How should I look at SS and pensions when developing my post-FRA AA?

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TheTimeLord
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How should I look at SS and pensions when developing my post-FRA AA?

Post by TheTimeLord »

Simple straightforward question. How should I look at SS and pensions when developing my post-FRA AA? Should I count them as bonds @ 25x, should I discount them to 20x or 15x, or should I disregard them. It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by MoonOrb »

You look at the gap between what you expect in expenses and what you anticipate in income and combine that with the size of your portfolio and use that combined information to assess your need, ability, and willingness to take risk.

If the gap is big and you don’t have a large portfolio you’ll need to take on risk and have an aggressive equity weighted portfolio. If the gap is small or there is no gap, you can do basically whatever you want.

Unless the gap is big and you have a lot of need to take on risk, you might consider doing whatever will be the least time consuming and least stressful for you. I’d personally pick something between 30/70 and 70/30, call it good and relax with the knowledge that I’ll have enough to meet my expenses and stop worrying about this.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by dbr »

TheTimeLord wrote: Sun Dec 10, 2017 8:42 am Simple straightforward question. How should I look at SS and pensions when developing my post-FRA AA? Should I count them as bonds @ 25x, should I discount them to 20x or 15x, or should I disregard them. It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA.
Of course it makes no sense to just ignore them. How on earth would you even be asking?

Yes, it is a simple straightforward question to which the simple straightforward answer is to regard them as income streams and then consider how the difference between that and expenses is to be made up.

The slightly less straightforward answer is that the fact the income streams are guaranteed and steady means that the effect on need, ability, and willingness to take risk requires some thoughtfullness concerning how those income streams affect those aspects of taking risk. There is also a mathematical problem that if the pensions are not fully COLAd taking inflation into account becomes more involved. That is why one might use a planning model like FireCalc that can include COLAd and not COLAd income streams as well as portfolio withdrawals. It is also why simple 4% or 25x rules don't apply.

But you already know all this.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by JW-Retired »

TheTimeLord wrote: Sun Dec 10, 2017 8:42 am Simple straightforward question. How should I look at SS and pensions when developing my post-FRA AA? Should I count them as bonds @ 25x, should I discount them to 20x or 15x, or should I disregard them. It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA.
I think about everything when I pick what my real equities to real bonds (or other fixed income) ratio is going to be (60/40). SS and pensions are a big part of feeling good with the 60/40, which I have used as my target AA for 15+ years, but I believe everybody here when they report their AA they compute it from the real investments.

As it happens, if I were to add in a SS/pension present value into the AA calculation as pseudo-bonds, I would get more like my 70+ age in bonds+pseudo bonds. That could be an indication the Jack Bogle's rule is not too bad.
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indexonlyplease
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by indexonlyplease »

I am not sure why you would include your income (pension and SS) in your AA.

For me my pension covers all expenses, just like when I worked. I am to young for SS. I did reduce my investments to from 60/40 AA to 50/50 AA. Thinking I had enough so why take on more risk then needed.

So I think your question would be different if you needed to take money from your investments each month to pay for your expenses. If not why not just keep them separate.

Pension and SS are guarenteed income.

Investments go up and down and you take some of it when needed. This is what I am doing. I have been retired 1 yr and have not touched my investments. Living off pension. Also, wife still works.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by vested1 »

You answered your own question in the beginning of your last sentence, then qualified it with a non-quantifiable variable.
TheTimeLord wrote: Sun Dec 10, 2017 8:42 am It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA
Anytime feelings are involved there is trouble on the horizon. Ignore your feelings. Including guaranteed income streams in AA will lead to an overly aggressive risk profile. Ask yourself if greed is one of those feelings you speak of and try to divorce yourself of emotion.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by TheTimeLord »

vested1 wrote: Sun Dec 10, 2017 9:44 am You answered your own question in the beginning of your last sentence, then qualified it with a non-quantifiable variable.
TheTimeLord wrote: Sun Dec 10, 2017 8:42 am It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA
Anytime feelings are involved there is trouble on the horizon. Ignore your feelings. Including guaranteed income streams in AA will lead to an overly aggressive risk profile. Ask yourself if greed is one of those feelings you speak of and try to divorce yourself of emotion.
I rewrote that sentence a few times starting with using "incorrect" then "misguided" and finally I used "feel" in an attempt to soften it and not become argumentative. I am not sure how anyone could be considered overly aggressive (or underly) with their AA if their expenses are totally covered by guaranteed income streams. Unless they wanted to factor in some degree of failure on the part of their guaranteed income streams.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by dbr »

This sentence "It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA." leaves out the correct answer that regarding pensions and annuities as income streams and subtracting them from needed income is not the same thing as ignoring them when calculating your AA. You don't have to tabulate income streams as assets to consider how the existence of income streams might affect what one chooses for an AA.

There is also another logical issue where you mention "calculate my AA." To work this problem you have to be clear about how you intend to arrive at an AA. So, what method of calculation are you intending to use?

As an aside on "calculating" AA, one of the ways to do that is age-in-bonds. That method has no input on the face of it for taking income streams into account. Therefore that problem can be fixed by calling the NPV of income streams a bond. But that is a result of using an inflexible and perhaps illogical method of "calculating" AA. A result is that adding consideration of income streams to what one would otherwise have done must result in choosing a more aggressive stock allocation. One should consider carefully if that is what one really wants.

tl:dr This discussion makes no sense until one is clear on what method one uses to decide on an asset allocation.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by midareff »

IMHO they should be counted as a separate cash flow, as your WR $ from your portfolio is or will be, towards paying your monthly obligations and left overs for discretionary spending.

I use a "Budget Book" which contains a column for monthly expenses, a column for monthly escrow or IRS Quarterly, property tax, car and home insurance, and a column for savings which is discretionary money for luxuries, toys, travel and such. My RMD goes direct to savings, taxable dividends go to escrow, pensions and SS go towards monthly expenses with some moved to escrow and savings. That's how I do it, YMMV.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by vested1 »

TheTimeLord wrote: Sun Dec 10, 2017 9:50 am
vested1 wrote: Sun Dec 10, 2017 9:44 am You answered your own question in the beginning of your last sentence, then qualified it with a non-quantifiable variable.
TheTimeLord wrote: Sun Dec 10, 2017 8:42 am It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA
Anytime feelings are involved there is trouble on the horizon. Ignore your feelings. Including guaranteed income streams in AA will lead to an overly aggressive risk profile. Ask yourself if greed is one of those feelings you speak of and try to divorce yourself of emotion.
I rewrote that sentence a few times starting with using "incorrect" then "misguided" and finally I used "feel" in an attempt to soften it and not become argumentative. [b]I am not sure how anyone could be considered overly aggressive (or underly) with their AA if their expenses are totally covered by guaranteed income streams.[/b] Unless they wanted to factor in some degree of failure on the part of their guaranteed income streams.
Easily. Most who would include guaranteed income place it on the side of bonds, which causes a reaction to overly increase stocks. If this fits your desire to take risk then you have no issues.

Notice I didn't say that "greed" is bad. While not rising to the level of Gordon Gekko in the movie "Wall Street", a modicum of greed is necessary in order to provide security for your family. This makes some portion of greed inevitable. The problem arises when you allow that emotion to override common sense.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by Garco »

As a recent retiree, I have three sources of income. 1. My 401k from 38 years of employment, 2. Social Security, 3. Other investments and cash savings.

I live on the income generated from 1 and 2. In the case of the 401k, it's my required minimum distribution (RMD); and in future years only a fraction of my RMD, mainly b/c of this year's incredible growth in the account valuation but also b/c the RMD percent increases with age above what I consider to be a SWR. My current allocation to equities is about 45% in this account.

I do not regard 3 ("other investments") as a source of income for regular use. Rather it's more an emergency fund and a special purchases fund. But I invest there more aggressively than in my 401k -- with 50-60% equities. The performance of this account doesn't directly affect how I allocate investments within my 401k, but it gives me peace of mind -- knowing there's an emergency reserve out there. When I get ready to buy a new car, cash will come from category 3. And if I make special gifts to my (grown) children, cash could also come from this category.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by Thesaints »

My pension plan gives me the choice of collecting 500k at separation, or 3k/month for the rest of my life.
Would anyone think that if I chose the instant payout I can include that amont under “cash”, but if I pick the pension I am half a million poorer ?
Last edited by Thesaints on Sun Dec 10, 2017 10:39 am, edited 1 time in total.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by jebmke »

I just project them as income (so net expenses have to be funded from investments).
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by jebmke »

Thesaints wrote: Sun Dec 10, 2017 10:38 am My pensin plan gives me the choice of collecting 500k at separation, or 3k/month for the rest of my life.
Would anyone think that if I chose the instant payout I can include that amont under “cash”, but if I pick the pension I am half a million poorer ?
If you elect the annuity your net assets will be lower than if you elect a lump sum, yes. But your net expenses that have to be funded by your net assets will be lower. I wouldn't count it as an asset until you make the election and the payout is received.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by bobcat2 »

I’m assuming you are (t) years from retirement and not already retired. You could do what others have suggested and simply look at the expected income streams in retirement from Social Security (SS) and your pension. But, if you want to be more precise about this, I suggest doing the following.

Put into your retirement plan the income streams you would get from SS and your pension in retirement, if you never worked another day. Then find the present value (PV) of your and your employer’s estimated future contributions (FCs) to SS and your pension from now until retirement. This PV can be put into your portfolio and its asset allocation (AA) as the equivalent of a very low risk bond. You can also put into your portfolio and its AA the PV of estimated future contributions by you and your employer to your defined contribution retirement savings plan as a very low risk bond.

In using this methodology you are taking into consideration your relevant human capital dedicated to retirement income. Notice that as you get closer to retirement the income streams increase, but the PV of FCs decreases and is zero at retirement. In other words, the amount of low risk assets you can add to your retirement portfolio and its AA decreases regularly over time to the point where it is zero once you get to retirement.

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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by Thesaints »

jebmke wrote: Sun Dec 10, 2017 10:39 am [If you elect the annuity your net assets will be lower than if you elect a lump sum, yes. But your net expenses that have to be funded by your net assets will be lower. I wouldn't count it as an asset until you make the election and the payout is received.
I don’t have any expenses. Wife provides everything free of charge (sort of). So basically you are saying with the pension I lose 500k ?
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by dbr »

Thesaints wrote: Sun Dec 10, 2017 10:38 am My pensin plan gives me the choice of collecting 500k at separation, or 3k/month for the rest of my life.
Would anyone think that if I chose the instant payout I can include that amont under “cash”, but if I pick the pension I am half a million poorer ?
Yes, you are absolutely half a million poorer by definition. You can't trade that annuity for a yacht or a second home in Belize other than by the detour of taking out a loan. Your question uses "poor" in an offhand and undefined sense.

If you want that word to refer to your standard of living as in the income you will have and can spend, you will probably have more if you take the annuity.

But this thread is about figuring out an appropriate asset allocation for ones assets. So the question would be, what asset allocation would you choose with the difference being having the pension and allocating whatever stocks and bonds your have or allocating the cash and your stocks and bonds.

Would you include the annuity as an asset, work out some kind of asset allocation that includes virtual assets, and then use that to deduce how much income you can take from such a portfolio when you already know exactly how much income you can take from the pension part?
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by flyingaway »

I don't have a pension. I do not count social security in my retirement portfolio. I just consider it as one of my safety nets or financial cushions.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by stan1 »

I consider SS and pensions to be income. I invest my portfolio to cover the gap between my retirement income and my expenses. If SS and pension cover all my expenses I'm investing for my heirs. Maximizing paper net worth is not the objective.
Last edited by stan1 on Sun Dec 10, 2017 10:52 am, edited 1 time in total.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by dbr »

Thesaints wrote: Sun Dec 10, 2017 10:45 am
jebmke wrote: Sun Dec 10, 2017 10:39 am [If you elect the annuity your net assets will be lower than if you elect a lump sum, yes. But your net expenses that have to be funded by your net assets will be lower. I wouldn't count it as an asset until you make the election and the payout is received.
I don’t have any expenses. Wife provides everything free of charge (sort of). So basically you are saying with the pension I lose 500k ?
Yes, in the literal senses that is exactly right. There is compensation. The compensation is that someone starts handing you $3000/mo. for the rest of your life. This is just like people who don't want to buy an annuity because they have to give up all the money up front, duh. But the question is simple -- what do you want. Maybe you have a really helpful use for $500K and no reason to arrange for more income. In that case it would be obvious that you would take the money. Other people are concerned that they want the income, especially income that can't run out. Those people would bd better off taking the annuity.

In investing everything starts with what a person wants. You have to know that or you can't start.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by Thesaints »

I would use a DCF method to estimate a value for the pension, or any other stream of future payments, and count that in the bonds component of my AA.
This to avoid all those absurdities that usually pop out when one uses extravagant accounting procedures.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by dbr »

flyingaway wrote: Sun Dec 10, 2017 10:49 am I don't have a pension. I do not count social security in my retirement portfolio. I just consider it as one of my safety nets or financial cushions.
Which then affects how you manage our portfolio without social security being turned into a virtual portfolio asset.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by TomatoTomahto »

TheTimeLord wrote: Sun Dec 10, 2017 8:42 am Simple straightforward question. How should I look at SS and pensions when developing my post-FRA AA? Should I count them as bonds @ 25x, should I discount them to 20x or 15x, or should I disregard them. It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA.
You keep wanting to make this more difficult than it needs to be, at least for someone who has won the game.

AA calculations and obsessions are, imo, counter-productive for those who have won the game. Use SS and pensions to calculate your residual expenses. Put 30x residual expenses in Fixed Income (Bernstein might discourage Total Bond for that, but I think it's close enough for government work). Put the rest in equities, with some sensible mix of index funds. Put new money in equities. Go about your life.

A percentage-based AA is, imo, past its usefulness for you. A Liability Matching Portfolio, or dollar-based AA if you prefer, is useful.

It is difficult, I guess, to let go of the habit of obsessing over how you're doing (says someone who still gives in to the impulse on occasion). One of the blessings of having gotten it right is supposed to be that you now have other things to worry about. Don't throw away that blessing.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by jebmke »

Thesaints wrote: Sun Dec 10, 2017 10:52 am I would use a DCF method to estimate a value for the pension, or any other stream of future payments, and count that in the bonds component of my AA.
This to avoid all those absurdities that usually pop out when one uses extravagant accounting procedures.
If the plan provides a lump sum option, that number is what you should use. But keep in mind, unlike other assets, you can't liquidate it, re-balance in or out. So it is a bit of an odd duck. That is why I never included my pension (lump sum) or the "value" of Social Security in the asset base. My general rule is if I can convert something to cash within a short period of time (< one business week), I count it. Otherwise, not. The other thing is that these assets don't transfer at full value to my spouse when I croak.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by MnD »

I look at ss and a pension as allowing me to not worry a bit about our plan for a 70/30 AA for life with a 5% of annual portfolio balance SWR.
If the market drops 50% and never recovers our income drops 17% prior to age 70 and 14% after age 70, neither of which would present any problem whatsoever as under that scenario our discretionary income is still plenty (just a bit under what it is now both working full time) and fixed expenses are very low. If all our expected retirement income was coming from the portfolio side I would not be comfortable with 70/30 AA and 5% of balance SWR.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by dbr »

Thesaints wrote: Sun Dec 10, 2017 10:52 am I would use a DCF method to estimate a value for the pension, or any other stream of future payments, and count that in the bonds component of my AA.
This to avoid all those absurdities that usually pop out when one uses extravagant accounting procedures.
Incorporating virtual assets when trying to arrive at a portfolio allocation would be considered by many to be an example of an extravagant accounting procedure that might lead to absurdities.

But the real question is how do you determine your asset allocation.

I determine mine in retirement by selecting a balance of stocks and bonds that is highly likely to sustain the withdrawals I want to make without running out of money, that steers a middle course between how much wealth I will accumulate and how uncertain that accumulation will be, and that is not so high in stocks that I would go nuts if stocks took a huge decline. The answer is 50/50, but it could be ten points or so different in either direction. Calling income sources a bond would not help at all in making those decisions and would in fact make the problem immensely more complicated.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by carolinaman »

I think it depends upon your need and goals for your investments. I agree with subtracting pension and SS income from your total annual expenses (including taxes). The balance, if any, is what you need to derive from your investments. If you do not need any funds or very little from your investments, you can be pretty aggressive with your investments. Conversely, if you need a fair percentage of your annual expenses from income, you should be more conservative.

There is no one right answer. It really comes down to what you are comfortable with. I am retired and live off my pension and SS. Theoretically, I could be very aggressive in my investments, but I am currently 44% in equities. Some people in my situation may be 70% or 80% equities.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by technovelist »

TheTimeLord wrote: Sun Dec 10, 2017 8:42 am Simple straightforward question. How should I look at SS and pensions when developing my post-FRA AA? Should I count them as bonds @ 25x, should I discount them to 20x or 15x, or should I disregard them. It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA.
Yes, this is correct.

As for the effect on your AA, what would you want your AA to be if your expenses were reduced by the amount of your SS and pensions?

That's the answer.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by The Wizard »

MoonOrb wrote: Sun Dec 10, 2017 9:02 am You look at the gap between what you expect in expenses and what you anticipate in income and combine that with the size of your portfolio and use that combined information to assess your need, ability, and willingness to take risk...
This is correct.
If you get to the point where those income streams cover all your retirement expenses, then you've Won the Game in a way and your remaining portfolio is no longer critical to lifestyle maintenance.
I'll be close to that situation in two years at age 70, so I'm letting my stock allocation ramp up a bit to celebrate...
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by Mike Scott »

As has been said already, this is not just a math problem. It requires some choices based on how comfortable you are with those choices. You could estimate the current "cash" value of the pension and SS and use them as bonds in setting your AA but it gives a "precise" answer to the wrong question. The pension and SS may count kind of like bonds but they are not bonds. They are income and knowing I have income changes how I feel about risk. In my case, similar circumstances allow me to be OK with a little more risk aka stocks.
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Re: How should I look at SS and pensions when developing my post-FRA AA?

Post by JW-Retired »

TheTimeLord wrote: Sun Dec 10, 2017 8:42 am How should I look at SS and pensions when developing my post-FRA AA? Should I count them as bonds @ 25x, should I discount them to 20x or 15x, or should I disregard them. It makes sense to me to regard them as guaranteed income streams and subtract them from projected expenses for cash flow purposes but it doesn't feel right just to ignore them when I calculate my AA.
TimeLord,
I'm very uncertain what you mean by "developing my post-FRA AA" versus "when I calculate my AA". "Developing" to me means deciding what your investment portfolio of real equities and fixed income assets ought to be. IMO, you can do that any way you want to.

"Calculating" sounds more like just the reporting of what that AA is. Are you actually thinking of mixing income streams into that? .... i.e, telling folks your AA is something different from that of your real assets?
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