Asset allocation across accounts & factoring SS

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GoneCamping
Posts: 87
Joined: Mon Mar 01, 2021 5:45 pm

Asset allocation across accounts & factoring SS

Post by GoneCamping »

Looking to rebalance to get our portfolios better aligned with life stage. Wife and I are both retired, though she contracts p/t. We are in our late 50's.

I read on the Wiki, John Bogle's advice for SS in portfolio balancing:
John Bogle recommended "roughly your age in bonds"; for instance, at age 45, about 45% of the portfolio should be allocated to high-quality bonds. He also suggested that, during the retirement distribution phase, you should treat the value of any future pension and expected Social Security payments as a bond-like component of wealth and asset allocation.

I'm a bit confused by this as to how to factor in future and, let's be honest, undetermined SS benefits in balancing portfolios TODAY. Or if I even should. Practically speaking, I understand the thought here but pragmatically am at a lost as to how to go about it.

On a different note, we have most of our retirement savings in 401k but also have a couple after tax accounts and Roth IRAs. I'm struggling a bit on full portfolio allocation (the easy part) vs. each account, or acct. type. Perhaps I should adjust balances by type to be more conservative on the after tax accounts given the recommendation to withdrawal from those first but the issue is tax on any gains. The goal is to have an allocation across entire portfolio but I'm trying to make sense of how to practically apply that across several different accounts/account types.
WhitePuma
Posts: 1238
Joined: Fri May 05, 2023 6:34 pm

Re: Asset allocation across accounts & factoring SS

Post by WhitePuma »

This is a good question and I’m eager to hear responses.

If one expects SS to cover, say, 50% of their retirement expenses, does that mean that having a portfolio where one’s fixed income is 10x expenses means they really have 20x expenses and hence a very different AA than what they think they have?
dorster
Posts: 372
Joined: Tue Aug 15, 2017 4:20 pm

Re: Asset allocation across accounts & factoring SS

Post by dorster »

GoneCamping wrote: Tue Jul 09, 2024 4:45 pm I'm a bit confused by this as to how to factor in future and, let's be honest, undetermined SS benefits in balancing portfolios TODAY. Or if I even should. Practically speaking, I understand the thought here but pragmatically am at a lost as to how to go about it.
Its up to you to decide whether you want to or not. For me its always seemed intuitive to include guaranteed income in my asset allocation decisions. But its a choice and many people will suggest not to include it. If you'd like to hear arguments in favor of valuing SS or pensions look up the TPAW thread including this post.

Pragmatically speaking, estimate how much longer you'll work and what your PIA will be. Make a decision about when you'll plan to take benefits and what you're monthly payout will be. Then price an annuity (maybe with 3% COLA as a ballpark inflation adjustment). This will give you a NPV.

Don't be worried about getting it exact. You can also use calculators that will price a theoretical inflation-adjusted annuity--not currently available on the market. I find I usually get similar NPV of SS using a variety of methods of calculation, which to me implies that they are robust enough.

Also remember that if you think of yourself as being 60/40 in your investment portfolio then your Total portfolio (including SS, pension, whatever else) should probably be 30/70 or something. In other words using the NPV of SS isn't an explicit argument to hold more stocks.

If this all seems complicated, unintuitive, and not worth the time then don't do it.
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