Author Topic: Should workers with a pension adopt a more aggressive investing strategy?  (Read 4750 times)

missj

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I just turned 34 and I have a company pension that I am already 100% vested in.  obviously, the value of my pension goes up every year that I work, but I'm already guaranteed to get at least SOMETHING once I retire (provided the US federal government keeps protecting and guaranteeing private pensions.)

Which brings me to my question.  since a portion of my retirement plan is essentially "locked up" does that mean I can afford to be more risky with my personal retirement savings?

I am currently invested in about 71% stock and 29% bonds.

The majority of my holdings are in these 2 funds: VITPX (Vanguard Institutional Total Stock Market Index Fund Institutional Plus Shares)
and 29% VBMPX (Vanguard Total Bond Market Index Fund Institutional Plus Shares)  but I do have a small amount of my portfolio (about 4%) in a balanced fund: Vanguard Wellington Fund Admiral Shares (VWENX)

If I was to adopt a more aggressive strategy...what would that look like?  simply a higher % of VITPX....or something else entirely?

forummm

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I'm guessing the amount of pension you have is pretty small in net present value terms. Impossible for me to know without any info beyond your age. But it could be on the order of $10k or something like that.

One reason why people recommend holding bonds in your portfolio is that a lot of people feel terrible and panic and sell when the market crashes (which it will--quite a few times before you hit pension age). How will you react if you're 100% stocks and the market drops 60%?

missj

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I'm guessing the amount of pension you have is pretty small in net present value terms. Impossible for me to know without any info beyond your age. But it could be on the order of $10k or something like that.

One reason why people recommend holding bonds in your portfolio is that a lot of people feel terrible and panic and sell when the market crashes (which it will--quite a few times before you hit pension age). How will you react if you're 100% stocks and the market drops 60%?

I don't know how to put a lump sum dollar amount on my pension,  but I know if I quit now then once I hit 65 I would get $521 per month in today's dollars.  Compare that with $4,500 per month if I worked full time until age 65.

And I am planning on working here until i retire...which is hopefully at age 51 (minimum to retire with healthcare benefits from my company).  I have excellent job security in a union position...but ya never know what could happen between now and then.
« Last Edit: July 27, 2015, 05:10:05 PM by missj »

MDM

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Which brings me to my question.  since a portion of my retirement plan is essentially "locked up" does that mean I can afford to be more risky with my personal retirement savings?
Two roughly opposite strategies are both defensible:
1) Be more aggressive because you can tolerate more losses due to the pension
2) Be less aggressive because you don't need high returns due to the pension.

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If I was to adopt a more aggressive strategy...what would that look like?  simply a higher % of VITPX....or something else entirely?
Roughly an infinite number of options.  More VITPX is a reasonable one.  You might also consider international stocks.

deborah

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It depends a little upon your pension.

Your pension covers a large percentage of your day to day expenses and is indexed to inflation - you don't really need your stash, so you can do whatever you wish with it - even keep it under the bed - as it will probably last all your life.

Your pension covers a large percentage of your day to day expenses but is not indexed to inflation - you will need your stash in later years - grow it aggressively so it is larger when you will need it and don't look at how big or small it is at any stage.

Your pension covers about half of your day to day expenses. You need your stash all the time, but you can afford to be more aggressive than most with your stash because you can tolerate some losses due to the pension. You can also afford not to be as aggressive as other ERs with your stash investing because of your pension.

Your pension is minimal. Do the normal thing with your stash.

forummm

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I'm guessing the amount of pension you have is pretty small in net present value terms. Impossible for me to know without any info beyond your age. But it could be on the order of $10k or something like that.

One reason why people recommend holding bonds in your portfolio is that a lot of people feel terrible and panic and sell when the market crashes (which it will--quite a few times before you hit pension age). How will you react if you're 100% stocks and the market drops 60%?

I don't know how to put a lump sum dollar amount on my pension,  but I know if I quit now then once I hit 65 I would get $521 per month in today's dollars.  Compare that with $4,500 per month if I worked full time until age 65.

And I am planning on working here until i retire...which is hopefully at age 51 (minimum to retire with healthcare benefits from my company).  I have excellent job security in a union position...but ya never know what could happen between now and then.

The cash value of your pension today is probably around $10k--perhaps a few grand more. If you had $10k and put it in the market you'd expect it to grow in real terms to around $90k (today's dollars) by the time you hit 65. And $90k is about the amount that would provide $521/mo (adjusted for inflation) for life for someone of that age.

beltim

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Why did you use a 7% withdrawal rate?

forummm

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Why did you use a 7% withdrawal rate?

I was using 6% but did some rounding for simplicity. Someone 65 on average probably lives about 20 years. Just a quick back of the envelope.

beltim

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Why did you use a 7% withdrawal rate?

I was using 6% but did some rounding for simplicity. Someone 65 on average probably lives about 20 years. Just a quick back of the envelope.

521*12 = 6252
6252/90000 = 0.0695
Right?

In any case, why wouldn't you use 4%?  You want to calculate the value of the pension to the OP, not the cost to the company.  It would take something like 25x expenses to provide the same likelihood of providing that amount to the OP as a pension.

lostamonkey

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The best way to calculate the present value of a pension is to find the current cost of an annuity that will provide the same payout as the pension then discount it by the number of years till the payments begin. I do not feel like doing the actual math.

lostamonkey

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Why did you use a 7% withdrawal rate?

I was using 6% but did some rounding for simplicity. Someone 65 on average probably lives about 20 years. Just a quick back of the envelope.

521*12 = 6252
6252/90000 = 0.0695
Right?

In any case, why wouldn't you use 4%?  You want to calculate the value of the pension to the OP, not the cost to the company.  It would take something like 25x expenses to provide the same likelihood of providing that amount to the OP as a pension.

A big difference here is if you have 25x in pretax investments when you are 65, you will likely leave a very large inheritance (and a very small chance you go broke). If you have a pension, you will leave no inheritance but you have no chance of going broke.

chasesfish

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I am in a similar situation.  I don't think it changes your investment strategy, but should allow you to tick up your withdraw rate.  If I were to pull the plug and stop working, I'd use a 5% withdrawl rate instead of a 4%. 

I would be looking at 21 years before I can start the early withdraw option in my pension. Its worth about $1,000/mo in future dollars and the number grows nicely for each year I keep working.

Check out our journal, counting down the days until I Stop Ironing Shirts

We hit $1mil by 33 and will retire at 36!  Stop by over at my site Stop Ironing Shirts

forummm

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Why did you use a 7% withdrawal rate?

I was using 6% but did some rounding for simplicity. Someone 65 on average probably lives about 20 years. Just a quick back of the envelope.

521*12 = 6252
6252/90000 = 0.0695
Right?

In any case, why wouldn't you use 4%?  You want to calculate the value of the pension to the OP, not the cost to the company.  It would take something like 25x expenses to provide the same likelihood of providing that amount to the OP as a pension.

I was approximating:

The best way to calculate the present value of a pension is to find the current cost of an annuity that will provide the same payout as the pension then discount it by the number of years till the payments begin. I do not feel like doing the actual math.

But without looking up annuity quotes. Any current annuity quote is likely far overstate the cost of an annuity of that kind given the historically low interest rates.

The point is not to get an exact estimate. The point is to let the OP know that the value of her pension is on the order of $10k (plus maybe a few grand more), and not on the order of say $100k. This approximation of the value of the pension can put into perspective how much, if any, should be shifted. The point is that a $10k valued pension wouldn't cause me to shift my portfolio AA.

Rural

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I do look at our pensions as the bond portion of our investments (so our investments are 100% equities), but I'm not planning on a higher withdrawal rate, largely because we are close to the age when we can collect already. Ours are very stable government pensions, and we each have one. They don't adjust for inflation until we start collecting, but after that they do.


His doesn't include health insurance, but mine will cover both of us if I work until the age I can collect, so I likely will. Odds are I'll need to, anyway, plus I like my job and have a great deal of  schedule flexibility (college professor).

beltim

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I was approximating:

The best way to calculate the present value of a pension is to find the current cost of an annuity that will provide the same payout as the pension then discount it by the number of years till the payments begin. I do not feel like doing the actual math.

But without looking up annuity quotes. Any current annuity quote is likely far overstate the cost of an annuity of that kind given the historically low interest rates.

The point is not to get an exact estimate. The point is to let the OP know that the value of her pension is on the order of $10k (plus maybe a few grand more), and not on the order of say $100k. This approximation of the value of the pension can put into perspective how much, if any, should be shifted. The point is that a $10k valued pension wouldn't cause me to shift my portfolio AA.

Oh, got it.  Yes, that makes sense. Thanks!

Scandium

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I'm your age and plan to retire about same timeframe. Pension or not, why do you have any bonds at all at this point? I see no reason to. Maybe once I'm ~40 or so, with 10 years to retirement, then maybe I'll do 80/20. So I really have no way to be more aggressive, without leverage.

missj

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I'm your age and plan to retire about same timeframe. Pension or not, why do you have any bonds at all at this point? I see no reason to. Maybe once I'm ~40 or so, with 10 years to retirement, then maybe I'll do 80/20. So I really have no way to be more aggressive, without leverage.

To be honest, I have bonds because up until pretty recently I was just doing what the "experts recommended" as far as retirement investing.  I just recently "saw the light" and moved my money out of actively managed mutual funds and into Vanguard Index funds almost a year ago.

After taking a few investment "risk tolerance" surveys and talking to a couple of advisors over the years it always turns out that for my age and risk tolerance they recommend 70/30 or 80/20.  so that's why I've landed somewhere in the middle of those.

so...you might say that this thread is actually the result of me thinking for myself and going: "Wait a minute.  I have a pension.  and I'm young.  Why am I investing in bonds at all?"
« Last Edit: July 28, 2015, 12:41:05 PM by missj »

AlwaysLearningToSave

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Be wary of counting on the full pension benefit.  When a company is financially stressed, it is not uncommon for a company to declare bankruptcy and dump its unfunded pension liability on the Pension Benefit Guarantee Corporation which will only make good on a fraction of the promised benefit.  There is a long time between now and when you will be getting the pension payments and no one knows what will happen to your company between now and then.  Bottom line, you should be prepared to live without the pension (or on a fraction of the promised benefits).  Then, if you are lucky enough for the company to make good on its promises, you will have more money than you know what to do with in retirement.  The fact you are on this forum at all suggests you are already taking this into consideration but thought it was necessary to point out, as some people wrongly assume a pension is "guaranteed" income.   

beltim

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Be wary of counting on the full pension benefit.  When a company is financially stressed, it is not uncommon for a company to declare bankruptcy and dump its unfunded pension liability on the Pension Benefit Guarantee Corporation which will only make good on a fraction of the promised benefit. 

This is a popular misconception, and wrong in the overwhelming majority of cases.  The PBGC will pay out the full pension earned as long as it's below the maximum, which is currently ~$60k for pensions starting at age 65:
http://www.pbgc.gov/wr/benefits/guaranteed-benefits.html

missj

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Be wary of counting on the full pension benefit.  When a company is financially stressed, it is not uncommon for a company to declare bankruptcy and dump its unfunded pension liability on the Pension Benefit Guarantee Corporation which will only make good on a fraction of the promised benefit.  There is a long time between now and when you will be getting the pension payments and no one knows what will happen to your company between now and then.  Bottom line, you should be prepared to live without the pension (or on a fraction of the promised benefits).  Then, if you are lucky enough for the company to make good on its promises, you will have more money than you know what to do with in retirement.  The fact you are on this forum at all suggests you are already taking this into consideration but thought it was necessary to point out, as some people wrongly assume a pension is "guaranteed" income.
it's a good thought...I certainly don't "count" on my pension anymore than I count on social security.  however, my company has existed 70+ years and is extremely stable and well known.  certainly anything can happen...but the kinds of economic conditions that would result in my company going bankrupt would most likely crash the stock market anyways, wiping out my personal retirement portfolio in the process.

most likely scenario is that at some point my company will scrap the pension and move to a 401(k) with matching.  but they will still be required to honor their commitments to those of us who are vested. 

as the poster above pointed out...pensions are pretty staunchly protected by the PBGC.  we've all heard stories of workers getting "screwed" out of their pensions in chapter 11...but in reality they are the highest income earners and the government exludes a certain portion of their pension....which admittedly sucks for those employees.

also, a bunch of pilots got screwed because they legally are not allowed to fly past a certain age (long before 65) In their contracts, they have something like age 55 as their "full retirement" age....but then when their airline goes bust and the PBGC comes in, the pilots are considered an "early retiree" even if they flew up until the last possible day they legally could;  so their pension gets proportionately slashed.