re: Question about pension and risk

Post by BogleBoogie » Sun Sep 03, 2017 12:55 pm

delamer wrote:
Sun Sep 03, 2017 10:42 am
BogleBoogie wrote:
Sun Sep 03, 2017 10:31 am
Sounds like you have "won the game." In that regard, my personal advice would be not to take on additional [unnecessary] risk. I believe I will be in the same boat as you in a decade or 2. I have a very generous and secure pension and a good chunk of 401k building up. My plan is to be conservative. I'm mid 30's and I'm about 60/40 now. I can see 40/60 in retirement while in my 50's. I'm not risk averse, I just don't feel the need to take on additional risk with the pension.
I don't really understand what people mean by "unnecessary risk" in this context. If you really will not need the money, then isn't investing in anything other than cash, and maybe TIPS, unnecessary risk? Why is 40% stocks "necessary" but 60% stocks "unnecessary?"
You should invest in something, otherwise you are losing money due to inflation right? My point is that "something" should be a conservative AA (IMO) as the OP has already arrived at a comfortable place. The emphasis can be on maintaining the wealth, versus taking on additional risk to build when there is no need to build.

secondact
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Re: Question about pension and risk

Post by secondact » Sun Sep 03, 2017 1:05 pm

I thought Beehave gave a great answer involving the taxation implications of a reasonable pension. I am about 8 years away from a similar situation. My own choice is to remain more aggressive (probably winding up at 80/20 by retirement, but that suits my temperment.) I do want to leave 3-5 years worth of withdrawls in high-quality bond funds to hedge against any sequence of returns risk, so I have allocated towards bonds now to ensure that even in a rising interest rate environment, my time horizon will exceed the average duration of the funds. This also provides the advantage of having "dry powder" in the event of another crash between now and retirement. This is the "ballast" function of bonds, for which a pension cannot be substituted. Good Luck!

itstoomuch
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Re: Question about pension and risk

Post by itstoomuch » Sun Sep 03, 2017 1:15 pm

We moved to an Income model in 2009, from an BH's Investment 80/20-40/60 retirement model (ours was 60/40) . I now use a FundingRatio methodology to gauge overall risk.
We have buckets of Income Streams.
We bought a pension plan in the form of GLWB annuities.
Only about 5% of retirement assets (SS and pension normalized at 3.5% ROT) are now directly connected to the security Markets.
Our risks have shifted from the equity and debt markets to RE and renters. What equity I have are in speculative individual stocks.
The RE is selected for stepup inheritance to Only, Income, and desirability.
YMMV
Last edited by itstoomuch on Sun Sep 03, 2017 1:35 pm, edited 1 time in total.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

itstoomuch
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Re: Question about pension and risk

Post by itstoomuch » Sun Sep 03, 2017 1:30 pm

Monster99 wrote:
Fri Sep 01, 2017 9:27 am
I recently retired from a large Corp with a reasonable pension and was evaluating how it affects risk tolerance. I have 2M investable assets with ~ 45/55 stock/bond AA and was wondering if I should be more aggressive with the AA since there is a steady stream of income.
When both the spouse and myself start SS in a few years we will have more than enough to cover our expenses and lifestyle.
In early 2008 we almost achieved the FI number. Early 2009, we were severely behind in a 60/40 portfolio and almost out of human capital.
YMMV
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

itstoomuch
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Re: Question about pension and risk

Post by itstoomuch » Mon Sep 04, 2017 11:46 am

FiveK wrote:
Fri Sep 01, 2017 9:38 am
Two schools of thought in your situation:
1) You have more than you need, thus no need to take risks with your investments. Relax, be conservative, and enjoy.
2) You have more than you need, thus you can take risks with your investments. Relax, be aggressive, and enjoy.

Take your pick.... :wink:
OP. This. But keep looking.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

Monster99
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Re: Question about pension and risk

Post by Monster99 » Mon Sep 04, 2017 7:01 pm

Thanks to all who took the time to reply -

I am happy with the current AA and will "stay the course".

The only change I plan on is to shift some CD's (1.5% APR) that are coming due in November over to I-Bonds at Treasury Direct. Didn't know you could buy small denomination, inflation adjusted bonds until I saw it discussed here...

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