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Should Social Security (and pensions) be considered an asset and factored into a retiree’s investment allocation?
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Should Social Security (and pensions) be considered an asset and factored into a retiree’s investment allocation?

Well yes, unless you are going to decline Social Security. The question is how factor it in.

My belief is the dominate rule should be attempt to avoid the dreaded Buy High Sell Low trap.

We keep enough Cash equivalents and other income (Social security income, Bond fund dividends) that we can go for two years without selling any equity holdings (all our portfolio is mutual funds).

Our last paycheck was dated April 30, 2008 - at which time we had a 15 to 18 month cash reserve plan. The great recession convinced me to extend the cash to 24 months.

During 2008, unlike lots of "experts" I was not able to see July as the start of the mess. Similarly I was not able to see in the middle of March the bottom had been reached. But with 20/20 hindsight I can see both our portfolio and the S&P 500 had recovered to a breakeven value about December 2010.
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Should Social Security (and pensions) be considered an asset and factored into a retiree’s investment allocation?

I keep a spread sheet of our assets, which I update a few times a month. Essentially all mutual funds. At the bottom, I add all the data to compute a total. Below that I calculate the "present value" of our Social Security and what's left of my pension. (I took a 15 year payout which expires when my wife turns 62.) I use 5% as the interest rate, and make a SCWAG for the term of my SS. (How long will I live?)

CNC
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SCWAG - Scientifically Calculated Wild Assed Guess?
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Should Social Security (and pensions) be considered an asset and factored into a retiree’s investment allocation?

No, they are "guaranteed" income streams. The difference between the annual "guaranteed" income streams and your annual, inflation adjusted expenses defines the annual, inflation adjusted income that must be generated by your investments over your life span.

I have one traditional IRA account that has an allocation of 70% equities and 30% fixed income but my over all my investment accounts the allocation is 90% equities and 10% fixed income. I might be too concerned about coming up short 30 years from now. :-\
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"Should Social Security (and pensions) be considered an asset and factored into a retiree’s investment allocation?"

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Some folks talk about their Social Security and pension as a substitute for a
bond - fixed income - and then use that portion of the income to represent a
bond payout - most talk about using current treasury yields as a basis to convert
the income stream to a nominal "bond principal" equivalent.

Frankly, I do not know what this accomplishes for an investor - other than keeping a fellow
busy doing calculations and avoiding doing actual harm.

Howie52
If you are worried about portfolio risk, I suspect you really need to look at the investment portfolio.
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It appears that opinions differ.
I don't think they are assets until you have been paid your monthly or whatever amount.
Instead I think you consider them to be future income which is applied to future expenses which may affect you asset allocation considerations.
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I keep a spread sheet of our assets, which I update a few times a month. Essentially all mutual funds. At the bottom, I add all the data to compute a total. Below that I calculate the "present value" of our Social Security and what's left of my pension. (I took a 15 year payout which expires when my wife turns 62.) I use 5% as the interest rate, and make a SCWAG for the term of my SS. (How long will I live?)


That’s kind of like what I do. I keep a spreadsheet of my assets, etc. and it auto calculates my yearly and monthly income at retirement given my anticipated SS amount, pension payment, and planned distributions from retirement $$ (4%).
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Seems like you'd just subtract out pensions, social security from your income needs and the allocate the rest of the money however you prefer (i.e, 60/40, etc.).

Like the other poster, I'm not sure why people worry about stuff like this but I guess there are worse things to do.

Rich
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Should Social Security (and pensions) be considered an asset and factored into a retiree’s investment allocation?

Michael Kitces has a nice article on valuing SS on the household balance sheet:

https://www.kitces.com/blog/valuing-social-security-benefits...

If you use i-Orp (https://www.i-orp.com/LumpSum/index.html) or Personal Capital (https://www.personalcapital.com/) to run some calculations where you plug in all of your data, including your expected SS and when you will take it, you can at least get an idea of how much you will need from your risk portfolio as an annual withdrawal to meet your expenses/needs over and beyond your other income streams (SS, pension, rental income, dividends, etc...) for the gap years leading up to SS, as well as once SS begins.

Think of it more as an income stream along with the other possible legs of your income stream:

(examples)

•Pension Income
•Social Security Income
•Dividend Income
•Rental Income
•Part-time work/consulting Income
•Selling assets from risk portfolio Income

Depending on your various streams of income, and your goals for your wealth - you may or may not want to choose a particular asset allocation that will help you meet those needs/goals. For example, if you would receive enough of an income stream from SS and Pension alone to cover all of your expenses/needs, you may be able to be more aggressive with your asset allocation.
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For example, if you would receive enough of an income stream from SS and Pension alone to cover all of your expenses/needs, you may be able to be more aggressive with your asset allocation.

It wouldn't even have to cover all expenses, just a significant portion. If you need 4% of your portfolio (excluding any calculation of NPV for SS) for income, but SS and/or pension provides income equal 1.5% of your portfolio, managing the portfolio to last 30 years or longer becomes a whole lot easier.
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Instead I think you consider them to be future income which is applied to future expenses which may affect you asset allocation considerations.

I think I am in the same camp as CABob. I treat my future SS the same as I consider my paycheck today. It's income. It belongs on the income & expense sheet, not the balance sheet.

Gup
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It wouldn't even have to cover all expenses, just a significant portion. If you need 4% of your portfolio (excluding any calculation of NPV for SS) for income, but SS and/or pension provides income equal 1.5% of your portfolio, managing the portfolio to last 30 years or longer becomes a whole lot easier.

Exactly!

To be honest, I was thinking in the back of my mind as I typed the previous post you responded to of a particular goal my wife and I have, but failed to mention when I made the comment:

For example, if you would receive enough of an income stream from SS and Pension alone to cover all of your expenses/needs, you may be able to be more aggressive with your asset allocation.

The goal I was thinking of when I typed the comment "may be able to be more aggressive with your asset allocation" if SS and pension alone provided a large portion of one's income stream was setting an allocation that both provided additional needs for us as well as was able to grow enough to leave something to our heirs. That's not a goal everyone shares, so I didn't type it. However, I thought I should mention it just to qualify my comment when thinking about SS (and or pension) as income streams in retirement and how they may or may not impact one's asset allocation choices. I imagine if we did not have a goal of transfer remaining assets to heirs, and our target was instead to deplete our risk portfolio by "the end", it would indeed change our AA.

If you prepare a detailed cash flow table (or have i-Orp or PC do it for you) that includes all of the income events coming up in retirement (when SS starts and how much, when pension starts and how much, etc...) as well as how much is needed to be withdrawn from the risk portfolio to meet the retirement spending needs/desires - then once the percentage of the portfolio that is projected to be needed becomes better known, it would indeed be easier to manage for the longer term - as well as to manage in terms of setting an asset allocation that helps get you there, remain there, and cover the expected years.

i-Orp has already built into the detailed cash flow calculations the premise of projected cuts in SS benefits beginning in 2034 which helps one focus a bit better on other sources of income due to that inclusion. I haven't looked closely enough at PC or FIRECalc to see if they also allow one to factor in expected cuts in benefits. I try to remain more on the conservative or moderate side when I run any of those calculations

Obviously, financial life remains fluid which means there will continue to be tweaks in a cash flow table for all of us based on portfolio value, changes in SS benefits, changes in other streams of income, etc.... . That means the detailed cash flow table should indeed be updated if and when any changes become known.

This household is still - in our minds - about five years to a decade--ish out from what one would call a traditional retirement, but fully expect there to be bumps, surprises, adaptations, and changes in assumptions along the way between now and then. The first bump/change/surprise already occurred earlier this year with employment layoff and the resulting job change which immediately skewed the previously detailed cash flow calculation that I had set up and led to me running through a variety of scenarios. I would imagine those in retirement would be able to answer more from experience if the bumps/changes/surprises continue in retirement as much as they do in the decade leading up to it.

That being said, the OP who asked about factoring in SS when it comes to asset allocation has heard from enough of us now to at least mull a few things over.

BB
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CountNoCount wrote How long will I live?

Few of us really know the answer. But we can look at our health - Are we overweight? Do we smoke? Do we exercise more or less than other folks our age? How long did our parents live? Do you eat a balanced diet?

With that information identify a quartile. Are we average? (50th percentile) or 75th percentile or 25th percentile?

Next go to: https://goo.gl/FQlwza

and look up you age and sex. Those life expediencies are averages - the 50th percentile.

I am a male, 77 and figure I am at the 75th percentile. The table says for age 77 average expectancy is 9.9 years, Add 9.9 to 77 and you get about 87. Look at the table for age 87 & male and the number is 5 years. So for planning purposes, I say there is 50% chance I will live to age 93.
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It wouldn't even have to cover all expenses, just a significant portion. If you need 4% of your portfolio (excluding any calculation of NPV for SS) for income, but SS and/or pension provides income equal 1.5% of your portfolio, managing the portfolio to last 30 years or longer becomes a whole lot easier.

Yes, but you have the order wrong.

1st: SS & pension provides a portion of your income requirements.
2nd: The balance is provided by 4% (or lower or whatever) SWR withdrawal.

An outside source of income lowers the dollar amount that you need to withdraw from your investments.
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"For example, if you would receive enough of an income stream from SS and Pension alone to cover all of your expenses/needs, you may be able to be more aggressive with your asset allocation."

The goal I was thinking of when I typed the comment "may be able to be more aggressive with your asset allocation" if SS and pension alone provided a large portion of one's income stream was setting an allocation that both provided additional needs for us as well as was able to grow enough to leave something to our heirs.


The reason for having bonds in your asset allocation is to reduce volatility. The problem with volatility in your withdrawal phase is that in down times your portfolio balance gets hit with both percentage reduction due to bear market and absolute reduction due to withdrawal of fixed dollar amount. The withdrawal forces you to convert unrealized losses to realized losses.

Bonds reduce volatility but also reduce return.

If you have enough income, then the volatility does no harm (because you don't have to realize the losses by withdrawing money), therefore there is no particular reason or benefit to reduce your volatility, therefore no particular reason to have a high bond allocation.

For all intents and purposes, you are still in accumulation phase, and not in decumulation.
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