Do you include the capitalized value of Social Security in your asset allocation?

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Ron Scott
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Do you include the capitalized value of Social Security in your asset allocation?

Post by Ron Scott » Thu Oct 26, 2017 9:39 am

...in the bonds class I mean.
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by bobcat2 » Thu Oct 26, 2017 9:51 am

The amount of income I would get from Social Security (SS) in retirement if I never worked another day, I count as retirement income. The present value of estimated future contributions to SS by me and my employer I count as safe bonds in my AA. Notice this declines a lot as I approach retirement. OTOH the SS income increases a lot as I approach retirement.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by investing1012 » Thu Oct 26, 2017 9:52 am

Ron Scott wrote:
Thu Oct 26, 2017 9:39 am
...in the bonds class I mean.
No

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by JW-Retired » Thu Oct 26, 2017 10:00 am

No, the AA convention here is just to include investment assets in your portfolio. IMO, if you do something else it would confuse everybody.

I have done such things as you say as part of deciding what conventional AA I'm going to pick.
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Jack FFR1846 » Thu Oct 26, 2017 10:03 am

There's no universal answer to this. Heck...I see people considering their home, their rental buildings and their REITs all to be bonds.

Personally, I don't consider social security or pension income to be anything in my AA. I have a separate spreadsheet with yearly expected income and spending and everything is in there. Sale of our house in a particular year with purchase of a smaller house, for example. I had predicted the sale of my "toy" car during my first son's college in order to reduce stress from college expenses.

In general, if I can't rebalance into and out of something, it's not in my AA.
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Nate79 » Thu Oct 26, 2017 10:09 am

Income that helps over expenses. Not as part of asset allocation.

And there are tons of threads on this subject for both SS and pensions.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by rkhusky » Thu Oct 26, 2017 10:40 am

No. It reduces my yearly expenses and affects my projected withdrawal rate.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by runner3081 » Thu Oct 26, 2017 10:43 am

I do not count it or use it anywhere for planning. Being relatively young, there may be significant changes by the time I would be able to draw from it. Any SS that comes my way would just be some bonus "play money".

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Kenkat » Thu Oct 26, 2017 10:46 am

No, I count it as income I will receive in retirement. My portfolio (plus any pensions) will be required to make up the additional income I will need above what social security provides, so that is managed to reach a specific value to make up this gap.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by runner540 » Thu Oct 26, 2017 10:50 am

Jack FFR1846 wrote:
Thu Oct 26, 2017 10:03 am
In general, if I can't rebalance into and out of something, it's not in my AA.
+1
SS **may** reduce the amount of income needed from your portfolio. But you can't rebalance it, pass it on, or borrow against it. And both you and the program have to survive long enough to collect. I assume I will receive $0.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by 3feetpete » Thu Oct 26, 2017 11:16 am

No but I do consider the income stream from SS and a pension when considering what AA is acceptable to me. If it weren't for that guaranteed income stream, I would tilt more towards bonds.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Admiral » Thu Oct 26, 2017 12:24 pm

runner540 wrote:
Thu Oct 26, 2017 10:50 am
Jack FFR1846 wrote:
Thu Oct 26, 2017 10:03 am
In general, if I can't rebalance into and out of something, it's not in my AA.
+1
SS **may** reduce the amount of income needed from your portfolio. But you can't rebalance it, pass it on, or borrow against it. And both you and the program have to survive long enough to collect. I assume I will receive $0.
Why do you assume that? Have you not paid into it? If you have, and have worked for the minimum number of years (which I forget), it's safe to assume you will get something. Only minor changes are necessary to keep it from going "bust" as the pundits like to claim. If you are disabled tomorrow, and you have credits, you can collect.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by vested1 » Thu Oct 26, 2017 1:47 pm

Admiral wrote:
Thu Oct 26, 2017 12:24 pm
runner540 wrote:
Thu Oct 26, 2017 10:50 am
Jack FFR1846 wrote:
Thu Oct 26, 2017 10:03 am
In general, if I can't rebalance into and out of something, it's not in my AA.
+1
SS **may** reduce the amount of income needed from your portfolio. But you can't rebalance it, pass it on, or borrow against it. And both you and the program have to survive long enough to collect. I assume I will receive $0.
Why do you assume that? Have you not paid into it? If you have, and have worked for the minimum number of years (which I forget), it's safe to assume you will get something. Only minor changes are necessary to keep it from going "bust" as the pundits like to claim. If you are disabled tomorrow, and you have credits, you can collect.
I'll give my perspective, if I may. I pretended that SS didn't exist until I was 55. This resulted in a more aggressive savings strategy, which in turn resulted in a larger balance. Some say this is playing a mental game, which may be true, but I like games that give me a better chance of winning. Now at 65.5, retired, and still delaying, SS is a welcomed bonus I never counted on until I got closer to getting it.

That being said, I never counted SS as part of my AA, but rather just another leg of my income stool. It's nice to know that between SS and my wife's 100% survivor pension, which will cover 100% and more of expenses at my age 70, it will be the portfolio that will become the unneeded bonus.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by maj » Thu Oct 26, 2017 1:54 pm

Yes. Absolutely.
I also have a secure defined benefit and capitalize that as well.

peace

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by runner540 » Thu Oct 26, 2017 2:00 pm

vested1 wrote:
Thu Oct 26, 2017 1:47 pm
Admiral wrote:
Thu Oct 26, 2017 12:24 pm
runner540 wrote:
Thu Oct 26, 2017 10:50 am
Jack FFR1846 wrote:
Thu Oct 26, 2017 10:03 am
In general, if I can't rebalance into and out of something, it's not in my AA.
+1
SS **may** reduce the amount of income needed from your portfolio. But you can't rebalance it, pass it on, or borrow against it. And both you and the program have to survive long enough to collect. I assume I will receive $0.
Why do you assume that? Have you not paid into it? If you have, and have worked for the minimum number of years (which I forget), it's safe to assume you will get something. Only minor changes are necessary to keep it from going "bust" as the pundits like to claim. If you are disabled tomorrow, and you have credits, you can collect.
I'll give my perspective, if I may. I pretended that SS didn't exist until I was 55. This resulted in a more aggressive savings strategy, which in turn resulted in a larger balance. Some say this is playing a mental game, which may be true, but I like games that give me a better chance of winning. Now at 65.5, retired, and still delaying, SS is a welcomed bonus I never counted on until I got closer to getting it.

That being said, I never counted SS as part of my AA, but rather just another leg of my income stool. It's nice to know that between SS and my wife's 100% survivor pension, which will cover 100% and more of expenses at my age 70, it will be the portfolio that will become the unneeded bonus.
Vested1, you and I are on the same page, a generation apart.

I make that assumption because I am 3-4 decades from being able to collect. A lot can and will happen. Assuming $0 is a way to make assumptions conservative for "known unknowns" like increased healthcare and taxes.

If I'm lucky, I'll continue earning and saving at high levels, and "minor changes" to the program are likely to hit my earning/benefits. If I'm not lucky, SS will be a more significant assumption. If I'm really lucky, I'll continue earning and saving at high levels, and the program won't change for me. It doesn't seem prudent for me to plan assuming that "really lucky" scenario.

Of course I see the value of the disability insurance. And I see my parents and grandparents benefitting from SS.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by goodenyou » Thu Oct 26, 2017 2:08 pm

I need to see it to believe it. Not sure it will there in the the amount that has been promised to date. I don't include it at all since I have no control of the political forces that are capable of derailing it. Therefore, I do not. Nor do I include it in my plans to determine my retirement date. I will have to hit my "number" ex-SS benefits before I consider retirement.
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Artful Dodger » Thu Oct 26, 2017 2:15 pm

I don't include in my asset allocation.

I include SS projected payments in my retirement planning forecast (Fidelity software). I do take into account that SS and wife's pension will cover most necessary expenses, and this has a slight impact on the asset allocation of my retirement savings.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by JW-Retired » Thu Oct 26, 2017 2:25 pm

For those who capitalize SS et al and add it into your AA bonds, how does that AA compare with a conventionally counted one with just your real equities/bond type assets included?

Plus which AA do you report you have in discussions here?
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by nisiprius » Thu Oct 26, 2017 2:28 pm

No. I can't buy it or sell it. I compare Social Security and other guaranteed income streams from the amount of income I need/want in retirement, and evaluate the ability of my portfolio to make up the shortfall. Subtracting an actual income stream from an actual income need seems much sounder and straightforward than a) converting an income stream into an imaginary bond allocation, b) commingling it with an actual bond allocation, and then c) evaluating the ability of a partly-imaginary portfolio to meet an actual income need.
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by itstoomuch » Thu Oct 26, 2017 2:30 pm

You can.
We don't.
It's a tracking constant, thus avoid using the constant in every calculation.
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Admiral » Thu Oct 26, 2017 4:00 pm

I think if one is retired and drawing on it, then it's appropriate to consider it as part of fixed income in AA. This is essentially what you're doing anyway when you determine your expenses and how much income you need to draw from your portfolio to cover them. More SS = lower drawdown = ability (though not necessarily desire) to take more risk. (I'd also argue that if you're close to claiming it, it's reasonable to use it as part of your AA in the fixed income/bond category. It might pay a bit less than expected, but it will be there.)

I am 20 years from FRA but I do use my expected/projected SS payment in my projections. I'm just not using it as part of my AA nor am I saving any less because I "expect" it. I also "expect" that I will be continuously employed and get raises. But I don't "count" on them, or save any less today. I like the whole compounding thing :wink:

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Ron » Thu Oct 26, 2017 4:36 pm

nisiprius wrote:
Thu Oct 26, 2017 2:28 pm
No. I can't buy it or sell it. I compare Social Security and other guaranteed income streams from the amount of income I need/want in retirement, and evaluate the ability of my portfolio to make up the shortfall. Subtracting an actual income stream from an actual income need seems much sounder and straightforward than a) converting an income stream into an imaginary bond allocation, b) commingling it with an actual bond allocation, and then c) evaluating the ability of a partly-imaginary portfolio to meet an actual income need.
Agreed.

I'm scheduled to receive my first SS deposit on February 14, 2018. I have never looked at changing my/our target AA based upon either adding or subtracting retirement income streams along the way (subtracting means to cover those folks who don't believe that they will get SS in the future).

I have my retirement expense budget, I have my retirement income sources. I designed my/our AA based upon the gap in those two distinct opposite facts with the additional input of planning for the remaining lifespan of our disabled son. Since he was born when my wife/me were age 22, we look at our current age (for planning/investment purposes) as age 47 rather than our current actual ages of 69. At age 47, most folks are far away from their scheduled/desired retirement and maintain a higher percentage in equity investments vs. those in/close to retirement.

- Ron

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Admiral » Thu Oct 26, 2017 4:41 pm

Ron wrote:
Thu Oct 26, 2017 4:36 pm
nisiprius wrote:
Thu Oct 26, 2017 2:28 pm
No. I can't buy it or sell it. I compare Social Security and other guaranteed income streams from the amount of income I need/want in retirement, and evaluate the ability of my portfolio to make up the shortfall. Subtracting an actual income stream from an actual income need seems much sounder and straightforward than a) converting an income stream into an imaginary bond allocation, b) commingling it with an actual bond allocation, and then c) evaluating the ability of a partly-imaginary portfolio to meet an actual income need.
Agreed.

I'm scheduled to receive my first SS deposit on February 14, 2018. I have never looked at changing my/our target AA based upon either adding or subtracting retirement income streams along the way (subtracting means to cover those folks who don't believe that they will get SS in the future).

I have my retirement expense budget, I have my retirement income sources. I designed my/our AA based upon the gap in those two distinct opposite facts with the additional input of planning for the remaining lifespan of our disabled son. Since he was born when my wife/me were age 22, we look at our current age (for planning/investment purposes) as age 47 rather than our current actual ages of 69. At age 47, most folks are far away from their scheduled/desired retirement and maintain a higher percentage in equity investments vs. those in/close to retirement.

- Ron
But SS is the same as an annuity. Would you not consider that (guaranteed) income stream when determining how to determine an AA in retirement? True, you cannot sell it, but it still exists and is guaranteed income for life, and is not subject to loss (market fluctuations).

I'm speaking of the drawdown not the accumulation phase.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by JBTX » Thu Oct 26, 2017 4:58 pm

No. Not a capitalized asset. When I draw retirement around 2030-2032, that is around the time the fictitious trust fund goes bust and after that inflows will cover 75% of outflows. So it is reasonable to assume something will change before or after we get to that point, especially those with significant savings or income, beyond that is pure speculation.

Since it is assumed most people will draw social security i would think that popular asset allocation strategies would include that assumption.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by oldcomputerguy » Thu Oct 26, 2017 5:00 pm

No. If I can't rebalance into or out of it, I don't count it as part of my investment portfolio.
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by SQRT » Thu Oct 26, 2017 5:04 pm

JW-Retired wrote:
Thu Oct 26, 2017 2:25 pm
For those who capitalize SS et al and add it into your AA bonds, how does that AA compare with a conventionally counted one with just your real equities/bond type assets included?

Plus which AA do you report you have in discussions here?
JW
My capitalized very large private pension would represent almost 60% of my actual portfolio. Since my portfolio is 100% equity, this gives a combined AA of around 65/35. I think it would be foolish to ignore the pension, which covers all fixed expenses in retirement so I include it. If you don’t include material pensions the rules of thumb that people use for AA will not be comparable to you. If you adjust the AA ,even in your mind, you have, effect included the value, no? I wouldn’t include SS because everyone has it to some degree so is probably already baked into the rules of thumb. Wouldn’t be that material anyway.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by J295 » Thu Oct 26, 2017 6:24 pm

No. Ignore it we do our paid for home, auto, etc. Fits our conservative approach.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by Dale_G » Thu Oct 26, 2017 7:54 pm

maj wrote:
Thu Oct 26, 2017 1:54 pm
Yes. Absolutely.
I also have a secure defined benefit and capitalize that as well.

peace
Sure you can capitalize it, but unless you know your actual life span, you are just guessing at the capitalized value. SS, like a pension or life annuity provides an income stream while you live. It is okay to adjust your AA based on the expected cashflow, but it doesn't make sense to capitalize the flow because the number of payments is unknown.

Once collecting, are you going to reduce the capitalized amount each time a payment is received - or are you going to extend your presumed lifetime by another month?

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by amarone » Thu Oct 26, 2017 7:59 pm

3feetpete wrote:
Thu Oct 26, 2017 11:16 am
No but I do consider the income stream from SS and a pension when considering what AA is acceptable to me. If it weren't for that guaranteed income stream, I would tilt more towards bonds.
This

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by ResearchMed » Thu Oct 26, 2017 8:03 pm

Dale_G wrote:
Thu Oct 26, 2017 7:54 pm
maj wrote:
Thu Oct 26, 2017 1:54 pm
Yes. Absolutely.
I also have a secure defined benefit and capitalize that as well.

peace
Sure you can capitalize it, but unless you know your actual life span, you are just guessing at the capitalized value. SS, like a pension or life annuity provides an income stream while you live. It is okay to adjust your AA based on the expected cashflow, but it doesn't make sense to capitalize the flow because the number of payments is unknown.

Once collecting, are you going to reduce the capitalized amount each time a payment is received - or are you going to extend your presumed lifetime by another month?

Dale
One obviously cannot change how the payments are collected.

However, in terms of capitalizing it without knowing actual life span, a appropriate way to do that is to find how much an SPIA (inflation adjusted) would cost, if it started with the current SS payment.
(This is for those already collecting, but one can also get estimates of costs of SPIA's "in x years" that start with "$y", if one uses some approximations. It's not exact, but it can't be "exact". This gives an approximation of the current value of that income stream.)

We just made that calculation for our current SS payments (both started at age 70), but used the non-inflation adjusted SPIA cost to match each.
That would be quite an overestimate, due to the COLA for SS benefits, but it was startling how high that total (of 2 SPIA's) was. Even cutting them each in half was a hefty sum, a sum that we've never "included" in "total assets". But it's clearly of *considerable* value to us!


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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by JW-Retired » Thu Oct 26, 2017 8:57 pm

SQRT wrote:
Thu Oct 26, 2017 5:04 pm
JW-Retired wrote:
Thu Oct 26, 2017 2:25 pm
For those who capitalize SS et al and add it into your AA bonds, how does that AA compare with a conventionally counted one with just your real equities/bond type assets included?

Plus which AA do you report you have in discussions here?
JW
My capitalized very large private pension would represent almost 60% of my actual portfolio. Since my portfolio is 100% equity, this gives a combined AA of around 65/35. I think it would be foolish to ignore the pension, which covers all fixed expenses in retirement so I include it. If you don’t include material pensions the rules of thumb that people use for AA will not be comparable to you. If you adjust the AA ,even in your mind, you have, effect included the value, no? I wouldn’t include SS because everyone has it to some degree so is probably already baked into the rules of thumb. Wouldn’t be that material anyway.
Wow, thank you! It's rare someone answers this question so I'm thrilled. :beer

I'm always looking for some assessment of John Bogle's rule stating as a rule of thumb you should have your real chronological age in bonds but only if your are counting the pension/SS present values as such. In my case I have a significant pension and SS and a retirement nest egg, but I still find his rule comes out right around my intuitive choice of 60/40 real stocks/real bonds anyway.

I looked at some old threads to know your age and it looks like you might be even a little more stock heavy now than the Bogle rule might approve of. How would it come out if you did include your SS?
thanks,
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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by SQRT » Fri Oct 27, 2017 3:44 am

JW-Retired wrote:
Thu Oct 26, 2017 8:57 pm
SQRT wrote:
Thu Oct 26, 2017 5:04 pm
JW-Retired wrote:
Thu Oct 26, 2017 2:25 pm
For those who capitalize SS et al and add it into your AA bonds, how does that AA compare with a conventionally counted one with just your real equities/bond type assets included?

Plus which AA do you report you have in discussions here?
JW
My capitalized very large private pension would represent almost 60% of my actual portfolio. Since my portfolio is 100% equity, this gives a combined AA of around 65/35. I think it would be foolish to ignore the pension, which covers all fixed expenses in retirement so I include it. If you don’t include material pensions the rules of thumb that people use for AA will not be comparable to you. If you adjust the AA ,even in your mind, you have, effect included the value, no? I wouldn’t include SS because everyone has it to some degree so is probably already baked into the rules of thumb. Wouldn’t be that material anyway.
Wow, thank you! It's rare someone answers this question so I'm thrilled. :beer


I looked at some old threads to know your age and it looks like you might be even a little more stock heavy now than the Bogle rule might approve of. How would it come out if you did include your SS?
thanks,
JW
I’m Canadian so I don’t get SS. The comparable pension in Canada is called Canada Pension Plan (CPP) and pays out less than SS. Max payout for CPP is about $18k per year fully indexed to inflation. Capitalized value might be somewhere in the $200k range I estimate at retirement. This is insignificant to the size of my portfolio and private pension so I ignore it. Also, almost everybody gets some CPP so it is probably already implicitly included in the “rule of thumb” AA ratios.

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Re: Do you include the capitalized value of Social Security in your asset allocation?

Post by SQRT » Fri Oct 27, 2017 3:54 am

Dale_G wrote:
Thu Oct 26, 2017 7:54 pm
maj wrote:
Thu Oct 26, 2017 1:54 pm
Yes. Absolutely.
I also have a secure defined benefit and capitalize that as well.

peace
Sure you can capitalize it, but unless you know your actual life span, you are just guessing at the capitalized value. SS, like a pension or life annuity provides an income stream while you live. It is okay to adjust your AA based on the expected cashflow, but it doesn't make sense to capitalize the flow because the number of payments is unknown.

Once collecting, are you going to reduce the capitalized amount each time a payment is received - or are you going to extend your presumed lifetime by another month?

Dale
Life expectancy is unknown but easily forecasted. Yes, you should gradually reduce the capitalized value as you age. In my case I have full survivorship for my spouse who is quite a bit younger than I, so I use her life expectancy in the calcs. Accordingly, everything else being equal, your AA will tend to skew higher to equities as you age. This is consistent with some commentators who suggest higher equities, at least to a point, as we age. But if you are uncomfortable with that, you should gradually increase FI to offset the decline in pension NPV. Doesn’t seem that difficult to me? AA is only a rule of thumb and precision not the primary objective.

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