How to count pension cash value in asset allocation

[dragoncar]

My wife has a pension with cash-value that pays around 6% annually (think CALPERS).  Unless something really unexpected happens, she would never take the annuity option (no COLA so the payout in 30-40 years will be terrible compared to the cash value).  Although the 6% isn't guaranteed not to drop, it probably won't (it stayed at 6% during the ZIRP times), and if it does she can roll it over to an IRA.

So right now she has something like a pinwheel portfolio (https://portfoliocharts.com/portfolio/pinwheel-portfolio/).  But I haven't been implementing the cash or bonds portion because this pension seems very bond-like to me and is around 20% of her investable assets.  I know it's not really a bond; it won't increase in market value if stocks tank or interest rates are lowered.  But based on yield alone, it seems to be worth 3x a 30-year treasury.

Any ideas how this asset could be modeled from a SWR perspective?  If I model it as cash, the model will severely underperform reality.  Perhaps I could model it as 3x cash?  Or 3x bonds?  Or nothing and just count it against expenses at 4% WR?

[arebelspy]

Or nothing and just count it against expenses at 4% WR?

Bingo.

Don't overthink it.

Just subtract it from her expenses, and calculate the rest of her expenses versus the rest of her portfolio.

[hadabeardonce]

I know co-workers who treat their CalPERS benefits like a fixed annuity then invest their 403b/457 money 100% in equities(stock index funds). Most look at the pension money as guaranteed, so they work for 30 years, retire at age 63, and they get 75% of their final compensation in retirement. That's pretty much equal to their take home pay(after you subtract deductions), then you add in Social Security and they are bringing home more in retirement than while they were working. Any investment returns are icing on the cake.

If you're going to take the cash value option can't you roll the pension over into a IRA?

[DeniseNJ]

Or nothing and just count it against expenses at 4% WR?

Bingo.

Don't overthink it.

Just subtract it from her expenses, and calculate the rest of her expenses versus the rest of her portfolio.

So you just consider it income, calc what you still need for expenses, and do a 60/40 for the balance?  This doesn't seem aggressive enough to me.  Others aren't investing their needed income to cover expenses in bonds and the remainder in stock.  Or do you but away two years expenses in bonds or cash and somehow allocate the rest, so you don't have to sell if the market slumps or tanks?  From what I understand, many have all of thier assets going into RE as 60/40 stocks to bonds.  Do you withdraw from the bonds in a bad market or in proportion of your AA?

Not to hijack thread, but DH and I have pensions and are 9 yrs from RE so we put everything in total stock, since the pension seems like safe "bond" money.

[arebelspy]

I wasn't commenting on how it should affect your AA (I view it more akin to a bond or more secure), but merely on how to model it.

I wouldn't put it in as a bond for modeling purposes. You can't rebalance out of it. I'd put it in as income (or subtracted expenses).

Asset allocation takes a lot more into account, especially risk tolerance.

Someone can view it as a bond and go 100% equities in their paper assets, and that's all well and good, if they can handle the swings at the next crash and stick with that AA, rather than deciding at that time they need bonds for a smoother ride, and sell low.

[dragoncar]

I know co-workers who treat their CalPERS benefits like a fixed annuity then invest their 403b/457 money 100% in equities(stock index funds). Most look at the pension money as guaranteed, so they work for 30 years, retire at age 63, and they get 75% of their final compensation in retirement. That's pretty much equal to their take home pay(after you subtract deductions), then you add in Social Security and they are bringing home more in retirement than while they were working. Any investment returns are icing on the cake.

If you're going to take the cash value option can't you roll the pension over into a IRA?

Yeah I’m currently counting it as bond/cash so don’t hold other bonds cash as part of AA.  Good to hear I’m not crazy on that front

We can roll it to an IRA but a 6% guaranteed interest rate is too good to pass up.  If they lower the rate in the future, or don’t increase it during high inflation, the option to roll over is always there.  But it’s almost impossible to put the worms BACK in the 6% can.

Yes I know 6% is less than 8% or whatever expected return of the stock market, but there’s no volatility

There’s some insolvency risk but I consider it negligible