Article: bonds pensions SS

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communipaw
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Article: bonds pensions SS

Post by communipaw » Mon Jun 23, 2014 6:26 pm

A New Perspective on Your Portfolio

Don't overlook your house and Social Security in assessing your asset mix.

http://online.wsj.com/articles/new-take ... 1403470472

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sdsailing
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Re: Article: bonds pensions SS

Post by sdsailing » Mon Jun 23, 2014 7:31 pm

Social Security is not strictly speaking an "asset", and a WSJ reporter should know better.

Also, using the full value of the house seems reckless. If the justification is based on downsizing, for example, it only makes sense to consider the difference in prices between the two houses.

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Re: Article: bonds pensions SS

Post by steve_14 » Mon Jun 23, 2014 7:46 pm

sdsailing wrote:Social Security is not strictly speaking an "asset", and a WSJ reporter should know better.


Indeed. It simply reduces your income needs in retirement.

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Re: Article: bonds pensions SS

Post by joe8d » Mon Jun 23, 2014 8:07 pm

steve_14 wrote:
sdsailing wrote:Social Security is not strictly speaking an "asset", and a WSJ reporter should know better.


Indeed. It simply reduces your income needs in retirement.


Yes and a house is what you live in.
All the Best, | Joe

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Re: Article: bonds pensions SS

Post by heyyou » Mon Jun 23, 2014 8:14 pm

The reporter could have written about the Morningstar (M*) authors' thesis then offered some qualifiers. As is, the article is one sided--buy more stocks because most of your non-stock assets are considered as bonds.

Seems like the wrong message at perhaps the wrong time. The reporter failed to mention that many investors do not stay the course in bear markets. Your allocation percentages are a much lower priority than staying the course, even if M* says your allocation is imperfect.

Using the article's criteria, this age 64 retiree needs to sell all of his bond holdings to own all equity in marketable securities. My related risks are high equity exposure to a stock bust early in retirement. Without the reporter or the authors adding further info, the article offers incomplete advice to the public which could hurt M*'s reputation if that is still possible.

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Re: Article: bonds pensions SS

Post by bhsince87 » Mon Jun 23, 2014 9:26 pm

I think that article has some good points.

I still don't understand why so many people think of TIPS, treasuries, or I bonds as being safer long term than Social Security. That discussion usually devolves into political debate, and gets shut down.

But the last thread I followed on it, I got some clarification on differences in the laws as currently written that made a lot of sense to me. So now I discount Social Security by 75% to be a bit more conservative.

My only other nit to pick with the article would be to suggest that if you count home equity as equivalent to a bond (and I think that is reasonable), you should also count any outstanding mortgage balance as a "negative" bond. For example, if you have $50k in equity and owe $200k, then you should subtract $150k from your bond holdings before you calculate your ratio.
BH87

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Re: Article: bonds pensions SS

Post by alec » Mon Jun 23, 2014 9:44 pm

heyyou wrote:The reporter could have written about the Morningstar (M*) authors' thesis then offered some qualifiers. As is, the article is one sided--buy more stocks because most of your non-stock assets are considered as bonds.


:thumbsup I think the problem with this is that people may start out with a stock/bond mix first, when, IMO, the stock/bond mix is not the starting point, it's the ending point. For example, my in-laws both have gov't pensions (inflation adjusted) whose present value is probably around $3.25 million, which, using the article's math, makes them roughly 90% bonds. And so what? They seem to be perfectly happy with this stock/bonds mix. Why would they be considered "too heavy in bonds"? Because some financial planner, or mutual fund company pamphlet, put a vague statement like "Well, the average investor should probably be somewhere around 60% stocks at age 60"?

It's certainly fine for people to realize "Hey, I have a large portion of my retirement income from a pension and SS, so I can take some more risk in my investment portfolio." But that's a far cry from saying people should buy more stocks because they have a pension or SS. Perhaps the WSJ should find some actual people that did this.

-Alec
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Re: Article: bonds pensions SS

Post by FinancialDave » Tue Jun 24, 2014 1:24 pm

sdsailing wrote:Social Security is not strictly speaking an "asset", and a WSJ reporter should know better.

Also, using the full value of the house seems reckless. If the justification is based on downsizing, for example, it only makes sense to consider the difference in prices between the two houses.


SS does not necessarily have to be considered an asset for it to show up on your "balance sheet." In retirement it is all about cash flow, so another way to think about this is to compare all your sources of cash flow and decide how much of it is coming from a bond or "bond like" source and how much of it is coming from equities. Some (like myself) also like to consider dividends from companies like JNJ as a "bond like" source of income - as it is not a trivial matter that they have been increasing their dividends year in and year out for over 50 years --- at lot longer than any bond and most bond funds.

Anyway, I digress. Now using the house as an asset is as you point out a little problematic, because you need a place to live. It is also a highly illiquid asset which is not that easy to turn into cash and if you do you will surely need to use that cash for a place to live.

For the above reasons I have no problem factoring in SS, but the house I just leave in reserve. Maybe at age 85 I will sell and turn it into an immediate annuity - that has some promise.

fd
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Re: Article: bonds pensions SS

Post by Rodc » Tue Jun 24, 2014 3:17 pm

It is not a new perspective. It has been hotly debated here many times.

I'm in the camp that says don't pretend apples are oranges. From the other active thread
(viewtopic.php?f=10&t=141715&p=2100010#p2100010) on the same topic:

While I certainly agree with factoring SS (and home equity as discussed in the link) into one's financial planning, I don't understand the mind set that says there are only two possible investing buckets, stocks and bonds, and we should take all not-stocks and all not-bonds and pretend they are what they are not, namely pretend they are pseudo-stocks or pseudo-bonds.

Just take the expected income stream and pretend it is an expected income stream. :)

That is, figure out what income you need/desire, and subtract all expected income steams to find the income you need to generate from your personal investments.

Invest in such a way that you will with very high likelihood cover your needed investment income stream, and if possible, then go after your desired income stream.

No contortions needed.

I also note the these articles always end up recommending you increase your holdings in stocks. But if you factor in the value of SS (and/or housing), or more properly simply subtract them from income needs, you may find that your need for risk is very low and you can safely decrease your stock holdings.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Article: bonds pensions SS

Post by longinvest » Tue Jun 24, 2014 4:10 pm

From a recent interview with our mentor John Bogle (http://www.aaii.com/journal/article/ach ... nds.mobile):

For example, when you think about asset allocation, think about all of your investments. Social Security, for example, has a capitalized value of around $300,000 to $350,000 when you retire, depending on your lifetime earnings. Social Security is a fixed-income position with as much safety as you’re going to find in this world. Add the cost-of-living hedge that Social Security provides, and there aren’t a lot of things better than Social Security for your retirement, believe me. It may be expensive to get there, but once you get there, it’s a big asset.

If you’ve accumulated $350,000 of your own savings, you could easily say all of your money should go in stocks, leaving you with perhaps 50% stocks/50% safe rates. I wouldn’t actually do that; I’d have a lower stock allocation than that. But I would say, “Here I am with 50% of fixed income with an inflation hedge (e.g., Social Security) and 50% in equities. Do I want more or less than that in equities?” That involves a little mental discipline. The problem with all this is that we look at the equity side, but we don’t get an integrated statement that shows your total portfolio, including Social Security, and how it performs when the market goes down, let’s say, 50%, as it did a few years ago. You just see that equity fund going down 50%. However, your total holdings, which include the income on your bond position, have gone down maybe 22% because the bonds went up in that period. There are a lot of factors that go into this. It comes down to, “what do I have to do to be able to sleep well?”
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Article: bonds pensions SS

Post by FinancialDave » Tue Jun 24, 2014 5:47 pm

Rodc wrote:It is not a new perspective. It has been hotly debated here many times.


I also note the these articles always end up recommending you increase your holdings in stocks. But if you factor in the value of SS (and/or housing), or more properly simply subtract them from income needs, you may find that your need for risk is very low and you can safely decrease your stock holdings.


Another way to look at this is not that anyone is recommending you increase your stock position.

It is more that you know what your asset allocation is as it relates to your retirement cash flow.

If you have decided that in retirement you want to rely on a 50/50 split between what I would call "less risky fixed income sources" (bonds, SS, cash, etc) and "more risky assets" (equities, commodities, etc) why would you not evaluate that as a total picture. Or to put it another way, say you inherited a fixed annuity at retirement, that you didn't count on - why would you not look at your investment plan and say "I am way off base now in my asset allocation and my written plan" and re-adjust. To just say this fixed income stream (say SS) is not part of my asset allocation is just putting your head in the sand and that is what Bogle has been attempting to say for a few years now. From some of his earlier books he may not have realized that when he was younger, but even he is allowed to change his mind if something more logical presents itself.

fd
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Re: Article: bonds pensions SS

Post by Mel Lindauer » Tue Jun 24, 2014 5:58 pm

Rodc wrote:It is not a new perspective. It has been hotly debated here many times.

I'm in the camp that says don't pretend apples are oranges. From the other active thread
(viewtopic.php?f=10&t=141715&p=2100010#p2100010) on the same topic:

While I certainly agree with factoring SS (and home equity as discussed in the link) into one's financial planning, I don't understand the mind set that says there are only two possible investing buckets, stocks and bonds, and we should take all not-stocks and all not-bonds and pretend they are what they are not, namely pretend they are pseudo-stocks or pseudo-bonds.

Just take the expected income stream and pretend it is an expected income stream. :)

That is, figure out what income you need/desire, and subtract all expected income steams to find the income you need to generate from your personal investments.

Invest in such a way that you will with very high likelihood cover your needed investment income stream, and if possible, then go after your desired income stream.

No contortions needed.

I also note the these articles always end up recommending you increase your holdings in stocks. But if you factor in the value of SS (and/or housing), or more properly simply subtract them from income needs, you may find that your need for risk is very low and you can safely decrease your stock holdings.


Add me to the camp that thinks SS and pensions should simply be considered an inflation-adjusted stream of income that reduces the amount you'll have to withdraw from your portfolio. Some other considerations that make me feel SS shouldn't be considered as bonds:

1. It would lead one to hold way more equities than they're comfortable with.
2. You can't rebalance into or out of your SS " bonds"
3. You can't take extra money out of SS if needed for a large expense as you can with real bonds or a real bond fund.
4. You can't leave your SS to your heirs.
Best Regards - Mel | | Semper Fi

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Re: Article: bonds pensions SS

Post by longinvest » Tue Jun 24, 2014 6:07 pm

As a complement to my previous post:

I think that Mr. Bogle just complicates things by including SS in his calculations. I think that he does that because his "age in bonds" rule of thumb would otherwise get too conservative for older investors/retirees.

It is much simpler to consider SS as an income stream and consider the portfolio separately using a reasonably balanced AA (60/40, 50/50, 40/60), depending on one's ability, willingness and need for risk during retirement.
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Re: Article: bonds pensions SS

Post by Rodc » Tue Jun 24, 2014 6:19 pm

FinancialDave wrote:
Rodc wrote:It is not a new perspective. It has been hotly debated here many times.


I also note the these articles always end up recommending you increase your holdings in stocks. But if you factor in the value of SS (and/or housing), or more properly simply subtract them from income needs, you may find that your need for risk is very low and you can safely decrease your stock holdings.


Another way to look at this is not that anyone is recommending you increase your stock position.

It is more that you know what your asset allocation is as it relates to your retirement cash flow.

If you have decided that in retirement you want to rely on a 50/50 split between what I would call "less risky fixed income sources" (bonds, SS, cash, etc) and "more risky assets" (equities, commodities, etc) why would you not evaluate that as a total picture. Or to put it another way, say you inherited a fixed annuity at retirement, that you didn't count on - why would you not look at your investment plan and say "I am way off base now in my asset allocation and my written plan" and re-adjust. To just say this fixed income stream (say SS) is not part of my asset allocation is just putting your head in the sand and that is what Bogle has been attempting to say for a few years now. From some of his earlier books he may not have realized that when he was younger, but even he is allowed to change his mind if something more logical presents itself.

fd


Where is the world did you get the part in bold? Where did I suggest one not evaluate the entire picture? I'm not sure you read the post. :confused
Last edited by Rodc on Wed Jun 25, 2014 3:45 pm, edited 1 time in total.
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Re: Article: bonds pensions SS

Post by bhsince87 » Tue Jun 24, 2014 6:27 pm

I think part of the problem here is lack of a codified language or set of terms on these topics. I think back to my first investing guru in the early 80's. Coming more from a financial planning perspective then a purely investing one, he talked in terms of "growth and income".

Of course, "growth" was mostly equities, with possibly some real estate. But "income" included pensions, social security, bonds, annuities, and even dividend stocks and commercial or rental properties.

It sort of follows the "Many roads to Dublin" theme. But maybe adds the twist that, "Several languages are spoken along the many roads to Dublin".
BH87

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Re: Article: bonds pensions SS

Post by dbr » Tue Jun 24, 2014 6:32 pm

Rodc wrote:
Where is the world did you get the part in bold? Where did I suggest one not evaluate the entire picture? I'm not sure you read the post. :confused


I am genuinely curious why the discussion of income streams as bonds* is so persistent after so much discussion over the years. This is especially so when so much care is taken to emphasize that the issue is not whether SS and pensions should be taken into account but rather how. Is it possible that Mr. Bogle's repeated mention of SS as bonds is the explanation for this? My theory is that it is. This is so even though many people hearing about what he has said have missed that Mr. Bogle's statement is in the context of determining asset allocation using the rule age in bonds. This leaves hardly any alternative to the idea if SS is to be considered at all.

*Ironically, with the recent discussion of Liability Matching Porfolios, we now have bonds as income streams, an idea that may be as much misunderstood as is income streams as bonds.

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Re: Article: bonds pensions SS

Post by dbr » Tue Jun 24, 2014 6:36 pm

bhsince87 wrote:I think part of the problem here is lack of a codified language or set of terms on these topics. I think back to my first investing guru in the early 80's. Coming more from a financial planning perspective then a purely investing one, he talked in terms of "growth and income".

Of course, "growth" was mostly equities, with possibly some real estate. But "income" included pensions, social security, bonds, annuities, and even dividend stocks and commercial or rental properties.

It sort of follows the "Many roads to Dublin" theme. But maybe adds the twist that, "Several languages are spoken along the many roads to Dublin".


I think you are right on with this one. Certainly part of the classic confusion is the fact that "fixed income" is neither fixed nor income, unless it actually is SS, which is both fixed (real) and certainly income, but not an investable asset. Well, anyway, I am not sure there isn't a scheme to buy someone's SS benefits, but it sounds like that coudn't be legal.

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Re: Article: bonds pensions SS

Post by Rodc » Tue Jun 24, 2014 6:41 pm

*Ironically, with the recent discussion of Liability Matching Porfolios, we now have bonds as income streams, an idea that may be as much misunderstood as is income streams as bonds.


So I'll count income streams as bonds, then count all bonds as income streams! :)

The good news is that as long as I am careful and consistent I will get the same answer using all three, singularly or in combination:

A) income is income and bonds are bonds
B) bonds are income streams
C) income streams are bonds

:sharebeer
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Article: bonds pensions SS

Post by LongerPrimer » Tue Jun 24, 2014 11:48 pm

:oops:
Finally, some one said the obvious: SS acts as a bond as does pensions. I am not as sure about equity in a house.
I am an advocate for 100% equity in IRA and 401k, until one is fairly certain that they will have enough in retirement. 8-)

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Re: Article: bonds pensions SS

Post by FinancialDave » Wed Jun 25, 2014 11:38 am

LongerPrimer wrote::oops:
Finally, some one said the obvious: SS acts as a bond as does pensions. I am not as sure about equity in a house.
I am an advocate for 100% equity in IRA and 401k, until one is fairly certain that they will have enough in retirement. 8-)


And if someone does not have enough in retirement, does that mean 100% equity will help over a 40 year retirement? Not necessarily.

This is where Jim Otar's aftcast program becomes quite useful. Consider the following historical runs for someone at age 65 wanting to use the 4% rule as a withdraw criteria on a $400,000 portfolio.

Let's compare two things:
1. What would happen from the 40 years from 1974 to 2013?
2. Is there any chance he could have run out of money starting any year from 1900 to the present?

a) 100% equity position - 1. Ending value at age 105 $4.012 million. 2. Would have gone broke at age 89 if retirement started in 1929. (worst year for investor)

b) 90% equity position - 1. Ending value at age 105 $3.917 million. 2. Would have gone broke at age 98 if retirement started in 1929. (worst year for investor)

c) 80% equity position - 1. Ending value at age 105, $3.744 million. 2. Never went broke, ended with $100k at age 105 if retirement started in 1966 (worst year for investor)

fd
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Re: Article: bonds pensions SS

Post by LongerPrimer » Wed Jun 25, 2014 12:06 pm

I think your examples in starting at 1929 could be better ran at a later date 1959. 1929 we didn't have SSIu, Fed. regulation, or reasonable margin controls. Many other stuff different in 1929 VS 1959,1949,1939.

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Re: Article: bonds pensions SS

Post by FinancialDave » Wed Jun 25, 2014 1:13 pm

LongerPrimer wrote:I think your examples in starting at 1929 could be better ran at a later date 1959. 1929 we didn't have SSIu, Fed. regulation, or reasonable margin controls. Many other stuff different in 1929 VS 1959,1949,1939.


It is not really about comparing regulation or the many other things that change over time. It is more about capturing the interaction between stocks, bonds and inflation or deflation. Sure regulations have an affect, but since we can't predict the future, all we can do is look at history and hope our future falls somewhere between the extremes.

The example doesn't start at 1929, 1929 just happens to be the worst year, out of a hundred runs of historical data, for a 100% equity position. I can provide 100 different outcomes but they will obviously range from the worst to the best. 1929 is the worst if you owned 100% or 90% equities, but 1966 turns out to the be worst if you owned 80% equities.

If you want to look at the best outcome, in all three cases it is 1950, where you could have had between $15 million and $11 million left after 40 years.

fd
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Re: Article: bonds pensions SS

Post by rleonardh » Wed Jun 25, 2014 1:19 pm

you guys going to count on Social Insecurity ?
Last edited by rleonardh on Wed Jun 25, 2014 3:28 pm, edited 1 time in total.

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Re: Article: bonds pensions SS

Post by lolbatross » Wed Jun 25, 2014 1:59 pm

rleonardh wrote:you guys going to count on Social Insecurity ?


I'm pretty sure SS isnt legally guaranteed. As such it probably isn't a true asset. However, if you are close to retirement then its more & more likely to be there as an income stream. I am 30 years out so I am saving & investing as if it wont be there. If it still is when I am 50-55 I will re-evaluate and possibly retire earlier. Also I dont count my house as anything. I have 25% equity and would lose 6% on transactional costs. The other 19% is just minimal protection from going underwater.

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Re: Article: bonds pensions SS

Post by Professor Emeritus » Wed Jun 25, 2014 3:35 pm

OFGS

There are Assets (everything that has value) and Portfolio assets (liquid assets that you can put on a spreadsheet and spend endless hours playing with) Until you have an understanding of your total assets, Portfolio asset allocation is a game you can play when you have nothing better to do with your time. The real question is what percentage your portfolio assets are of your total assets . Since portfolio assets can be a negative number , this requires careful analysis.
All assets have valuation uncertainty. Liquidity is simply a lancastrian characteristic of any asset. It reduces uncertainty in the analysis. Asset risk e.g. default is also a characteristic

I always laugh when I see the bald statement of a desired asset allocation for portfolio assets without the slightest attention paid to the ratio of portfolio to non portfolio assets.

NB Human capital is a non portfolio asset.

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Re: Article: bonds pensions SS

Post by rnitz » Wed Jun 25, 2014 7:03 pm

Although I'm in the camp that doesn't count SS (or pensions or SPIAs) as bonds, but rather counts them as a reduction in cash flow needs in retirement, let me play devil's advocate:

1. If I have a portfolio of 50% stocks/50% bonds at retirement, and I take all of the bond money and buy an inflation indexed SPIA, have I increased my risk now that my portfolio is 100% stocks?

2. If the above SPIA pays for all of my retirement spending needs (and more), does this change anything about my above mentioned risk?

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Re: Article: bonds pensions SS

Post by dbr » Wed Jun 25, 2014 7:06 pm

rnitz wrote:Although I'm in the camp that doesn't count SS (or pensions or SPIAs) as bonds, but rather counts them as a reduction in cash flow needs in retirement, let me play devil's advocate:

1. If I have a portfolio of 50% stocks/50% bonds at retirement, and I take all of the bond money and buy an inflation indexed SPIA, have I increased my risk now that my portfolio is 100% stocks?

Have you changed what risk? Said differently, have you changed the risk of what? As we/you answer those questions specifically the answers become self evident. Note there are several answers. All conversations about risk are this way.

2. If the above SPIA pays for all of my retirement spending needs (and more), does this change anything about my above mentioned risk?

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Re: Article: bonds pensions SS

Post by LongerPrimer » Wed Jun 25, 2014 8:42 pm

rleonardh wrote:you guys going to count on Social Insecurity ?


Yep, which also means that we currently drawing prior to age 67, mostly because of cash flow problems and the belief that US will recover from the Great Recession, For us, the breakeven point was over ten years if we had delayed to 67. We are clipping the SS coupons.

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Re: Article: bonds pensions SS

Post by Professor Emeritus » Wed Jun 25, 2014 8:45 pm

rnitz wrote:Although I'm in the camp that doesn't count SS (or pensions or SPIAs) as bonds, but rather counts them as a reduction in cash flow needs in retirement, let me play devil's advocate:

1. If I have a portfolio of 50% stocks/50% bonds at retirement, and I take all of the bond money and buy an inflation indexed SPIA, have I increased my risk now that my portfolio is 100% stocks?

2. If the above SPIA pays for all of my retirement spending needs (and more), does this change anything about my above mentioned risk?


If you do a proper asset analysis between portfolio and non portfolio assets You will see that your risk is unchanged .

If you put on your tunnel vision blinders and only look at your portfolio assets you will shriek in horror that you lost half your money

You will then believe firmly that annuities are terrible since they make your portfolio assets vanish

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Re: Article: bonds pensions SS

Post by texasdiver » Wed Jun 25, 2014 8:54 pm

Being entitled to X-amount of social security income is certainly better than not having that entitlement.
Owning 500,000 in home equity is certainly better than owning no home equity or worse yet....being underwater

Any realistic appraisal of ones retirement needs has to take these into account. The question is how. I used to be all wrapped up in figuring out how to view social security and other pension income as part of my overall portfolio. I think people do that because they want to be able to add x-amount of additional dollars to their retirement savings and be able to stand back and say to themselves look what I am worth when I take into account my SS and my home. But i have come around to just thinking of both as adjustments to my income stream. Much simpler that way and doesn't distort ones investment management as much.

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Re: Article: bonds pensions SS

Post by LongerPrimer » Wed Jun 25, 2014 9:04 pm

@Financial Dave, If I remember my readings, in 1929, one could margin 10:1 without much of a credit check. A few years later, no one had any money, but the qualifications for stock trading became much higher. I think your data and everyones else would be more valid if the data would start in 1935, which is 2 years into the NewDeal and implementation of modern Monetary and Fiscal Theory.

I did know a gentleman, who actually witnessed the crash of '29. He and his new wife worked as a maid and driver-mechanic (model T) for a stock broker on Long Island. He was advised by his broker/employer to buy GM and GE after the crash-which he did. The first WW! battle on Germany's Eastern front, happened on his farm. The Nazi, in the USA, tried to recruit him. He actually saw the Dempsey fight. He regularly saw Babe Ruth at Yankee Field. The annuity purchased in 1966 actually had to be refunded to him as matured at age 100, He lived to be 101. There is a lot more about him that is very interesting. He was real standup guy.

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Re: Article: bonds pensions SS

Post by Dandy » Thu Jun 26, 2014 7:55 am

Taking Salary, Pension, SS and other assets gold, house, patents etc into account when determining you asset allocation makes some sense. You have some income or assets that you can live on or turn into cash (if the market liquid). There is a big difference in actually counting a house, pension or SS into your actual asset allocation.

A person who has SS and pension equaling 100% of their retirement expenses can take a lot of risk - but they don't have to. If a person actually counted the value of their house as a bond and it equaled their total fixed income allocation:
1. How do they re balance if equities go down? You really can't sell part of a house or SS.
2. Do they change their "bond" value based on change in area housing market value or equity in the house as they pay down the mortgage?

It really just confuses the ongoing investment allocation process unnecessarily. Keep in mind all your income streams, assets and future earning power, health, expenses and age when making your risk assessment/investment allocation decision - but then use the normal investment products to implement and revise your plan. If you like to keep things simple you will appreciate this approach.

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Re: Article: bonds pensions SS

Post by dognose » Thu Jun 26, 2014 8:58 am

Those of you who do not believe that pensions or Social Security are real assets have never met any real divorce lawyers.

On a more serious note, here's a comment from Jack Bogle in the latest (June 2014) issue of the American Association of Individual Investors:

""For example, when you think of asset allocation, think about all of your investments. Social Security, for example, has a capitalized value
of $300,000 to $350,000 when you retire, depending on your lifetime earnings. Social Security is a fixed-income position with as much safety
as you're going to find in this world. Add the cost-of-living hedge that Social Security provides, and there aren't a lot of things better than
Social Security for your retirement, believe me. It may be expensive to get there, but once you get there, it's a big asset."

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Re: Article: bonds pensions SS

Post by WJW » Thu Jun 26, 2014 9:15 am

dognose wrote:Those of you who do not believe that pensions or Social Security are real assets have never met any real divorce lawyers."


When it comes to divorce, everything you own is an asset usually with a lawyer inflated value. However, your own Social Security payments are unaffected even if your ex-spouse qualifies for benefits. Part of my divorce agreement was to wait to finalize the divorce until after the 10 year mark so my ex would qualify. Bottom line is divorce is very expensive, it's best to choose your spouse wisely. I think that and choice of career are two of the most important decisions one can make in their lifetime.

Related Link:
https://faq.ssa.gov/link/portal/34011/3 ... r-benefits

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Re: Article: bonds pensions SS

Post by JW-Retired » Thu Jun 26, 2014 9:16 am

longinvest wrote:I think that Mr. Bogle just complicates things by including SS in his calculations. I think that he does that because his "age in bonds" rule of thumb would otherwise get too conservative for older investors/retirees.

It is much simpler to consider SS as an income stream and consider the portfolio separately using a reasonably balanced AA (60/40, 50/50, 40/60), depending on one's ability, willingness and need for risk during retirement.

I believe he does this because it's a formula with a deterministic AA result: the investor's actual chronological age in bonds including present values of pensions/SS as such. It doesn't leave anything at all to investor whims about their risk tolerance/needs/et al. Most investors are just wild guessing at both what these are and how they should adjust AA for them anyway. "Reasonably balanced" can mean practically any AA to a sample of investors.

Personally, I would much rather my kids use Bogle's rule instead of telling me they expect to have X so after some vague need/risk thought process they "pick" AA= Y. IMO, much less chance they will go far wrong using Bogle's approach.
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Re: Article: bonds pensions SS

Post by longinvest » Thu Jun 26, 2014 11:45 am

JW Nearly Retired wrote:
longinvest wrote:I think that Mr. Bogle just complicates things by including SS in his calculations. I think that he does that because his "age in bonds" rule of thumb would otherwise get too conservative for older investors/retirees.

It is much simpler to consider SS as an income stream and consider the portfolio separately using a reasonably balanced AA (60/40, 50/50, 40/60), depending on one's ability, willingness and need for risk during retirement.

I believe he does this because it's a formula with a deterministic AA result: the investor's actual chronological age in bonds including present values of pensions/SS as such. It doesn't leave anything at all to investor whims about their risk tolerance/needs/et al. Most investors are just wild guessing at both what these are and how they should adjust AA for them anyway. "Reasonably balanced" can mean practically any AA to a sample of investors.

Personally, I would much rather my kids use Bogle's rule instead of telling me they expect to have X so after some vague need/risk thought process they "pick" AA= Y. IMO, much less chance they will go far wrong using Bogle's approach.
JW


JW,

That's a nice argument, but it fails when you think about it a little more:
  1. You really expect the average Joe (like me) to be able to be able to calculate the present-value of his accrued future SS (and pension) payments at each rebalance interval?
  2. What should the average Joe do if he discovers that he should be 120% in stocks? How does he rebalance?
  3. What if the average Joe panics during a stock market meltdown, despite knowing about the high present value of his future SS and pension payments?
  4. What mortality prediction do you use for calculations? What discount rate: long-term corporates? Long-term government bonds?

It fails the simplicity test, one of the basic principles of Mr. Bogle.

I think that all investors can benefit from a simple method of setting their asset allocation that can be used all life long. Mr. Swedroe's framework of Ability/Willingness/Need to take risk fits the bill, here. It is, in my humble opinion, far superior to using complex present value calculations.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Professor Emeritus
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Re: Article: bonds pensions SS

Post by Professor Emeritus » Thu Jun 26, 2014 12:40 pm

longinvest wrote:
That's a nice argument, but it fails when you think about it a little more:
  1. You really expect the average Joe (like me) to be able to be able to calculate the present-value of his accrued future SS (and pension) payments at each rebalance interval?
  2. What should the average Joe do if he discovers that he should be 120% in stocks? How does he rebalance?
  3. What if the average Joe panics during a stock market meltdown, despite knowing about the high present value of his future SS and pension payments?
  4. What mortality prediction do you use for calculations? What discount rate: long-term corporates? Long-term government bonds?

It fails the simplicity test, one of the basic principles of Mr. Bogle.

I think that all investors can benefit from a simple method of setting their asset allocation that can be used all life long. Mr. Swedroe's framework of Ability/Willingness/Need to take risk fits the bill, here. It is, in my humble opinion, far superior to using complex present value calculations.


IMHO Your analysis fails the simplicity test
Social security, pensions houses, businesses you own and operate, professional licenses etc are non portfolio assets. "Asset allocation" is done within a portfolio after analyzing the relationship of portfolio to non portfolio asset. Your portfolio can even be negative. Asset allocation should be he last and least consideration and has to vary as the relationship between portfolio and non portfolio assets changes.

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Re: Article: bonds pensions SS

Post by cfs » Thu Jun 26, 2014 1:21 pm

Not on my watch.

Just my two centimos, on our side of the house we have four checks (pension X 2, social security X 2), not counted in any way as part of our investment portfolio. Those four checks are nice to have (awesome income) but are not part of our allocation. Now, we do count our equity mutual funds, bond mutual funds, individual stock, and cash reserves as part of our boring SWAN or sleep well at night portfolio.

And now back to watching the World Cup Reviews -- Go Team USA and congratulation on making "Los Octavos De Finales."

Thanks for reading.
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Re: Article: bonds pensions SS

Post by Rodc » Thu Jun 26, 2014 8:21 pm

I'm trying to get to the airport and it is 60 miles away with two tolls and I need to park and walk a short distance. I need to be there by noon, so when do I leave the house?

If I think the tolls will be 5 minutes each, and I think I can drive 60 miles an hours so I convert the 60 miles to one hour, 10 minutes to park and 10 minutes to walk, I estimate I need to leave about 90 minutes before noon.

Or I could pretend the tolls are really 5 miles long, I could pretend the parking is 10 miles long as is the walk and estimate I need to leave home 90 miles before noon.

Am I more interested in the distance or the time and once I answer that which set of conversions makes the most sense?

For retirement planning am I interested in how many bonds I own or am I more interested in how much income I can generate?

Now which makes more sense: converting the portfolio to income and adding to pensions and SS to see if my needs and maybe some wants are covered? Or should I convert my income streams to bonds and see how big my portfolio is?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Article: bonds pensions SS

Post by Professor Emeritus » Thu Jun 26, 2014 8:32 pm

cfs wrote:Not on my watch.

Just my two centimos, on our side of the house we have four checks (pension X 2, social security X 2), not counted in any way as part of our investment portfolio. Those four checks are nice to have (awesome income) but are not part of our allocation. Now, we do count our equity mutual funds, bond mutual funds, individual stock, and cash reserves as part of our boring SWAN or sleep well at night portfolio.

And now back to watching the World Cup Reviews -- Go Team USA and congratulation on making "Los Octavos De Finales."

Thanks for reading.


You realize of course that you can be very comfortably retired without an investment portfolio AT ALL. You have to have assets, but an investment portfolio is TOTALLY OPTIONAL. My investment portfolio is 40 percent of my assets. I sleep very well

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Re: Article: bonds pensions SS

Post by texasdiver » Thu Jun 26, 2014 10:28 pm

Professor Emeritus wrote:
cfs wrote:Not on my watch.

Just my two centimos, on our side of the house we have four checks (pension X 2, social security X 2), not counted in any way as part of our investment portfolio. Those four checks are nice to have (awesome income) but are not part of our allocation. Now, we do count our equity mutual funds, bond mutual funds, individual stock, and cash reserves as part of our boring SWAN or sleep well at night portfolio.

And now back to watching the World Cup Reviews -- Go Team USA and congratulation on making "Los Octavos De Finales."

Thanks for reading.


You realize of course that you can be very comfortably retired without an investment portfolio AT ALL. You have to have assets, but an investment portfolio is TOTALLY OPTIONAL. My investment portfolio is 40 percent of my assets. I sleep very well


My mother in law owns about 10 apartments that throw off income. She owns them....no mortgages. That along with a small pension and social security is her retirement. She has no portfolio at all outside of ordinary bank accounts. Most would consider her comfortably well to do and secure.

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Re: Article: bonds pensions SS

Post by FinancialDave » Thu Jun 26, 2014 11:57 pm

lolbatross wrote:
rleonardh wrote:you guys going to count on Social Insecurity ?


I'm pretty sure SS isnt legally guaranteed. As such it probably isn't a true asset. However, if you are close to retirement then its more & more likely to be there as an income stream. I am 30 years out so I am saving & investing as if it wont be there. If it still is when I am 50-55 I will re-evaluate and possibly retire earlier. Also I dont count my house as anything. I have 25% equity and would lose 6% on transactional costs. The other 19% is just minimal protection from going underwater.


In your early & mid working years it is quite prudent to not worry about things that are out of your control, such as SS and even a pension. Best to just save as much as you can (at least 15% of your salary,) and invest wisely.

fd
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Re: Article: bonds pensions SS

Post by Austintatious » Fri Jun 27, 2014 6:20 am

FinancialDave wrote:
lolbatross wrote:
rleonardh wrote:you guys going to count on Social Insecurity ?


I'm pretty sure SS isnt legally guaranteed. As such it probably isn't a true asset. However, if you are close to retirement then its more & more likely to be there as an income stream. I am 30 years out so I am saving & investing as if it wont be there. If it still is when I am 50-55 I will re-evaluate and possibly retire earlier. Also I dont count my house as anything. I have 25% equity and would lose 6% on transactional costs. The other 19% is just minimal protection from going underwater.


In your early & mid working years it is quite prudent to not worry about things that are out of your control, such as SS and even a pension. Best to just save as much as you can (at least 15% of your salary,) and invest wisely.

fd


But the big question, here, is whether you're really saving as much as you can and investing it wisely if, when determining your investment portfolio allocation, you're not somehow factoring in the future value of your SS and/or pension. I think what Bogle is suggesting is that many are overlooking significant long term potential for saving, and that they're not investing as wisely as they might, if they don't somehow allow for the "fixed income nature" (my words) of SS and/or pensions in determining their exposure to the stock market.

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Re: Article: bonds pensions SS

Post by Professor Emeritus » Fri Jun 27, 2014 9:17 am

texasdiver wrote:
My mother in law owns about 10 apartments that throw off income. She owns them....no mortgages. That along with a small pension and social security is her retirement. She has no portfolio at all outside of ordinary bank accounts. Most would consider her comfortably well to do and secure.


I would actually consider these apartments a "portfolio" of rental properties or that she owns and runs an apartment rental business. clearly they and the pensions and SS are all assets.

The spreadsheet lovers would run screaming in terror since she has nothing they can put on a spreadsheet and re-balance to 9 decimal places.

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Re: Article: bonds pensions SS

Post by Professor Emeritus » Fri Jun 27, 2014 9:25 am

Austintatious wrote:
FinancialDave wrote:
lolbatross wrote:
rleonardh wrote:you guys going to count on Social Insecurity ?


I'm pretty sure SS isnt legally guaranteed. As such it probably isn't a true asset. However, if you are close to retirement then its more & more likely to be there as an income stream. I am 30 years out so I am saving & investing as if it wont be there. If it still is when I am 50-55 I will re-evaluate and possibly retire earlier. Also I dont count my house as anything. I have 25% equity and would lose 6% on transactional costs. The other 19% is just minimal protection from going underwater.


In your early & mid working years it is quite prudent to not worry about things that are out of your control, such as SS and even a pension. Best to just save as much as you can (at least 15% of your salary,) and invest wisely.

fd


But the big question, here, is whether you're really saving as much as you can and investing it wisely if, when determining your investment portfolio allocation, you're not somehow factoring in the future value of your SS and/or pension. I think what Bogle is suggesting is that many are overlooking significant long term potential for saving, and that they're not investing as wisely as they might, if they don't somehow allow for the "fixed income nature" (my words) of SS and/or pensions in determining their exposure to the stock market.



You have to do risk analysis on everything. Bonds stocks SS and jobs. I'm not sure who originated the fantasy is that anything financial is "within your control".

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Re: Article: bonds pensions SS

Post by rmark1 » Fri Jun 27, 2014 10:18 am

Stocks, bonds, pensions, homes are all assets and are part of your allocation. Some may be illiquid, but they are still assets. The present value of a stream of payments is basic finance. A mismatch between the payments and their value suggests a modeling problem, not a allocation problem. Assuming you want inflation adjusted withdrawals in retirement you can just spend COLA pensions, but fixed pensions need to be adjusted by you for expected inflation losses.

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Re: Article: bonds pensions SS

Post by FinancialDave » Fri Jun 27, 2014 12:47 pm

Austintatious wrote:
FinancialDave wrote:
lolbatross wrote:
rleonardh wrote:you guys going to count on Social Insecurity ?


I'm pretty sure SS isnt legally guaranteed. As such it probably isn't a true asset. However, if you are close to retirement then its more & more likely to be there as an income stream. I am 30 years out so I am saving & investing as if it wont be there. If it still is when I am 50-55 I will re-evaluate and possibly retire earlier. Also I dont count my house as anything. I have 25% equity and would lose 6% on transactional costs. The other 19% is just minimal protection from going underwater.


In your early & mid working years it is quite prudent to not worry about things that are out of your control, such as SS and even a pension. Best to just save as much as you can (at least 15% of your salary,) and invest wisely.

fd


But the big question, here, is whether you're really saving as much as you can and investing it wisely if, when determining your investment portfolio allocation, you're not somehow factoring in the future value of your SS and/or pension. I think what Bogle is suggesting is that many are overlooking significant long term potential for saving, and that they're not investing as wisely as they might, if they don't somehow allow for the "fixed income nature" (my words) of SS and/or pensions in determining their exposure to the stock market.


And when you have 20+ years to retirement, just how would you suggest you factor something like a pension in, with any kind of accuracy at all. This is much like trying to factor in your tax rate in retirement, when you still have 20 years until retirement.

Many times people put credence in things that have such a large error factor, or uncertainty, as to make the analysis useless.

I just fail to see how factoring in SS or a pension "should" change how much someone saves early on for retirement. At least in my 30's and 40's it did not even enter the picture. During those years what was important was what many call "human capital" and saving around 15% in my 401k - all things I had very good control over.

fd
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Re: Article: bonds pensions SS

Post by Austintatious » Fri Jun 27, 2014 2:08 pm

FinancialDave, it was the same for me in my 30's and 40's. I certainly wasn't thinking about considering SS and my pension as a fixed income substitute that would enable us to crank up the stock allocation some more. Hey, I was so focused on my job during those years that I barely remember thinking about SS at all. As for the pension, it was a mandatory 7% contribution for me with a very generous match from employer, so another no brainer. Sad truth is that I didn't begin to dedicate sufficient thought to investing, in general, during those years. But looking back on it, my 30's and 40's would have been a great time to add a bit more exposure to stocks, feeling secure with my pension and very secure with my SS. Same with DW. I would think the answer of how to accurately value, and factor in, a pension or SS would be investor specific. One might, I suppose, go to a resource like immediateannuities.com and come up with a figure in today's dollars for either a pension or SS. If one wanted to hedge either a bit or a lot substitute a lesser number, say 3/4 or even 1/2. But even with those smaller figures, 2 to 3 decades of an increased allocation to stocks would likely have a meaningful and positive impact. It is, to me, a concept that makes sense.

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Re: Article: bonds pensions SS

Post by Professor Emeritus » Fri Jun 27, 2014 3:32 pm

FinancialDave wrote:And when you have 20+ years to retirement, just how would you suggest you factor something like a pension in, with any kind of accuracy at all. This is much like trying to factor in your tax rate in retirement, when you still have 20 years until retirement.

Many times people put credence in things that have such a large error factor, or uncertainty, as to make the analysis useless.

I just fail to see how factoring in SS or a pension "should" change how much someone saves early on for retirement. At least in my 30's and 40's it did not even enter the picture. During those years what was important was what many call "human capital" and saving around 15% in my 401k - all things I had very good control over.

fd


You had no "control".' You had the "illusion" of control. You do risk /uncertainty analysis on everything or you just live in fantasy land.

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Re: Article: bonds pensions SS

Post by JW-Retired » Sat Jun 28, 2014 9:25 am

cfs wrote:Just my two centimos, on our side of the house we have four checks (pension X 2, social security X 2), not counted in any way as part of our investment portfolio. Those four checks are nice to have (awesome income) but are not part of our allocation. Now, we do count our equity mutual funds, bond mutual funds, individual stock, and cash reserves as part of our boring SWAN or sleep well at night portfolio.

No offense, but I find it hard to believe that pension/SS were not considered (i.e., counted) in some way in deciding what your investment portfolio AA should be. That "counting" is what we are talking about. It can be by a specific deterministic formula like Bogle's Rule, or it can be a more ill defined personal judgment AA picking process that can't be fully explained. You certainly knew you had a pension when you were choosing your AA so IMO you had to have "counted" it subliminally even if you thought you didn't.
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