Social Security as a percentage of portfolio

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Mr Winston
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Social Security as a percentage of portfolio

Post by Mr Winston » Thu Nov 08, 2018 9:07 pm

Question: When reviewing my portfolio shall I count my future estimated social security payments towards the percentage I need as cash? Not emergency cash. Shall I calculate 10, 15 or 20 years of payments into my total net worth? I'm 63. My mom died at 92 and my father died at 96. I know I could die anytime... and Uncle Sam could reduce my future payments. But with that said, if I count it as in the "bank" I will feel better about having a greater percentage at risk in equities.

Any thoughts?

sport
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Re: Social Security as a percentage of portfolio

Post by sport » Thu Nov 08, 2018 9:51 pm

Future payments are not part of your net worth. They are current income when you get them. They reduce the amount of cash needed from your portfolio for expenses during retirement. So, if you need 60K per year for expenses, and you receive 20K from SS, then you need 40K from your portfolio. If you follow the 4% "rule", this means you would need 1M in this example. If you receive 30K from SS, then you would need 30K from your portfolio, then you would need 750K in your portfolio to meet your needs. Etc.

Teague
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Re: Social Security as a percentage of portfolio

Post by Teague » Thu Nov 08, 2018 9:58 pm

Mr Winston wrote:
Thu Nov 08, 2018 9:07 pm
My mom died at 92 and my father died at 96. I know I could die anytime...
Any thoughts?
First things first: Welcome! :happy

I just wanted to chime in that longevity seems to be, rather surprisingly, not very heritable. That is, the age to which your parents lived has less predictive value about your life expectancy than one might think. My take on this is that there are just so darned many different things that can end one's life that individual life expectancy is more random than typically assumed.
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calmaniac
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Re: Social Security as a percentage of portfolio

Post by calmaniac » Thu Nov 08, 2018 10:25 pm

The calculation you want is not how much your SS contributes to your net worth, it is how much does does net worth contribute to your cash flow.

During the accumulation phase (working years) one focuses on net worth. However, in retirement the more important metric is cash flow. Who cares how much money you have in the bank, it's how much money you have to live on. The question is: what are your expenses and what are your sources of income in retirement? I would do some searching on the Bogleheads site for the terms "retirement" AND "cash flow".

When I started working on my own retirement calculations ≈5-6 years back, I found the short e-book "How Much Money Do I Need to Retire?" by Todd Tresidder very useful in that regard (on Amazon). There are many postings on the Bogleheads site with similar info, but the book lays it out clearly.

Welcome to the site! Bogleheads is an amazing resource supporting by wonderful people who are very generous with their expertise...as well as the rest of us who are still learning.

Mickey7
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Re: Social Security as a percentage of portfolio

Post by Mickey7 » Thu Nov 08, 2018 10:34 pm

As noted by sport, your ss and/or pension constitutes the initial layer for your retirement income stream. As such it is not a part of my portfolio, it is a base to be used for each year's planning.

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calmaniac
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Re: Social Security as a percentage of portfolio

Post by calmaniac » Thu Nov 08, 2018 10:38 pm

Teague wrote:
Thu Nov 08, 2018 9:58 pm
I just wanted to chime in that longevity seems to be, rather surprisingly, not very heritable. That is, the age to which your parents lived has less predictive value about your life expectancy than one might think.
Please provide data for your statement above. This recent review notes that although the purely genetic basis for longevity is smaller than previously thought (maybe 10-15%), longevity running in families can be explained by "assortative mating". Thus having both parents live into their 90's gives one a longevity edge, even if not through a genetic mechanism.

[Sorry to be OT, but couldn't resist] :D

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SevenBridgesRoad
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Re: Social Security as a percentage of portfolio

Post by SevenBridgesRoad » Thu Nov 08, 2018 10:49 pm

calmaniac wrote:
Thu Nov 08, 2018 10:38 pm
Teague wrote:
Thu Nov 08, 2018 9:58 pm
I just wanted to chime in that longevity seems to be, rather surprisingly, not very heritable. That is, the age to which your parents lived has less predictive value about your life expectancy than one might think.
Please provide data for your statement above. This recent review notes that although the purely genetic basis for longevity is smaller than previously thought (maybe 10-15%), longevity running in families can be explained by "assortative mating". Thus having both parents live into their 90's gives one a longevity edge, even if not through a genetic mechanism.

[Sorry to be OT, but couldn't resist] :D
Easy to digest synopsis of assortative mating:
https://www.the-scientist.com/news-opin ... ught-65043
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Teague
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Re: Social Security as a percentage of portfolio

Post by Teague » Thu Nov 08, 2018 10:59 pm

calmaniac wrote:
Thu Nov 08, 2018 10:38 pm
Teague wrote:
Thu Nov 08, 2018 9:58 pm
I just wanted to chime in that longevity seems to be, rather surprisingly, not very heritable. That is, the age to which your parents lived has less predictive value about your life expectancy than one might think.
Please provide data for your statement above. This recent review notes that although the purely genetic basis for longevity is smaller than previously thought (maybe 10-15%), longevity running in families can be explained by "assortative mating". Thus having both parents live into their 90's gives one a longevity edge, even if not through a genetic mechanism.

[Sorry to be OT, but couldn't resist] :D
Per the abstract you linked to, "Though it is widely believed that long life runs in families for genetic reasons, estimates of life span "heritability" are consistently low (∼15-30%)."

I don't recall which study or studies I got that from, but probably one or some of the ones your link asserts are the basis for the "consistently low" estimates. I can't tell much from the abstract about any conclusions reached or any supporting evidence, and honestly I'm not going to take the time to pull the full text to find out. If the prior studies have been rendered obsolete by this recent study, perhaps you could provide a relevant excerpt from the full text, explaining more? Thanks.

As far as the OP's question, sorry this is getting derailed. I won't comment further in this thread other than to say that, personally, I think SS will still be around, largely as it is.
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Mr Winston
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Re: Social Security as a percentage of portfolio

Post by Mr Winston » Thu Nov 08, 2018 11:06 pm

Hey guys let me have my fantasy of a long life. ;-) lol

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Nestegg_User
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Re: Social Security as a percentage of portfolio

Post by Nestegg_User » Fri Nov 09, 2018 1:12 am

Mr Winston wrote:
Thu Nov 08, 2018 11:06 pm
Hey guys let me have my fantasy of a long life. ;-) lol
well, then I’d have to be dead... since I’ve already outlived both parents... and I’m only in my early sixties
(it would work both ways!). .... and most in either side of my family only survived until 83-85, at best, with one great aunt an outlier getting a few months shy of 100.
I’d agree that both the difference in conditions that prior generations lived in (higher smoking rates, potentially poorer environment, but also less sedentary lifestyle) and the availability of medical advancement would make any comparison difficult or specious.

jacksonm
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Re: Social Security as a percentage of portfolio

Post by jacksonm » Fri Nov 09, 2018 11:01 am

To answer the original question first, no I don't include SS as any part of my portfolio. If I did, I would probably view it more like a long term treasury bond than cash. I hold about 20% of my portfolio in those and sometimes I do wonder if I have too much riding on the full faith and credit of the U.S. government. SS most definitely does enter into budget calculations and the effect that has on my portfolio however.

As for the longevity question, here is an interesting article about 9 factors involved.....

https://www.thinkadvisor.com/2016/05/27 ... 1009103458

My grandparents on both sides lived into their 90's. My Dad died at 92 and my mom is still alive at 98. I'll be 70 in a few months.

My grandmother died just days before she turned 100 and as far as I know nobody else in the family ever reached that mark. So I'm planning on being the first. My Dad developed heart disease and diabetes in his late 80's after retiring at age 60. If he ever paid any attention to how his lifestyle and diet affected his health after he retired, it was hard to see. He had grown to be quite obese by the time he developed his major health problems. So I'm doing my best to learn from his example, already slimming down to a normal BMI with diet and exercise.

Jack FFR1846
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Re: Social Security as a percentage of portfolio

Post by Jack FFR1846 » Fri Nov 09, 2018 11:06 am

I don't include social security in my portfolio. Where I do include it is in my "life spreadsheet" which documents each year incomes, outflows, gains and such. I tend to be very conservative, so I've included a 25% reduction in SS payouts in 2034 which is pretty well agreed upon.
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CyclingDuo
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Re: Social Security as a percentage of portfolio

Post by CyclingDuo » Fri Nov 09, 2018 12:48 pm

Mr Winston wrote:
Thu Nov 08, 2018 9:07 pm
Question: When reviewing my portfolio shall I count my future estimated social security payments towards the percentage I need as cash? Not emergency cash. Shall I calculate 10, 15 or 20 years of payments into my total net worth? I'm 63. My mom died at 92 and my father died at 96. I know I could die anytime... and Uncle Sam could reduce my future payments. But with that said, if I count it as in the "bank" I will feel better about having a greater percentage at risk in equities.

Any thoughts?
Welcome to the BH forums.

No, don't count SS payments as part of your net worth! SS will be an income stream in your retirement. Being that you are 63, I imagine it is safe to assume that your income stream from SS will start sometime between now and within the next 7 years.

What other streams of income do you expect in your retirement?

Examples: rental income, pension, part-time work, etc...?

Your risk portfolio (stocks and bonds) will need to provide any gap that the income streams from SS, rental income, pension, part-time work, etc... does not provide to meet your expenses.

The classic three legged stool of where the money will come from to finance annual expenses during retirement...

Image

As we know, not everyone has the classic three legged stool. Your calculations need to be based on the income streams you will have and how much each of them will provide to meet your expenses.

Simple example of a hypothetical couple in retirement who will have a mix of income streams.

Income Streams

$25,000 from pension
$27,000 from social security
$6,400 from rental income
$10,000 from part-time work
$68,400 total from the above income streams

Annual Expenses (wants/needs/variables)

$88,500
- $68,400 from income streams
$20,100 = minimal amount needed from risk portfolio

Having the correct asset allocation in your risk portfolio as well as the size of the portfolio to meet the .04% SWR each year should be based on the amount needed to fuel that stream or leg of the stool.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

heyyou
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Re: Social Security as a percentage of portfolio

Post by heyyou » Fri Nov 09, 2018 12:55 pm

I don't include my SS in my portfolio since it would skew my bond allocation so low that I might fold in the next equity crash. Ignoring SS also helps me to delay taking it sooner than age 70. When I do start receiving it, then I might boost both my equity allocation and my WD rate a little, since I will have less longevity by then.

Gerbil
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Re: Social Security as a percentage of portfolio

Post by Gerbil » Fri Nov 09, 2018 3:59 pm

Jack Bogle says to capitalize the value of your Social Security and treat it as a fixed asset. So if you want to maintain a fixed/equity ratio of 50-50, and your portfolio was say $350k, and the capitalized value of your SSA was $350K (and he says it is commonly in that range), then you should put all your $350k in equities to maintain the 50-50 balance.

Since Social Security is inflation protected there is no need to factor inflation into your calculations, making it a simple calculation. Others suggest using 10 Year Treasuries as your discount rate.

https://finance.yahoo.com/news/heres-in ... soc_trk=ma

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