Asset allocation across accounts & factoring SS

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GoneCamping
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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
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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
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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.
Topic Author
GoneCamping
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Re: Asset allocation across accounts & factoring SS

Post by GoneCamping »

I think the idea of it makes sense in that there is an income source (hopefully) coming into play for us both and, as such should somehow be factored into the equation now as well as when we actually beginning drawing that income. The problems are how to go about it, whether or not it should be a factor in determining current AA, and the big one IF we will actually receive it and how much. I'm a bit of a pessimist when it comes to SS...

I think I'm more of the mindset that until it materializes and is a real source of income, to ignore it. Until we actually draw SS, the portfolio has to provide our income and as such I think I'll manage AA based on that alone.

The other part of this is I'm still trying to figure out the best allocation across the different types of accounts...
dbr
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Re: Asset allocation across accounts & factoring SS

Post by dbr »

GoneCamping wrote: Tue Jul 09, 2024 4:45 pm
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.
I would advocate a better way of deciding your asset allocation than age in bonds with Social Security and pensions as a bond that then gets trapped in an awkward computation of future uncertainties and other issues.

That does not mean there is an automatic formula to work the problem. I would advice the approach of Larry Swedroe that you step back and think through your need, ability, and willingness to take risk respecting the fractions allocated to stocks and bonds. But in the end the issue is one of informed judgement and preference understanding how asset behave. It also is not very important. Asset allocation is as powerful lever only in that it can be exercised over a wide range. Small variations in chosen asset allocation don't matter. Rebalancing accordingly, as a tool to manage risk, can be operated within fairly wide bounds. +/-5% is often chosen but +/-10% is not crazy.

Here is a presentation of what would have happened historically to different asset allocations over time with spending (negative for saving):

You can decide how much the changes in moving around the asset allocation would matter to you, the main issue being that different asset allocations hugely overlap in prospective outcome. https://engaging-data.com/visualizing-4-rule/
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wwhan
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Re: Asset allocation across accounts & factoring SS

Post by wwhan »

From a taxable standpoint it makes sense to have stock funds in a taxable account or Roth IRA and bond/cash type investments in IRA/401K accounts. But one could have a mix in each account, tilted more to the tax optimization, which will make it easier to rebalance.

I use an Excel spreadsheet to review overall asset allocation and also use the Vanguard manual entry for external accounts & portfolio review.

I was always pessimistic about getting SS income, so all my earlier planning ignored the income. Now at age 70 and getting SS income, it is easy to see the tax & IRRMA bomb coming for the age 73 RMDs of IRA & 401K. We have been doing Roth conversions, before age 73, to reduce this.

Getting as much as reasonable into a Roth IRA, can help with long term issues of RMDs, SS income, IRRMA & taxes, after age 70.

The Glide paths wiki provides some ideas on age vs asset allocation. At age 70, we have 45% stock market.

https://www.bogleheads.org/wiki/Glide_paths

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Mike Scott
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Re: Asset allocation across accounts & factoring SS

Post by Mike Scott »

If you balance AA across all accounts, you can be more tax efficient and then later you can take withdrawals from any account while rebalancing inside one of the tax advantaged accounts.

As a budget exercise, you can project total expenses for each year and subtract income as it becomes available. Maybe there is five years of expenses before the pension starts. Maybe 10 years to social security. Maybe 15 years to RMDs. Your portfolio withdrawals will be different at different times to cover any differences.

You can convert future income to present value but I don't see the point of converting it and then converting it back to future income. There are a bunch of prior threads on both sides of doing this. (And yes, I have done the calculation just to see the big number but I plan using the future income.)
privateID
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Re: Asset allocation across accounts & factoring SS

Post by privateID »

opensocialsecurity.com does give a present value that could be used but it is highly dependent on the discount rate used. I personally use it just for my ballpark calculations (ie., I want x million to retire. SS is worth 1 million. So, I need x-1.)

As for AA across accounts, I personally do that. I tax-adjust the values (use a conservative average tax rate). I know many don't bother to do that, but it really is pretty easy to do in a spreadsheet. I will add, I made the ability to toggle off after-tax values in my spreadsheet and it really doesn't make such a difference (a couple of percentage points).
rkhusky
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Re: Asset allocation across accounts & factoring SS

Post by rkhusky »

I look at income streams and expenses. The portfolio needs to cover the shortfall in the income streams. If 3.5% of my portfolio or less will make up the shortfall, then I'm fine. I have a moderately conservative 40/60 portfolio, although once my pension becomes inflation adjusted I may drop to 30/70.
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