Can pension be counted as part of bond allocation?

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D Paul
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Can pension be counted as part of bond allocation?

Post by D Paul » Wed Apr 13, 2011 6:37 pm

I'm retired and collecting a pension of $16,800 per year. My allocation goal is 50/50 equities/bonds. Can the pension income be thought of as equivalent to bond income and be included as part of my bond allocation? If so, what dollar equivalent amount should I give it? We are in the 15% tax brkt.

Thanks

exeunt
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Post by exeunt » Wed Apr 13, 2011 6:51 pm

Yes. Discount the after-tax income stream by the after-tax interest rate on a bond of similar credit quality to estimate its present value.

Uninvested
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Post by Uninvested » Wed Apr 13, 2011 6:58 pm

I do not think it really matters. It is whatever makes you feel better. I would ignore the pension and invest the other assets as you see fit..

larmewar
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Can, But Shouldn't

Post by larmewar » Wed Apr 13, 2011 7:11 pm

My pension offsets some of my expenses. So I don't need as much investment income, 401K/IRA withdrawals or sales ofl taxable investments to cover my expenses. Problems with counting a pension (or fixed annuity) as a bond include not being able to sell pension and extreme equity allocations. If the pension is large enough, the bond equivalent may cover the entire fixed income allocation (or more) leaving one with a 100% (or even leveraged) equity portfolio.

Depending on how you handle the pension, the value doesn't go up/down with interest rate changes; depends on whether you change the discount rate and recalculate.

Lar

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pjstack
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Post by pjstack » Wed Apr 13, 2011 7:13 pm

This question is asked a lot, but my answer is "NO"!

When you were working, you didn't count your wages as a bond, did you?

That said, I did count my military pension as a bond for a while. And, it seemed like a great idea at the time. After all, It's a pretty big bond that will kick out an amount equal to your pension every year!

So, pretending my pension was a bond, I set my investible allocation to 80/20 (stocks/bond). Things were great while stocks were climbing, but Oh My!, when the stock market took a tumble I learned a lesson.

I learned that 80/20 is a bit too aggressive for someone in their 70's and I wasn't as brave as I thought I was!
I had the ability to take equity risk, but I didn't have the need to do it and I shouldn't have.

Your pension is an income stream (be glad you have it) but it's not an investment.
pjstack

sscritic
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Post by sscritic » Wed Apr 13, 2011 7:14 pm

Your thinking is backwards.

You:
1) I want to hold 50% in bonds
2) I am not sure if my pension is a bond because I don't have a definition of what a bond is.

I hope you see the problem. Here are other people and their thinking:

Person A:
1) a pension is a bond.
2) given that a pension is a bond, I want to hold XX% in bonds.

OR

Person B:
1) a pension is not a bond.
2) given that a pension is not a bond, I want to hold YY% in bonds.

You can be an A or you can be a B. Both are fine positions to take. However, please note that XX is NOT equal to YY. What is not reasonable is to decide what percentage you want to hold in bonds if you don't have a definition of a bond.

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Post by dbr » Wed Apr 13, 2011 7:17 pm

sscritic wrote:Your thinking is backwards.

You:
1) I want to hold 50% in bonds
2) I am not sure if my pension is a bond because I don't have a definition of what a bond is.

I hope you see the problem. Here are other people and their thinking:

Person A:
1) a pension is a bond.
2) given that a pension is a bond, I want to hold XX% in bonds.

OR

Person B:
1) a pension is not a bond.
2) given that a pension is not a bond, I want to hold YY% in bonds.

You can be an A or you can be a B. Both are fine positions to take. However, please note that XX is NOT equal to YY. What is not reasonable is to decide what percentage you want to hold in bonds if you don't have a definition of a bond.
This may be the best succinct answer to this question yet.

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alec
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Re: Can pension be counted as part of bond allocation?

Post by alec » Wed Apr 13, 2011 7:33 pm

D Paul wrote:My allocation goal is 50/50 equities/bonds.
I don't really think that this is your goal. Most people come up with this stock/bond allocation without doing any real calculations and base this decision on their risk tolerance, age, etc. For example, "I'm 60 and have a 'medium' tolerance for risk." Is this type of "analysis" really how one wants to base their retirement income on? I don't think so.

A goal would be "I want $30,000 in retirement income". Since you have a pension of $16,800 per year, you need $13,200 per year from your portfolio. Thus, you set up your portfolio [in stocks and bonds] to generate the $13,200. You can do this multiple ways, like through monte carlo simulations with various stock/bond %'s, TIPS ladders, life annuities, etc.

For arguments sake, let's say that you decide on an AA of 50/50 stocks/bonds to generate this $13,200. And when you take your pension into account, your overall AA is 20% stocks and 80% bonds. As sscritic has said in the past [IIRC], you should be just as happy with 50/50 ignoring the pension and 20/80 not ignoring the pension.

The AA of your [non-pension] portfolio is the end result of a whole bunch of calculations, not the starting point like "I think I should be 50/50 given my age and risk tolerance, so I should put 80% of my investment portfolio into stocks to take into account of my pension." IMHO, the latter is quite silly if you think about it.

- Alec
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

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Post by The Wizard » Wed Apr 13, 2011 7:47 pm

It's hard to rebalance from your pension's principal into equities if conditions warrant.
Hence it's not a bond even though it has some of a bond's flavor.

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Post by joe8d » Wed Apr 13, 2011 8:23 pm

Pensions,SS and annuities should be considered as your "Retirement Salary".You then structure the AA of Stock/Bond investments to address any short fall between your "Salary" and expense needs.
All the Best, | Joe

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Post by dharrythomas » Wed Apr 13, 2011 8:45 pm

A least consider what pjstack had to say. His experience might be valuable to you.

Most of us use expected pension income to reduce the amount of income needed from investments. That leads to a reduction in the need for risk. It also may increase your ability to take risk but that is a specific to the individual.

Harry

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Post by gkaplan » Wed Apr 13, 2011 8:49 pm

No.
Gordon

Topic Author
D Paul
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Pension as a bond

Post by D Paul » Wed Apr 13, 2011 9:46 pm

Thanks everyone for your input. I'm definitely going to rethink this question!

D Paul

paulsiu
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Post by paulsiu » Wed Apr 13, 2011 11:12 pm

Yes and no.

A pension increase your income stream, so now your portfolio can be smaller, but pension are also usually not index to inflation like SS, so income stream decreases as you live. so you have to factor that in.

Paul

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Post by sscritic » Wed Apr 13, 2011 11:20 pm

paulsiu wrote: A pension increase your income stream, so now your portfolio can be smaller, but pension are also usually not index to inflation like SS, so income stream decreases as you live. so you have to factor that in.
Death decreases the value as well. Even if it is indexed to inflation, it is not worth a whole lot the day before you die.

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Post by bobcat2 » Thu Apr 14, 2011 9:26 am

Hi D Paul,

pjstack, Alec, and Joe are on the right track. Your question has everything backwards.

Your goal in retirement is to have a consistent living standard year to year. You need consistent retirement income to fund that retirement living standard goal.

So the much better question is - How do I get my portfolio of assets to produce reliable income the way my pension and SS produce reliable income?

What's important is to meet your retirement income target. Hitting a pre-assigned portfolio asset allocation percentage is a trivial and irrelevant goal for prudent retirement planning. As Alec has noted, the AA decision comes at the end of the retirement planning process - not at the beginning of the process. The portfolio AA is a decision you make to help you reach your retirement living standard goal. The portfolio AA in itself is not a retirement goal.

BobK

-Minor edit for clarity
Last edited by bobcat2 on Fri Apr 15, 2011 8:05 am, edited 1 time in total.
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Post by midareff » Thu Apr 14, 2011 9:37 am

joe8d wrote:Pensions,SS and annuities should be considered as your "Retirement Salary".You then structure the AA of Stock/Bond investments to address any short fall between your "Salary" and expense needs.
That makes a lot of sense to me.

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og15F1
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Post by og15F1 » Thu Apr 14, 2011 12:49 pm

I've been kicking around the same question lately as I look to decide whether to keep BND in my Roth or move my bond allocation into a nice index fund in my 401k. The likeness for me is that the company pension is held in US Treasury Bonds ... so it IS in bonds.

That said:
The Wizard wrote: It's hard to rebalance from your pension's principal into equities if conditions warrant.

Hence it's not a bond even though it has some of a bond's flavor.
Which is really the problem in my case. It's a bond on paper but in practice it's not useful for rebalancing.

Following joe8d and midareff's thoughts also make sense to me. If the pension is just treated like social security it leaves a more actionable and stable portfolio.

This is mostly moot for me however because I'm like 4 years (contributing) into this pension which is miniscule compared to my retirement "number" ... and will probably be rolled over whenever I switch jobs at some point in my career.

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Re: Can pension be counted as part of bond allocation?

Post by YDNAL » Thu Apr 14, 2011 1:01 pm

D Paul wrote:I'm retired and collecting a pension of $16,800 per year. My allocation goal is 50/50 equities/bonds.
Why :?:
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sscritic
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Post by sscritic » Thu Apr 14, 2011 7:13 pm

I don't understand the "it's hard to rebalance a pension if I count it as bonds" argument.

Suppose I have a pension that I value as 60% of my assets. My bond allocation can then go anywhere from 60% bonds (with all my non-pension assets in stocks) to 100% bonds (with all my non-pension assets in bonds). Suppose I decide to go 80% bonds - 20% stocks (in other words, split the 40% that is not pension 50-50 between bonds and stocks). I have no problem rebalancing around 80%-20%.

However, suppose I read something on the internet that tells me to increase my equity holdings to 50% of everything. On the one hand, that is impossible since my pension (bond) is 60% of my assets and the stock portion can never go over 40%. On the other, if I really want to, I could take out a second mortgage on my house to buy more stocks. Is that really what people are suggesting when they say the want to rebalance to a bond position lower than what the pension provides? Go ahead, ask them. I think they will tell you that they do not want you to borrow money to increase the portion of your non-pension assets held in stocks above 100%. But if that is true, then they don't really want you to rebalance your bonds (pensions included) below the value of the pension. It's just a mathematical fact: you can't have the bonds portion of your total holdings below the value of your pension unless you borrow money to buy stocks.

Perhaps I am missing something and putting words in their mouths, so perhaps they can explain the sort of rebalancing they want to do that valuing your pension as a bond would prevent.

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Post by JimInIllinois » Thu Apr 14, 2011 9:46 pm

sscritic wrote:I don't understand the "it's hard to rebalance a pension if I count it as bonds" argument.

Perhaps I am missing something and putting words in their mouths, so perhaps they can explain the sort of rebalancing they want to do that valuing your pension as a bond would prevent.
As you point out, rebalancing isn't a problem until you run out of real bonds to sell, but people may reason that the pension is 65% of their net worth at age 65, put everything else in stocks (or worse, leverage-up), and sell out when the market tanks and they lose half of their liquid assets.

How will you value your pension when you're 90? Do you reduce it's nominal value with your declining life expectancy based on the cost of an equivalent immediate annuity? Do you correct for current interest rates? It's much simpler to just say the pension is one source of retirement income, the investment portfolio is another, and manage the portfolio based on your need and ability to take risk.

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Post by og15F1 » Thu Apr 14, 2011 11:19 pm

JimInIllinois wrote:
sscritic wrote:I don't understand the "it's hard to rebalance a pension if I count it as bonds" argument.

Perhaps I am missing something and putting words in their mouths, so perhaps they can explain the sort of rebalancing they want to do that valuing your pension as a bond would prevent.
As you point out, rebalancing isn't a problem until you run out of real bonds to sell, but people may reason that the pension is 65% of their net worth at age 65, put everything else in stocks (or worse, leverage-up), and sell out when the market tanks and they lose half of their liquid assets.
That's exactly it. My pension is held in treasury bonds so it's tempting to call that my bond allocation. I know the current balance and could calculate the future income from it.

I'm at the relatively earlier accumulation part of the process so very recently I thought this pension could work as my entire bond allocation. Since it IS in bonds. The problem is that if it's ALL my bonds then I can never sell any of it to rebalance when stocks tank.

Now I have more bonds but if I still counted the pension as bonds and the market drops heavily I could have run out of bonds that I'm physically able to sell to rebalance.

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D Paul
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Re: Can pension be counted as part of bond allocation?

Post by D Paul » Thu Apr 14, 2011 11:49 pm

YDNAL wrote:
D Paul wrote:I'm retired and collecting a pension of $16,800 per year. My allocation goal is 50/50 equities/bonds.
Why :?:
I established the 50/50 allocation policy for assets I had not including pension, based on conversations with Vanguard. Later I began to wonder if my pension should count as part of the bond allocation, and that led me to post the question. I appreciate everyone's input!

D Paul

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Post by JimInIllinois » Fri Apr 15, 2011 1:02 am

og15F1 wrote:That's exactly it. My pension is held in treasury bonds so it's tempting to call that my bond allocation. I know the current balance and could calculate the future income from it.
When I see "pension" I think defined benefit retirement plan backed by a pool of assets managed by your employer or an insurance company. The only case where those assets are 100% treasury bonds is if the employer is Uncle Sam or if you have an insanely conservative manager running the pool. Adding a 20% allocation to stocks actually reduces volatility compared to an all-bond portfolio while increasing expected return.

If you actually have a defined contribution plan you likely have the option to invest in multiple asset classes, although the choices may not be great, and could use those funds to rebalance your portfolio.

So what exactly is this pension of yours?

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Re: Can pension be counted as part of bond allocation?

Post by sscritic » Fri Apr 15, 2011 8:34 am

D Paul wrote: I established the 50/50 allocation policy for assets I had not including pension, based on conversations with Vanguard. Later I began to wonder if my pension should count as part of the bond allocation, and that led me to post the question. I appreciate everyone's input!
Your allocation of the non-pension assets shouldn't change depending on whether you count your pension as a bond. If you do decide to count your pension as a bond, just make sure that you divide the non-pension assets 50-50 since that is the allocation that you decided on and is one that you are comfortable with. You would do the same if you decided to count your house as a bond or if you decided to count your mortgage as a negative bond. You can count them as anything you like, but make sure that your non-pension, non-house, non-mortage assets are allocated according to your plan, the plan you are comfortable with.

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Re: Can pension be counted as part of bond allocation?

Post by YDNAL » Fri Apr 15, 2011 9:13 am

D Paul wrote:
YDNAL wrote:
D Paul wrote:I'm retired and collecting a pension of $16,800 per year. My allocation goal is 50/50 equities/bonds.
Why :?:
I established the 50/50 allocation policy for assets I had not including pension, based on conversations with Vanguard. Later I began to wonder if my pension should count as part of the bond allocation, and that led me to post the question. I appreciate everyone's input!

D Paul
Thank you for your response.

IF you invest Non-Pension assets 50/50 Stocks/Bonds, it doesn't matter how you think of your Pension... does it?

Your question on the treatment in the overall portfolio of a Pension (asset) implies that you are willing to invest/risk 50% of ALL assets in Equities.
  1. Lets assume your Pension is 40% of ALL assets and counted as Bonds.
    50% Non-Pension Stocks -> represents 83% of 60% non-Pension
    10% Non-Pension Bonds -> represents 17% of 60% non-Pension
    40% Pension Bonds
  2. Is your ability and need for risk such that you should take 83% Equity risk in your non-Pension assets?
  3. In a severe market drop, are you willing to exchange 10% Non-Pension Bonds for Non-Pension Stocks?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Pension considered as bond

Post by cicero1s » Fri Apr 15, 2011 11:53 am

John Bogle states in his 1994 edition of "Bogle on Mutual Funds,"

"Retirement plan distributions should be regarded as similar to interest payments on a long-term bond." "As a result...you may wish to increase your equity holdings."

He doesn't say how much you may wish to increase it, only that the pension income allows you the option of increasing your stock holdings a little. It would certainly make me feel more comfortable increasing my stock %. But I don't have a pension so I don't have to worry about this.

However, I always point this out to any recent retiree I am advising. One of whom increased his stock allocation to 50% (from prior 40%) and another increased his stock % from 30% to 40%.

Of course, in the current environment risk is high in every direction, even pensions are risky.

I will keep you and all Bogleheads in my prayers!

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Post by Rick Ferri » Fri Apr 15, 2011 12:01 pm

I co-wrote an article with Craig Israelsen for Financial-Planning magazine about this question. See:

Is a Pension a Bond?
Unsure how to value a client's pension or social security? Use the liability reduction model.
By Craig L. Israelsen and Richard Ferri


The article was for financial planners, but it's fine for everyone.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Pension considered as bond

Post by YDNAL » Fri Apr 15, 2011 12:05 pm

cicero1s wrote:He (Bogle) doesn't say how much you may wish to increase it, only that the pension income allows you the option of increasing your stock holdings a little. It would certainly make me feel more comfortable increasing my stock %. But I don't have a pension so I don't have to worry about this.
Your AA (Stock/Bond) split should be determined by your ability and need for risk.
  • If you have the ability - whatever the reason - it doesn't necessarily mean that you have the need.
  • Feeling "comfortable" is subjective - more related to one's willingness to take risk (psychological).
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Post by tractorguy » Fri Apr 15, 2011 12:29 pm

I had an internal debate about this question last year when I was trying to decide if I could afford to retire. I have a very healthy fixed pension with a profitable and strong company but a long time horizon (I'm 58 & my wife is 55). As others have said, A lot can happen in 40 years to inflation, a pension, etc. I ended up with:
1) My pension isn't a bond but it does reduce my required withdrawal from my investments and the overall volatility of my portfolio. Because of this, I am comfortable allocating about 10% higher stocks than I would if I didn't have it. If the market really tanks in the next 5 years, I can still live well with a much diminished income stream from investments.
2) Because my pension isn't inflation indexed, if my expenses go up with inflation, my withdrawal from investments is going to go up at a rate significantly faster than inflation. This violates one of the primary assumptions of every Safe Withdrawal Rate study I've seen. So, my initial withdrawal rate from investments needs to be much lower than the commonly touted 4%. I'm trying to keep it in the 2-2.5% range but I'm not being obsessive about as long as the market is doing well. When it drops, I'll start watching my expenses a little more closely.
3) Also because my pension isn't indexed, I need to allocate more of my funds to an asset that is likely to grow faster than inflation than I would otherwise. Again this argues for a 60/40 stock/bond allocation rather than a 50/50 that I would target if I didn't have the pension.
Lorne

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Post by dbr » Fri Apr 15, 2011 12:42 pm

tweedlw wrote:I had an internal debate about this question last year when I was trying to decide if I could afford to retire. I have a very healthy fixed pension with a profitable and strong company but a long time horizon (I'm 58 & my wife is 55). As others have said, A lot can happen in 40 years to inflation, a pension, etc. I ended up with:
1) My pension isn't a bond but it does reduce my required withdrawal from my investments and the overall volatility of my portfolio. Because of this, I am comfortable allocating about 10% higher stocks than I would if I didn't have it. If the market really tanks in the next 5 years, I can still live well with a much diminished income stream from investments.
2) Because my pension isn't inflation indexed, if my expenses go up with inflation, my withdrawal from investments is going to go up at a rate significantly faster than inflation. This violates one of the primary assumptions of every Safe Withdrawal Rate study I've seen. So, my initial withdrawal rate from investments needs to be much lower than the commonly touted 4%. I'm trying to keep it in the 2-2.5% range but I'm not being obsessive about as long as the market is doing well. When it drops, I'll start watching my expenses a little more closely.
3) Also because my pension isn't indexed, I need to allocate more of my funds to an asset that is likely to grow faster than inflation than I would otherwise. Again this argues for a 60/40 stock/bond allocation rather than a 50/50 that I would target if I didn't have the pension.
The general philosophy of withdrawal rate studies has been implemented in any number of estimators that program your particular circumstances. These calculations inlclude such considerations as COLA'd and non-COLA'd annuities, when SS is elected, changes to portfolio, expense, or income profiles, and so on. Examples are i-ORP, FireCalc, the Fidelity planner, Analyze Now, and many others.

Estimators of that sort are subject to all the caveats and discussions that apply to SWR studies, but not to the objection that specific complications in arrangements are not considered.

SWR studies as such are not planning tools for retirement.

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Post by og15F1 » Fri Apr 15, 2011 8:34 pm

JimInIllinois wrote: When I see "pension" I think defined benefit retirement plan backed by a pool of assets managed by your employer or an insurance company. The only case where those assets are 100% treasury bonds is if the employer is Uncle Sam or if you have an insanely conservative manager running the pool. Adding a 20% allocation to stocks actually reduces volatility compared to an all-bond portfolio while increasing expected return.

If you actually have a defined contribution plan you likely have the option to invest in multiple asset classes, although the choices may not be great, and could use those funds to rebalance your portfolio.

So what exactly is this pension of yours?
Based on my limited research and understanding of the topic I am going to say it is a defined benefit retirement plan because I do not make contributions or have any option in how it's invested.

It may, in fact, not be entirely in bonds but basically the way it works is that the company contributes a "pay credit" every month that is 3% of my salary (increasing to 8% once I were to reach 50) and an "interest credit". The interest credit is "based on average 30 year US Treasury Bond yields. The interest rate will change each calendar year, but will not be less than the plan's minimum interest rate of 3.8%".

That's all I know about it. And I can roll it over if I leave. However they make their return behind the scenes is not revealed to us. But I assume it's weighted somehow towards bonds. Hence the question about considering it as a bond. Except I can't sell off any of it to rebalance when equities drop.

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D Paul
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Liability Reduction Model

Post by D Paul » Sat Apr 16, 2011 12:27 am

Rick Ferri wrote:I co-wrote an article with Craig Israelsen for Financial-Planning magazine about this question. See:

Is a Pension a Bond?
Unsure how to value a client's pension or social security? Use the liability reduction model.
By Craig L. Israelsen and Richard Ferri


The article was for financial planners, but it's fine for everyone.

Rick Ferri
Thanks, Rick. Very helpful to read this; I have a better understanding of what many others were saying.

larmewar
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Private Pension

Post by larmewar » Sat Apr 16, 2011 12:51 am

If you have a pension (or annuity) from the private sector, the pension (or insurance company) pays you monthly. Your pension is backed by the pension fund's investments, probably a mix of stocks, bonds, real estate and maybe other assets. The value of the pension fund investments will go up or down according to market conditions. You don't benefit from increases in value and you also don't assume the risk of drops in value. The pension fund owns the investments, so you really shouldn't count the teh pension as part of your investment protfolio.

Lar

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Post by Dandy » Sat Apr 16, 2011 8:28 am

In theory yes. But as has been pointed out it usually results in a very agressive equity allocation especially for those in retirement. I count the pension and social security as income and allocate my retirement assets without considering them.

The pension allows you to take more risk but doesn't require you to. Also, consider that most pensions are reduced by half for the surviving spouse. That would upset the target allocation and require a portfolio adjustement. I already have concerns about my wife managing our investments without the need for her to make adjustments.

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Post by dbr » Sat Apr 16, 2011 9:13 am

og15F1 wrote: Based on my limited research and understanding of the topic I am going to say it is a defined benefit retirement plan because I do not make contributions or have any option in how it's invested.
Defined benefit means that the benefit is defined not the contribution, no matter who is making it. The question for you is what are the terms by which the pension is paid out to you, whether as an annuity or as a lump sum.

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Post by magellan » Sat Apr 16, 2011 9:24 am

IMO, the focus should be on the overall riskiness of your combined retirement income sources. In a sense, this is like a "meta" portfolio allocation problem.

Instead of focusing on just stocks vs bonds, focus on the optimal blend of retirement income sources in your "retirement income" portfolio. What percent of needed retirement income will come from SS vs pensions vs TIPS vs annuities vs real estate vs other risky assets?

Sure, just like choosing an investment asset allocation, this is a tough problem and there are no hard answers. Still, at least with this approach you can optimize the risk at the correct level. When you think about it this way, the choice between a 30 percent or 50 percent bond allocation for the investment part of your retirement income portfolio may be inconsequential.

Jim

Edit: tried to sneak in some rewording on the last sentence. Man, dbr is fast :oops:
See dbr quote below for original.
Last edited by magellan on Sat Apr 16, 2011 9:30 am, edited 2 times in total.

dbr
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Post by dbr » Sat Apr 16, 2011 9:26 am

magellan wrote:IMO, the focus should be on the overall riskiness of your combined retirement income sources. In a sense, this is like a "meta" portfolio allocation problem.

Instead of focusing on just stocks vs bonds, focus on the optimal blend of retirement income sources in your "retirement income" portfolio. What percent of needed retirement income will come from SS vs pensions vs TIPS vs annuities vs real estate vs other risky assets?

Sure, just like choosing an investment asset allocation, this is a tough problem and there are no hard answers. Still, at least with this approach you can optimize the risk at the correct level. When you think about it this way, deciding between a 30 percent or 50 percent bond allocation for the investment part of your retirement income portfolio almost seems inconsequential.

Jim
This is a very important point.

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D Paul
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Thanks again!

Post by D Paul » Mon Apr 18, 2011 10:45 am

Thanks again everyone for the informative and spirited input!!

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og15F1
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Post by og15F1 » Mon Apr 18, 2011 7:59 pm

dbr wrote: Defined benefit means that the benefit is defined not the contribution, no matter who is making it. The question for you is what are the terms by which the pension is paid out to you, whether as an annuity or as a lump sum.
It would be paid as an annuity - assuming I stick around until retirement. I cannot presently imagine that happening. Which brings me to this:
larmewar wrote: You don't benefit from increases in value and you also don't assume the risk of drops in value. The pension fund owns the investments, so you really shouldn't count the teh pension as part of your investment protfolio.
It would appear that if I leave the company I can take the vested portion (all of it) with me and roll it over, etc. In that case, I am concerned about the value of the investments. If I were (or were not) considering it as a bond then, upon rollover, I could allocate it accordingly.

dbr
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Post by dbr » Mon Apr 18, 2011 8:37 pm

og15F1 wrote:
dbr wrote: Defined benefit means that the benefit is defined not the contribution, no matter who is making it. The question for you is what are the terms by which the pension is paid out to you, whether as an annuity or as a lump sum.
It would be paid as an annuity - assuming I stick around until retirement. I cannot presently imagine that happening. Which brings me to this:
larmewar wrote: You don't benefit from increases in value and you also don't assume the risk of drops in value. The pension fund owns the investments, so you really shouldn't count the teh pension as part of your investment protfolio.
It would appear that if I leave the company I can take the vested portion (all of it) with me and roll it over, etc. In that case, I am concerned about the value of the investments. If I were (or were not) considering it as a bond then, upon rollover, I could allocate it accordingly.
You should be sure how this works. A more conventional form of taking a pension which might be taken as an annuity as a lump sum instead is to capitalize the income stream using a discount rate, usually one mandated by formulas in law. This would have nothing to do with the investment results of the company underwriting the pension.

However, I am certainly not an expert on the various arrangements any particular employer might have in place. I would just be sure to understand clearly what the actual terms are.

If you do end up in the conventional lump sum situation you would not count the investment as bond now, but you would need to run a retirement model which instead of an income stream in the model would have the appearance of additional assets at the time of retirement. Those assets could be invested in any manner after retirement, but up to retirement possibly do look a little like a bond coming due, a bond that is completely illiquid up to then. However, unlike a real bond there is uncertainty regarding both the amount and even if you will get much of it. For example, you could leave your job many years short of retirement.

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