Is Social Security a bond for asset allocation?

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Kelly
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Is Social Security a bond for asset allocation?

Post by Kelly » Tue Jul 02, 2013 4:01 pm

Does anyone consider the present value of Social Security (or other gov't pension) a bond that would take the place of a major (if not all) of their bond allocation.

The only published research I could find on this appeared in the Journal of Financial Planning in 2001. A simplified version of the same is here:http://www.aaii.com/journal/article/val ... plications

Any thoughts are appreciated on whether this is or isn't a good approach.

Kelly

technovelist
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Re: Is Social Security a bond for asset allocation?

Post by technovelist » Tue Jul 02, 2013 4:13 pm

SS has bond-like characteristics, but it has zero liquidity and can't be rebalanced. So I would say it should be handled separately, as an income source that reduces the amount of money you will have to draw out during retirement.
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G-Money
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Re: Is Social Security a bond for asset allocation?

Post by G-Money » Tue Jul 02, 2013 4:14 pm

I don't. Can't sell it. Can't rebalance it. You don't even "own" it; it's a benefit that could disappear with the stroke of a pen.

I plan to consider it in my analysis of my need/willingness/ability to take risk, but I wouldn't count it as a bond.
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ourbrooks
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Re: Is Social Security a bond for asset allocation?

Post by ourbrooks » Tue Jul 02, 2013 4:28 pm

John Bogle has advocated using the present value of Social Security in calculating "age in bonds" for asset allocation. When he made that statement he suggested that a $20,000 Social Security annuity was worth about $300,000; with today's lower interest rates and using data from immediateannuities.com, I calculate that for a couple, $20,000 in Social Security benefits is now worth about $600,000.

If a person counted Social Security as bond and they had $500,000 in investments, being 100% in stocks would still put them at a 45% stocks / 55% bonds asset allocation.

Unless you're looking for a justification for investing mostly in stocks, no, don't count Social Security as a bond.

The other problem with using Social Security as a bond is that you need to project forward your future annual income, to figure out how much of a benefit you'll receive. That adds still more uncertainty to the calculation.

Chris M
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Re: Is Social Security a bond for asset allocation?

Post by Chris M » Tue Jul 02, 2013 4:31 pm

technovelist wrote:SS has bond-like characteristics, but it has zero liquidity and can't be rebalanced. So I would say it should be handled separately, as an income source that reduces the amount of money you will have to draw out during retirement.
I agree with this approach. The best thing about SS is that it enables you to substantially reduce your withdrawal rate. Reducing your withdrawal rate in retirement is the best way to reduce risk. It's better than a bond, which may reduce volatility but at the expense of reducing returns and potentially leaving you with returns insufficient to keep pace with inflation.

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Re: Is Social Security a bond for asset allocation?

Post by MnD » Tue Jul 02, 2013 4:37 pm

This Bogle guy had some opinions a few weeks back but it's not very Bogleheadesque 8-)

http://www.investmentnews.com/article/2 ... /130619939
“Social Security's the greatest fixed income you'll ever get,” Mr. Bogle said.
With that in mind, it would behoove retirees to pay more attention to dividend-paying stocks in a retirement account.
“Dividends go up virtually every year with two exceptions: the Great Depression and 2008. I don't think that's likely to happen again,” Mr. Bogle said.
Stocks, even dividend-paying ones, are going to be more volatile than bonds, but as long as there isn't another serious crash, the swings shouldn't bother investors, he said.
“We're all so transfixed with the movements of the stock market, but that has nothing to do with your retirement,” Mr. Bogle said.
“It doesn't matter what the stock market is worth as long as the income keeps coming from dividends,” he said. “In the long run, focus on the dividend stream and focus on the fact that Social Security will keep coming.”

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Ged
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Re: Is Social Security a bond for asset allocation?

Post by Ged » Tue Jul 02, 2013 4:37 pm

I don't consider it that way. Rather I think of it as an offset to my expenses in retirement. SS is more like an inflation indexed annuity than a bond.

Say I am planning on wanting $80K per annum in income for a comfortable retirement for myself and my wife. Going to the SS web site indicates that I can expect $40,000 in benefits for the two of us. We also have $20K in pensions. This means we need $20K from other sources. Then I look at my portfolio size and say hmm $1 million so I'm in pretty decent shape, 50% in equities is plenty.

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Re: Is Social Security a bond for asset allocation?

Post by scone » Tue Jul 02, 2013 4:43 pm

I think of SS as an annuity from an extremely reliable "vendor," compared to a private insurer.* It comes with a certain amount of inflation protection, which is a pretty good deal, actually. But I don't think I really understand the details. I need to get Mike Piper's book. :)

*In a certain sense, the "vendor" is the American people, or at least the portion that contributes. I think we all have a very strong incentive to keep the system going, in some form. So I have more trust in SS than in a private insurer which is motivated only by profit and stock price. In my mind, it's the closest thing in the public sector to Jack Bogle's "mutualism" philosophy-- which certainly works for me!
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Howard Donnelly
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Re: Is Social Security a bond for asset allocation?

Post by Howard Donnelly » Tue Jul 02, 2013 4:58 pm

Kelly wrote:Does anyone consider the present value of Social Security (or other gov't pension) a bond that would take the place of a major (if not all) of their bond allocation.

The only published research I could find on this appeared in the Journal of Financial Planning in 2001. A simplified version of the same is here:http://www.aaii.com/journal/article/val ... plications

Any thoughts are appreciated on whether this is or isn't a good approach.

Kelly
I asked the same question recently. Here are the responses I got:

http://www.bogleheads.org/forum/viewtop ... 0&t=117172

Best,
Howard

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Re: Is Social Security a bond for asset allocation?

Post by technovelist » Tue Jul 02, 2013 5:09 pm

scone wrote:I think of SS as an annuity from an extremely reliable "vendor," compared to a private insurer.* It comes with a certain amount of inflation protection, which is a pretty good deal, actually. But I don't think I really understand the details. I need to get Mike Piper's book. :)

*In a certain sense, the "vendor" is the American people, or at least the portion that contributes. I think we all have a very strong incentive to keep the system going, in some form. So I have more trust in SS than in a private insurer which is motivated only by profit and stock price. In my mind, it's the closest thing in the public sector to Jack Bogle's "mutualism" philosophy-- which certainly works for me!
I believe the reliability of Social Security would be considered "political discussion", which is prohibited on this board. But of course that is up to the admins to decide.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Is Social Security a bond for asset allocation?

Post by JW-Retired » Tue Jul 02, 2013 5:12 pm

IMO, the thought process should not matter. As long as you figure out how you are going to take account of the bond like pension/SS income streams before you choose your investible assets AA, you should be fine.

Having a pretty large pension/SS, I kind of like the logic of the Bogle and Bernstein recommended approach. They say just use your age-in-bonds but count the "assets" up differently. When I did that, I found it didn't make me change my portfolio AA at all. I had already come to an investible assets AA=60/40 using the more nebulous Boglehead approach. But it certainly ratified it. Using the Bogle/Berstein counting my AA would be 30/70, which is my age in bonds just like they recommend. Smart guys! :beer
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IlliniDave
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Re: Is Social Security a bond for asset allocation?

Post by IlliniDave » Tue Jul 02, 2013 6:21 pm

I do but I don't. Like others have pointed out, it's sort of a static element you can't do anything with except collect money from later in time. But at the same time it's a stabilizer to my retirement income picture so I take it loosely into account when assessing allocation decisions (hence I'm quite a bit heavier in stocks than "age in bonds"). I also look at it from the perspective of covering a fraction of income leaving the liability to my portfolio smaller. For me it's two perspectives on the same problem. I find myself comfortable grappling with the concept of being "bond-like" while not being literally a bond.
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Re: Is Social Security a bond for asset allocation?

Post by Ged » Tue Jul 02, 2013 6:48 pm

G-Money wrote:I don't. Can't sell it. Can't rebalance it. You don't even "own" it; it's a benefit that could disappear with the stroke of a pen.
To me the "can't rebalance it" point is a major reason against treating SS as a bond in your portfolio. One of the major functions of a bond allocation is being able to purchase stocks when the market is low. If you are have few bonds because of your SS benefit being used as bonds in your portfolio, you may find that you can't raise the assets to rebalance as you should.

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Re: Is Social Security a bond for asset allocation?

Post by avalpert » Tue Jul 02, 2013 7:27 pm

Not only can't you re-balance it, you don't own it or even own any guarantee of it - it must be riskier than a treasury bond which is an actual guaranteed income stream from the same entity for that reason alone.

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Re: Is Social Security a bond for asset allocation?

Post by The Wizard » Tue Jul 02, 2013 7:33 pm

Yes, it's a bond.
Next question, please...
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Re: Is Social Security a bond for asset allocation?

Post by YDNAL » Tue Jul 02, 2013 8:00 pm

Kelly wrote:Does anyone consider the present value of Social Security (or other gov't pension) a bond that would take the place of a major (if not all) of their bond allocation.
And, if one did, how does one rebalance when non-Bond investments (like Equities) take a 50% dive ?

And, when one's SS income stream reduces Need to take risk, why would one take the risk ?
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Re: Is Social Security a bond for asset allocation?

Post by dbr » Wed Jul 03, 2013 7:57 am

Kelly wrote:Does anyone consider the present value of Social Security (or other gov't pension) a bond that would take the place of a major (if not all) of their bond allocation.
Probably there are people who do. Even Mr. Bogle advocate(s/ed) that in the context of "age in bonds." Personally I think the approach is irrational and more likely to mislead than to help, depending on where in the thought process a person is.

The question is asked and discussed repeatedly on this forum.

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Re: Is Social Security a bond for asset allocation?

Post by Faith20879 » Wed Jul 03, 2013 8:58 am

I saw Mr. Bogle's interview as well. He also talked about people who are hurting for yield should go for dividend paying stocks and that gave me the impression that he was talking to folks in the de-cummulation stage or people who are already collecting SS.

For me, all I have is a piece of paper that says if conditions A, B, C, ..., and Z are true then I might get $xxx. I would rather treat it as part of my cash flow when I have actually received it.

Regards,
Faith

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Re: Is Social Security a bond for asset allocation?

Post by dbr » Wed Jul 03, 2013 9:10 am

Faith20879 wrote:I saw Mr. Bogle's interview as well. He also talked about people who are hurting for yield should go for dividend paying stocks and that gave me the impression that he was talking to folks in the de-cummulation stage or people who are already collecting SS.

For me, all I have is a piece of paper that says if conditions A, B, C, ..., and Z are true then I might get $xxx. I would rather treat it as part of my cash flow when I have actually received it.

Regards,
Faith
If you are going to treat an income stream as a bond, then presumably you don't actually own the bond until the income stream starts. But, one supposes one could imagine an investment instrument that generates no yield until a certain pre-determined point in time and then starts to pay interest. If one wants to call SS a bond of that type there is nothing to prevent it. It is still possible to calculate a NPV that one can imagine one owns is one wants to engage in that sort of fiction. Mr. Bogle is not actually off track in pointing out that the future presence of SS discounted by whatever uncertainty one might apply is a factor in deciding on how much investment risk to take. Imputing an asset value to that future income stream is a simplistic and problematic way to do that accounting. The question is, what is a better way? The question also is, what harm is done by forgetting to take SS into account altogether -- or by goofing up how it is taken into account?

My test is that if you end up with an asset allocation that does not pass a smell test of common sense, then you did something wrong. How often, for example, does an asset allocation in excess of 75% in stocks pass a smell test? The answer is an exercise for the reader.

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