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http://www.dallasnews.com/business/scottburns/columns/2003/stories/102603dnbusburns.50a9e.html

First, look at all of your assets. The most important thing is asset allocation – how much is in equity and how much is in bonds.

"Think about everything, not just your investment program. That means think about Social Security. If you're fortunate, it can be $25,000 a year. It's great money. When you do your asset allocation, you want to include that. At 5 percent, that $25,000 is like having $500,000 [in assets]. As a life income, it's more like $350,000. That should be part of your calculation."

Suppose, for example, that your Social Security income is $17,000 a year – a typical figure for a couple – and your 401(k) rollover account and other financial assets are $400,000. Then you start your asset allocation with a conservative value for your Social Security at 14 times the income, or $238,000. Added to your $400,000 in savings, this means you have the equivalent of $638,000. In effect, 38 percent of it is already allocated to a bond equivalent.

"Don't count your house as long as you are going to live in it," Mr. Bogle said.

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intercst

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No. of Recommendations: 5
This is a great quote to parents, by a great man:

"I use the Buffett Rule – leave them enough money so they can do whatever they want but not enough so they can do nothing."

Invaluable

Gary
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"Suppose, for example, that your Social Security income is $17,000 a year – a typical figure for a couple – and your 401(k) rollover account and other financial assets are $400,000. Then you start your asset allocation with a conservative value for your Social Security at 14 times the income, or $238,000. Added to your $400,000 in savings, this means you have the equivalent of $638,000. In effect, 38 percent of it is already allocated to a bond equivalent."


I've read many articles on asset allocation but I've never seen one before that considered the asset value of SS in the mix. Is anyone actually doing this? If I'm evaluating my portfolio for it's ability to supplement my pension/social security income, do I really want to include the asset value of pension/social security in the calculation? Seems like that would automatically push me into excessive equity exposure in my portfolio. Or am I thinking wrong on this?

Bill
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I've read many articles on asset allocation but I've never seen one before that considered the asset value of SS in the mix. Is anyone actually doing this? If I'm evaluating my portfolio for it's ability to supplement my pension/social security income, do I really want to include the asset value of pension/social security in the calculation? Seems like that would automatically push me into excessive equity exposure in my portfolio. Or am I thinking wrong on this?

No. Because of what a joke SS is, and the fact that the politicians like playing with it so much, we are not even accounting for it. We'll treat it as "found money" if and when either of us get it.
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FWIW, I agree with zsimpson. SS is a joke. My wife and I have never used it as a factor in our thinking/planning. Except that I intend to jump at whatever SS there is for me as soon as I hit 62...before it gets jiggered/means-tested away.

I respect Bogle greatly, but I'm not on board with his latest in this case. I prefer to stay on the more conservative side of the scale.
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FWIW, I agree with zsimpson. SS is a joke. My wife and I have never used it as a factor in our thinking/planning. Except that I intend to jump at whatever SS there is for me as soon as I hit 62...before it gets jiggered/means-tested away.

Hubby said the same thing - if it's there. Hubby will not be eligible for about another 8 years. A lot can happen in 8 years. Look at the past 8 years.
That's at least two presidencies, and a bunch of turn-overs in the two houses. I won't be eligible for a bunch of years later than that. We aren't counting on anything from them.
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I disagree with most of the responses to your post. For probably 80% of Americans SS is/will be the single most important source of income and you'd be remiss not to include it in your financial plan. Factoring SS into one's asset allocation is common practice.

On the other hand, if you've got $4MM saved and are planning on retiring on the income stream from that, SS becomes less important. I can also see how those many years from retirement would question the future solvency of the agency. However if you're that young you should be in stocks anyway.

>>Seems like that would automatically push me into excessive equity exposure in my portfolio

Excessive is a matter of opinion...you may have been underexposed before. Even at retirement, most of your retirement funds will be around for 20 years, or even much longer if they're passed to your heirs.

Nick
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I disagree with most of the responses to your post. For probably 80% of Americans SS is/will be the single most important source of income and you'd be remiss not to include it in your financial plan. Factoring SS into one's asset allocation is common practice.

I find it very hard to believe that anyone that cares enough about their retirement to be on a "Retirement Investing" board is going to have SS as the single most important source of income.

On the other hand, if you've got $4MM saved and are planning on retiring on the income stream from that, SS becomes less important.

4M?? Wow! You plan on seriously partying during retirement. I think that's a very inflated number.

I can also see how those many years from retirement would question the future solvency of the agency. However if you're that young you should be in stocks anyway.

Isn't that what I said earlier?
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I disagree with most of the responses to your post. For probably 80% of Americans SS is/will be the single most important source of income and you'd be remiss not to include it in your financial plan. Factoring SS into one's asset allocation is common practice.

We will likely receive some Social Security benefits, but I think benefit levels are very likely to be reduced. To what level? I have no idea. I just know that Congress loves to expand spending programs but not eliminate them.

Personally, I don't want to have my retirement standard of living dictated by a politician. I am ignoring Social Security and treating anything that I might receive as an added bonus.
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I just know that Congress loves to expand spending programs but not eliminate them.

And by this I mean that Congress will have to reduce spending and increase taxes down the road. All this pork will catch up to us, especially when the crushing burden of the prescription plan that they want to buy retirees' votes with takes effect.
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Thanks for the replies. One other thing I'll add which makes me reluctant to count too heavily on SS.

When I began working in late 60's it was assumed that retirement was a 3-legged stool -- Social Security, Pension, Savings. The first two combined would give you enough income to survive in retirement. The latter would give you the extra to live well.

I agree with those who say SS will continue to provide some income into the future though the amount is difficult to predict, especially for people many years from retirement. But let me share my experience with pensions. After changing jobs a few times early in my career I found a company I liked and worked for them for 24 years. At age 52 they decided my job and I were expendable. Too old for the new early 40's management team and too young for an early out program they offered the previous year, I found myself unemployed. (Not all bad because I was able to completely change my career path and do something I really enjoyed for the next few years.) But the joke was the pension from my old company. It was a defined benefit plan which I didn't have to contribute to. Annual benefit statements painted a picture of a happy retirement on over $2K/month. Early retirement would reduce it about 20%. But because I left the company at 52 I discovered when I took the pension at age 55 that I would get less than $600/month. What a joke! I took a lump sum instead and hope to earn more over time than $600/month plus still have the orginal investment. But it shows how dangerous relying on promises of something in the future can be. BTW, I had taken full advantage of the company's 401k plus individual IRA so no need to have a fund raiser for me, although any donations will be appreciated.

Bill
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I agree with those who say SS will continue to provide some income into the future though the amount is difficult to predict, especially for people many years from retirement. But let me share my experience with pensions. After changing jobs a few times early in my career I found a company I liked and worked for them for 24 years. At age 52 they decided my job and I were expendable. Too old for the new early 40's management team and too young for an early out program they offered the previous year, I found myself unemployed. (Not all bad because I was able to completely change my career path and do something I really enjoyed for the next few years.) But the joke was the pension from my old company. It was a defined benefit plan which I didn't have to contribute to. Annual benefit statements painted a picture of a happy retirement on over $2K/month. Early retirement would reduce it about 20%. But because I left the company at 52 I discovered when I took the pension at age 55 that I would get less than $600/month. What a joke! I took a lump sum instead and hope to earn more over time than $600/month plus still have the orginal investment. But it shows how dangerous relying on promises of something in the future can be. BTW, I had taken full advantage of the company's 401k plus individual IRA so no need to have a fund raiser for me, although any donations will be appreciated.

When Hubby retired last year, we had already watched the stock in the company drop close to $50 a share. We figured if they could screw up the stock that much, we certainly didn't want them handling the pension, and opted for the lump sum. The company we went with to manage the funds has been great. I keep telling Hubby they are getting a wonderful Xmas present from us (even though they already did from the percentages they take).
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I have several reasons for disagreeing with Jack Bogle on this:

1. One has to be able stomache the volatility of one's portfolio. If I were to consider SS and the "guaranteed" part of pension as a bond component, I would have to be 100% equities, and the market volatility is just too steep for me to handle 100% stock market exposure for funds that I can control.

2. I am only 12 years away from when I can start collecting SS. I wouldn't be at all surprised if SS becomes means tested, 100% taxable, or otherwise reduced in value. So any projections I see have to be with the understanding that it is subject to change by the elected officials.

3. My pension is likewise under control of politicians, this time at the state level. In the past six months they have passed laws that cut my projected pension benefits in half. So, whereas I was planning on a nice, comfortable retirement with lots of money for taking trips, I will have to change my plans. If this was part of my asset allocation, the last six months would be a sudden change.

4. SS and pension don't allow me to buy more of them if my equities portion has gone up, or to sell some SS & pension if the equities have gone down so I can buy more equities, so it fails as a means of rebalancing.

What I do is consider my pension as a reduction of the the amount I need from my investments, and thus the ability to invest more aggressively than if I didn't have it. But I don't take it as a license to invest 100% in equities this close to retirement.
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Author: intercst Date: 10/25/03 8:52 PM Number: 37579

"Think about everything, not just your investment program. That means think about Social Security. If you're fortunate, it can be $25,000 a year. It's great money. When you do your asset allocation, you want to include that. At 5 percent, that $25,000 is like having $500,000 [in assets]. As a life income, it's more like $350,000. That should be part of your calculation."

This is precisely the approach I have taken. I am 56, retired, and planning to take SS as early as possible. For many of us SS is/will be a significant portion of our income. There is no way we can ignore it as some of the other posts have suggested.

If we, in this situation, don't consider SS income as a proxy for bond income in our overall asset allocation, then we risk becoming too conservative in our other investments. And, we all know that being too conservative historically reduces portfolio growth and survivability, which could cause us to run out of money in our latter years.

On the other hand, for a younger person with plenty of time, I think it makes a lot of sense to plan for a retirement that does not depend on SS just in case it is reduced or 'means tested' away.

Russ
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