Unclear how to incorporate company pension into my asset allocation

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FIREasap100
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Unclear how to incorporate company pension into my asset allocation

Post by FIREasap100 » Thu Jan 25, 2018 10:09 pm

Hi everyone, I am in my early-20s with about $50k saved. The asset allocation I have decided upon is the following:

1) 60% US Stocks. This 60% is coming from the Vanguard Total Stock Market Fund, Schwab US Broad Market Fund, and my company's 401k which I have put 75% in an S&P 500 index fund (expense ratio 0.04%) and 25% in an extended market index fund (expense ratio 0.05%).

2) 20% International Stocks. This 20% is coming from the Vanguard Total International Stock Fund and is held 100% in a taxable brokerage account.

3) 10% US REIT. This 10% is coming from the Vanguard REIT Fund and 100% held in a tax-advantaged account. In practice, less than 10% of my portfolio is invested in the Vanguard REIT Fund because the Personal Capital Asset Allocation Calculator says that approximately 4-5% of the US Stock Total Market funds are REIT.

4) 10% US Bonds. This 10% is coming from the Vanguard Total Bond Market Fund.

Here is my question:
I will soon be enrolled in my company's pension plan. For this plan, a few percentage points of my income are put in an account, and the interest rate on the balance is the 30-year treasury security rate. If the treasury rate is below 2%, I am guaranteed an interest rate of at least 2%. First, how do I know what is the current 30-year treasury security rate? What is it right now if you know? And second, how do I incorporate the balance of my pension plan into my asset allocation? It's my understanding that 30-year treasury securities are a part of the Vanguard Total Bond Fund, but would this lean the weighting towards more long-term bonds? Do I need to include a short-term bond fund in my AA to compensate?

Thank you!

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Re: Unclear how to incorporate company pension into my asset allocation

Post by AlohaJoe » Thu Jan 25, 2018 10:17 pm

FIREasap100 wrote:
Thu Jan 25, 2018 10:09 pm
First, how do I know what is the current 30-year treasury security rate?
Have you tried Googling "30-year treasury security rate"?
And second, how do I incorporate the balance of my pension plan into my asset allocation?
Some people treat it as a bond, by calculating the Present Value of the pension. Some people ignore it entirely. The "right" way is to calculate the Present Value and treat is as a bond-like part of your portfolio. But that results in the rest of your portfolio being largely (or entirely) stocks, which some people aren't comfortable with.
It's my understanding that 30-year treasury securities are a part of the Vanguard Total Bond Fund, but would this lean the weighting towards more long-term bonds?
I don't quite understand what you mean here.
Do I need to include a short-term bond fund in my AA to compensate?
You don't have to, no. There's very little "need" when it comes to investing; there is a very large component of personal preferences.

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Re: Unclear how to incorporate company pension into my asset allocation

Post by patrick » Thu Jan 25, 2018 10:21 pm

I suspect the pension only resets the rate at certain times rather than every day. You can see the current and historical treasury rates on https://www.treasury.gov/resource-cente ... data=yield

If you have the right to withdraw the balance (which you may not have, at least not at first), then I would count that as equivalent to holding cash in whatever amount you can withdraw. Even if it pays at the 30-year rate, it's not really the same as holding 30-year bonds because (I presume) it won't have capital gains or losses when the interest rate changes.

FIREasap100
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Re: Unclear how to incorporate company pension into my asset allocation

Post by FIREasap100 » Thu Jan 25, 2018 10:26 pm

patrick wrote:
Thu Jan 25, 2018 10:21 pm
I suspect the pension only resets the rate at certain times rather than every day. You can see the current and historical treasury rates on https://www.treasury.gov/resource-cente ... data=yield

If you have the right to withdraw the balance (which you may not have, at least not at first), then I would count that as equivalent to holding cash in whatever amount you can withdraw. Even if it pays at the 30-year rate, it's not really the same as holding 30-year bonds because (I presume) it won't have capital gains or losses when the interest rate changes.
I don't have the option to withdraw it. I can take the balance of the plan as a lump sum when I leave the company though. Your point about capital gains and losses makes sense. I guess it's best to just not include it in the asset allocation at all in that case.

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Watty
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Re: Unclear how to incorporate company pension into my asset allocation

Post by Watty » Thu Jan 25, 2018 10:29 pm

FIREasap100 wrote:
Thu Jan 25, 2018 10:09 pm
And second, how do I incorporate the balance of my pension plan into my asset allocation?
The first thing to remember is that your pension is only worth what you would get if left that job today. It may not be vested and you might not get anything if you left the job today. It has been a while since I have looked at it but as I recall some companies vest their pension over five or seven years of employment.

There are different types of pensions. The traditional pension is where you will get $X a month when you retire. This type does not affect your asset allocation, instead it reduces the target amount that you need to generate from your investments when you retire.

Another type is a cash balance pension plan there is just a dollar amount in the pension plan with no promise about a set amount that it will pay you when you are retired. This can be treated as a bond in your asset allocation.

FIREasap100
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Re: Unclear how to incorporate company pension into my asset allocation

Post by FIREasap100 » Thu Jan 25, 2018 10:33 pm

Watty wrote:
Thu Jan 25, 2018 10:29 pm
FIREasap100 wrote:
Thu Jan 25, 2018 10:09 pm
And second, how do I incorporate the balance of my pension plan into my asset allocation?
The first thing to remember is that your pension is only worth what you would get if left that job today. It may not be vested and you might not get anything if you left the job today. It has been a while since I have looked at it but as I recall some companies vest their pension over five or seven years of employment.

There are different types of pensions. The traditional pension is where you will get $X a month when you retire. This type does not affect your asset allocation, instead it reduces the target amount that you need to generate from your investments when you retire.

Another type is a cash balance pension plan there is just a dollar amount in the pension plan with no promise about a set amount that it will pay you when you are retired. This can be treated as a bond in your asset allocation.
The vesting period is 3 years to be 100% vested in the balance of the account, and to my understanding, the payment options are a lifetime annuity at retirement or lumpsum. Since I'm still decades away from retirement, I was working under the assumption that I'd walk away with the lumpsum if/when I leave the company in some period of time that is longer than 3 years from now.

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Earl Lemongrab
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Re: Unclear how to incorporate company pension into my asset allocation

Post by Earl Lemongrab » Sat Jan 27, 2018 12:22 pm

I never included pension or social security or home equity or anything that wasn't a straight-up liquid investment.
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Re: Unclear how to incorporate company pension into my asset allocation

Post by CppCoder » Sat Jan 27, 2018 12:40 pm

Earl Lemongrab wrote:
Sat Jan 27, 2018 12:22 pm
I never included pension or social security or home equity or anything that wasn't a straight-up liquid investment.
Along the lines above, a non-liquid investment in your asset allocation can make rebalancing challenging. What if you treat your pension as a bond, it equals 30% of your investments, but your asset allocation calls for 20% bonds? What do you do, change your asset allocation, buy stock on margin? I have a sizable pension (promise). I think the two best ways to view it are either as a retirement cash flow offset or as a risk modifier. I view mine as a risk modifier and keep a higher stock allocation in my liquid AA than I otherwise might.

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Re: Unclear how to incorporate company pension into my asset allocation

Post by MichaelRpdx » Sat Jan 27, 2018 12:44 pm

FIREasap100 wrote:
Thu Jan 25, 2018 10:33 pm
The vesting period is 3 years to be 100% vested in the balance of the account, and to my understanding, the payment options are a lifetime annuity at retirement or lumpsum. Since I'm still decades away from retirement, I was working under the assumption that I'd walk away with the lumpsum if/when I leave the company in some period of time that is longer than 3 years from now.
Consider doing a close reading of the Summary Plan Description (SPD). You may have the option to leave the funds with your employer or roll them over to an IRA. I'll also echo the observation made earlier that the plan might (probably?) only resets the rate and does a balance credit on set dates during the year.

I'm freshly retired. One component of my ex-employer's retirement benefits is a cash balance plan. To illustrate what you might find in the SPD, here is an excerpt from the one I'm benefiting from.
SPD Interest Payment Section wrote:The interest credit to be added to your account will be the annual rate of return equal to the greater of the 10-Year
Treasury bond rate as of October for the calendar year prior to the Plan year in which the interest credit is applied or 3
percent.

The "equal to the greater of" phrase has been very beneficial, as 10-Year Treasury Bond rates have been much lower than that in recent years.
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Tyler Aspect
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Re: Unclear how to incorporate company pension into my asset allocation

Post by Tyler Aspect » Sat Jan 27, 2018 12:45 pm

FIREasap100 wrote:
Thu Jan 25, 2018 10:33 pm
The vesting period is 3 years to be 100% vested in the balance of the account, and to my understanding, the payment options are a lifetime annuity at retirement or lumpsum. Since I'm still decades away from retirement, I was working under the assumption that I'd walk away with the lumpsum if/when I leave the company in some period of time that is longer than 3 years from now.
Generally I would treat the vested lumpsum value as a bond allocation. However, that is just my opinion. Some people prefers to treat pension as an income stream in retirement, and do not include the lumpsum value as a bond allocation. If your intention is to eventually convert the pension into a rollover IRA account then that might lean the classification once again into the bond column. Your choice.
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Beehave
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Re: Unclear how to incorporate company pension into my asset allocation

Post by Beehave » Sat Jan 27, 2018 12:57 pm

Your pension is a cash accumulation fund. Eventually, you get the cash, with an option to annuitize that cash. It is a long-term holding, just like your 401k.

Suppose you are earning $50K per annum and the company is tossing 2% in and it is earning 2%. Then at the end of year one you have $1K "principle" plus ten dollars interest (not twenty because the principle grew to $1k over the course of the year).

Point 1: The interest you are receiving is low and on a small amount of principle at least for the first few years. It is also totally out of your control. It is not worth thinking about at this time as an allocation consideration.

Point 2: The cash accumulation fund is functioning exactly like your 401k relative to your retirement. My opinion is that you should treat the amount being contributed by your company as if it is part of your 401k contribution, and include it in your overall allocation. But with one caveat...

Point 3: Since the cash accumulation funds not co-mingled with the 401k, it is advisable, as suggested in another response above, to keep some cash on hand at the ready within the 401k itself. This is to dollar-cost-average-in when stocks (or stocks and bonds) tank at some time in the future. Psychologically, having cash-on-hand to put into a declining market makes you, as a long-term investor, not only stay the course during a downturn, but it also psychologically makes you feel proactive and in control and even comfortable if and when stuff hits the fan and prices sink horribly.

My opinion, hope it is helpful.

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Re: Unclear how to incorporate company pension into my asset allocation

Post by MichaelRpdx » Sat Jan 27, 2018 1:12 pm

Beehave wrote:
Sat Jan 27, 2018 12:57 pm
Point 3: Since the cash accumulation funds not co-mingled with the 401k, it is advisable, as suggested in another response above, to keep some cash on hand at the ready within the 401k itself. This is to dollar-cost-average-in when stocks (or stocks and bonds) tank at some time in the future. Psychologically, having cash-on-hand to put into a declining market makes you, as a long-term investor, not only stay the course during a downturn, but it also psychologically makes you feel proactive and in control and even comfortable if and when stuff hits the fan and prices sink horribly.
The OP is in his or her early 20s. I would suggest not keeping any cash in 401(k) and treat any market downturns as an exercise in dealing with market reversal. Assuming a big market tank in the next decade, they still have decades to recover. Since 401(k) are fairly constrained in action opportunity, they provide an excellent place for monitoring your emotional reaction to market events.

The asset allocation is already at a conservative 60/40. Compare that to Vangurard target retirement 2050 VFIFX - with a 90/10 allocation.

Note: FireASAP100 - I'm not suggesting your change your allocation.
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Earl Lemongrab
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Re: Unclear how to incorporate company pension into my asset allocation

Post by Earl Lemongrab » Sat Jan 27, 2018 2:26 pm

Beehave wrote:
Sat Jan 27, 2018 12:57 pm
Point 3: Since the cash accumulation funds not co-mingled with the 401k, it is advisable, as suggested in another response above, to keep some cash on hand at the ready within the 401k itself. This is to dollar-cost-average-in when stocks (or stocks and bonds) tank at some time in the future.
I disagree. That's what your fixed-income allocation and rebalancing is for.
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Re: Unclear how to incorporate company pension into my asset allocation

Post by Beehave » Sun Jan 28, 2018 12:11 am

Stocks and bonds can crash at the same time. My opinion is that holding some cash is prudent. It diversifies risk and can be used to rebalance, especially if stocks and bonds tank together.

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Re: Unclear how to incorporate company pension into my asset allocation

Post by celia » Sun Jan 28, 2018 1:01 am

I never included my pension as part of our assets. It is just a future income stream. At the time you are getting ready to retire, you can find out how much you will be getting each month and then you would have that much less to pull from savings to meet your living expenses. So instead of planning on withdrawing 4% (if you didn't have a pension or SS), maybe you'd only have to pull out 2% (if the pension and SS covered the rest of the 4%).

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Re: Unclear how to incorporate company pension into my asset allocation

Post by sco » Sun Jan 28, 2018 9:13 pm

Beehave wrote:
Sun Jan 28, 2018 12:11 am
Stocks and bonds can crash at the same time. My opinion is that holding some cash is prudent. It diversifies risk and can be used to rebalance, especially if stocks and bonds tank together.
It can also sit there for 10 years with inflation erosion. I don’t see the point of cash in the 401k at all...

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Re: Unclear how to incorporate company pension into my asset allocation

Post by Beehave » Sun Jan 28, 2018 10:30 pm

sco wrote:
Sun Jan 28, 2018 9:13 pm
Beehave wrote:
Sun Jan 28, 2018 12:11 am
Stocks and bonds can crash at the same time. My opinion is that holding some cash is prudent. It diversifies risk and can be used to rebalance, especially if stocks and bonds tank together.
It can also sit there for 10 years with inflation erosion. I don’t see the point of cash in the 401k at all...
Stocks can have a lost decade of erosion too. That's the point of diversification. Assets with different characteristics can be used for rebalancing. No one knows what the financial picture will be in the near term, but one possibility is that interest will rates rise, possibly more rapidly than most expect, and that as a result both bonds and stocks go down. In that environment, I want cash on hand (a) to cover any known or unforeseen expenses so I do not have to sell depressed assets and (b) to rebalance by trading my cash assets for bonds and stocks.

There's a lot of pushback on the board against cash. Cash, especially in 401k stable funds, has been earning decent interest and has a history of tracking inflation reasonably when interest rates rise. Seems prudent to me to keep some on hand because it can behave differently than, and sometimes positively relative to, stocks and bonds. Am I missing something in this reasoning?

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Re: Unclear how to incorporate company pension into my asset allocation

Post by sco » Sun Jan 28, 2018 10:57 pm

I just don’t think the upside outweights the downside risks. Just me personally, but 0% cash is just fine for the investment portfolio. That wouldn’t be the case right before or during retirement..

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Re: Unclear how to incorporate company pension into my asset allocation

Post by Beehave » Mon Jan 29, 2018 12:59 pm

sco wrote:
Sun Jan 28, 2018 10:57 pm
I just don’t think the upside outweights the downside risks. Just me personally, but 0% cash is just fine for the investment portfolio. That wouldn’t be the case right before or during retirement..
Maybe we're in basic agreement. I agree that some cash is more of a benefit or necessity closer-in to retirement, and much less of a necessity for a young person. My suggestion for a young person who will be hands-off would be to hold no or very little cash. For someone like the OP who seems very concerned even about the interest rate on a cash-accumulation account with very small balance, my suggestion for cash in the 401k was more psychological than for stoking up returns. Specifically, the idea was that if the market starts tanking (especially if both bonds and stock tank), then having some cash to toss in as the market goes down will reinforce the idea of staying the course with the stocks and bonds and, while feeling unhappy with the overall decrement to the account's value, feeling positive about being proactive and buying low and staying the course.

For my family members who come to me for advice who are young and hands-off, I recommend what you suggest, which is a bond and stock mix - - no cash component. For myself (and if anyone who seems hands-on were to ask me), I'd recommend some cash for the reasons I stated. So we're probably largely in agreement - - appreciate your comments and appreciate reading more if you have additional thought and comments.
:sharebeer

sco
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Re: Unclear how to incorporate company pension into my asset allocation

Post by sco » Mon Jan 29, 2018 10:19 pm

Beehave wrote:
Mon Jan 29, 2018 12:59 pm
sco wrote:
Sun Jan 28, 2018 10:57 pm
I just don’t think the upside outweights the downside risks. Just me personally, but 0% cash is just fine for the investment portfolio. That wouldn’t be the case right before or during retirement..
Maybe we're in basic agreement. I agree that some cash is more of a benefit or necessity closer-in to retirement, and much less of a necessity for a young person. My suggestion for a young person who will be hands-off would be to hold no or very little cash. For someone like the OP who seems very concerned even about the interest rate on a cash-accumulation account with very small balance, my suggestion for cash in the 401k was more psychological than for stoking up returns. Specifically, the idea was that if the market starts tanking (especially if both bonds and stock tank), then having some cash to toss in as the market goes down will reinforce the idea of staying the course with the stocks and bonds and, while feeling unhappy with the overall decrement to the account's value, feeling positive about being proactive and buying low and staying the course.

For my family members who come to me for advice who are young and hands-off, I recommend what you suggest, which is a bond and stock mix - - no cash component. For myself (and if anyone who seems hands-on were to ask me), I'd recommend some cash for the reasons I stated. So we're probably largely in agreement - - appreciate your comments and appreciate reading more if you have additional thought and comments.
:sharebeer

That makes sense, I was reading it a little different initially. Appreciate the detail.
If I was doing it this way, it would take 10-20% minimum cash before I would consider it worthwhile, and then I think the cash drag could get significant while waiting for the crash.

I tend to recommend target date something to people, if you can’t stay the course with those... well then you can just pick a earlier date.

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Re: Unclear how to incorporate company pension into my asset allocation

Post by cherijoh » Mon Jan 29, 2018 10:26 pm

AlohaJoe wrote:
Thu Jan 25, 2018 10:17 pm
FIREasap100 wrote:
Thu Jan 25, 2018 10:09 pm
First, how do I know what is the current 30-year treasury security rate?
Have you tried Googling "30-year treasury security rate"?
And second, how do I incorporate the balance of my pension plan into my asset allocation?
Some people treat it as a bond, by calculating the Present Value of the pension. Some people ignore it entirely. The "right" way is to calculate the Present Value and treat is as a bond-like part of your portfolio. But that results in the rest of your portfolio being largely (or entirely) stocks, which some people aren't comfortable with.
It's my understanding that 30-year treasury securities are a part of the Vanguard Total Bond Fund, but would this lean the weighting towards more long-term bonds?
I don't quite understand what you mean here.
Do I need to include a short-term bond fund in my AA to compensate?
You don't have to, no. There's very little "need" when it comes to investing; there is a very large component of personal preferences.
It sounds like the OP has a cash balance pension plan - not a defined benefit plan. The current value of the pension (i.e., statement value) is the "present value" :wink:

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