Allocation re: Social Security

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HickoryHill
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Allocation re: Social Security

Post by HickoryHill » Tue Oct 09, 2018 8:07 pm

I'm in the process of removing an external advisor and funds are at Fidelity. My goal is to get as close to 3 funds as possible, having studied Taylor Larimore's 3-Fund book and also having read a lot of John Bogle's writings. I am retired and one recommendation from Bogle that I have not seen before is to use estimated total future income from social security in the calculation of the bond component allocation, discounted by the current rate of inflation-adjusted Treasury bonds. He uses a predicted life-span in the calculation.
I'm interested in whether anyone has used this.

jebmke
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Re: Allocation re: Social Security

Post by jebmke » Tue Oct 09, 2018 8:21 pm

You will get mixed opinions. My unscientific estimate is the more people on this forum do not capitalize SS than do - but I have no data to support that estimate. I do not. I treat it as an income item.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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David Jay
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Re: Allocation re: Social Security

Post by David Jay » Tue Oct 09, 2018 8:26 pm

Like Jeb, I am subtracting SS from expenses and calculating from there.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

UpperNwGuy
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Re: Allocation re: Social Security

Post by UpperNwGuy » Tue Oct 09, 2018 8:29 pm

David Jay wrote:
Tue Oct 09, 2018 8:26 pm
Like Jeb, I am subtracting SS from expenses and calculating from there.
Me too.

HickoryHill
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Re: Allocation re: Social Security

Post by HickoryHill » Tue Oct 09, 2018 8:56 pm

Thank you. Prior to reading Bogle's method, I have simply determined my income needs from the portfolio based on total income, less social security income. Depending on which approach is used the resulting allocation is different.

moehoward
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Re: Allocation re: Social Security

Post by moehoward » Tue Oct 09, 2018 9:33 pm

UpperNwGuy wrote:
Tue Oct 09, 2018 8:29 pm
David Jay wrote:
Tue Oct 09, 2018 8:26 pm
Like Jeb, I am subtracting SS from expenses and calculating from there.
Me too.
Count me in, I do the same thing

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Peter Foley
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Re: Allocation re: Social Security

Post by Peter Foley » Tue Oct 09, 2018 10:57 pm

If you were to consider SS Benefits like a bond in terms of your asset allocation you would invest more aggressively than Bogle's "age in bonds" recommendation. Your bond holdings would be inflated and you would hold more in stocks to compensate.

I too subtract SS from expenses.

Ron Scott
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Re: Allocation re: Social Security

Post by Ron Scott » Wed Oct 10, 2018 6:33 am

What Bogle is saying is: When setting an asset allocation based on risk tolerance don’t forget to consider the size and relatively safe nature of your SS benefits. So, if you feel comfortable with a 50% equity drop of $100k in a million dollar portfolio (20-80) and you estimate the present vale of your future SS payments to be $500k, you might set a 30-70 AA instead, reflecting SS as a bond and increasing your exposure in a 50% down market to $150k.

In the end you are stuck with the same psychological mind game as someone who accounts for SS by subtracting annual payments from their expenses. ToMAYto toMAHto.

For those who will need to spend their equity investments in retirement it’s probably best to consider SS in one of the ways above while setting the bond allocation to your age or higher, depending on your risk tolerance. Better to not rely on strong equity returns for living expenses in the forth quarter. A real problem with the psychological “risk tolerance” approach is that you might FEEL OK with a potential losses that a) might have a more damaging effect than you anticipate or b) turn out to be greater than you anticipate.

Go-for-it when you’re young. Play it safe when you’re older.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

Dandy
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Re: Allocation re: Social Security

Post by Dandy » Wed Oct 10, 2018 7:04 am

Social Security is a great source of future income to be sure. For those who will get SS it allows you to take more risk with your investment portfolio -- if you choose to. There are some calculations to help you estimate what level of additional risk might be suggested. All that is fine. Just don't turn SS income into a pseudo bond. It is income. Your actual bonds, bond funds and other fixed income are assets that can be consumed or used to rebalance your portfolio. SS or a pseudo bond can't you can just consume or invest the monthly check.

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ruralavalon
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Re: Allocation re: Social Security

Post by ruralavalon » Wed Oct 10, 2018 8:42 am

UpperNwGuy wrote:
Tue Oct 09, 2018 8:29 pm
David Jay wrote:
Tue Oct 09, 2018 8:26 pm
Like Jeb, I am subtracting SS from expenses and calculating from there.
Me too.
Me three.

I find treating Social Security as an income stream, reducing the amount needed to be produced by investing an easier way to analyze my situation.

A large Social Security benefit, like a substantial pension, can influence your ability, willingness and need to take risk and so impact asset allocation in that way.

I just don't pretend that Social Security is a bond.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

megabad
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Re: Allocation re: Social Security

Post by megabad » Wed Oct 10, 2018 10:38 am

HickoryHill wrote:
Tue Oct 09, 2018 8:07 pm
I'm in the process of removing an external advisor and funds are at Fidelity. My goal is to get as close to 3 funds as possible, having studied Taylor Larimore's 3-Fund book and also having read a lot of John Bogle's writings. I am retired and one recommendation from Bogle that I have not seen before is to use estimated total future income from social security in the calculation of the bond component allocation, discounted by the current rate of inflation-adjusted Treasury bonds. He uses a predicted life-span in the calculation.
I'm interested in whether anyone has used this.
In my spreadsheet I do this but I use a different inflation rate. I don't look at it very often though, but I view it as the most accurate way to look at a total portfolio. SS is an annuity--annuities have cash value that can be actuarially calculated as Bogle has indicated (roughly). To me, this makes more sense than assuming SS is a "negative expense". For me, it is not and it has no affect on my expenses. For most people it will be their largest retirement investment. If you fail to calculate its true value, than it can give misleading picture of destitution for many.

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tennisplyr
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Re: Allocation re: Social Security

Post by tennisplyr » Wed Oct 10, 2018 11:08 am

To me, SS is not added to my AA (it is income) nor do I add home equity to it.
Those who move forward with a happy spirit will find that things always work out.

HickoryHill
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Re: Allocation re: Social Security

Post by HickoryHill » Wed Oct 10, 2018 1:43 pm

Peter Foley wrote:
Tue Oct 09, 2018 10:57 pm
If you were to consider SS Benefits like a bond in terms of your asset allocation you would invest more aggressively than Bogle's "age in bonds" recommendation. Your bond holdings would be inflated and you would hold more in stocks to compensate.

I too subtract SS from expenses.
I agree. When I did the calculations using SS as a bond, the equity portion of my portfolio increased substantially; to me, that increases my risk.

HickoryHill
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Re: Allocation re: Social Security

Post by HickoryHill » Wed Oct 10, 2018 1:50 pm

Thanks for all of the comments. I am now back to my original calculation; that is, using the portfolio as an adjunct to my SS income, to the extent needed, and using a normalized (50-70%) equity allocation for that adjunct amount. Fortunately, it's not a large amount, so my bond allocation can remain reasonable.

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