I'm eligible for a military pension when I retire. Some folks say this should be considered like a large government bond investment when considering your overall portfolio makeup meaning I could be more heavily invested in equities.
I'd like to hear the group thoughts.
I'm going to go with Milevsky:
http://the-military-guide.com/2010/12/30/tailor-your-investments-to-your-military-pay-and-your-pension/And here's a three-part post on investing once you're confident that you're getting a military pension:
http://the-military-guide.com/2011/03/24/asset-allocation-considerations-for-a-military-pension-part-3-of-3/ (parts 1 & 2 are linked at the bottom of that post)
How about the obverse-what is a pension worth as a present value (thus giving info re net worth)? Using a financial calculator, you could calculate the present value, assuming a term, payout frequency, and interest rate. It misses a COLA if there is one and underestimates any survivor benefits, but it gives a value. That present value could be added to your personal stash and you could calculate using your safe withdrawal rate. Since the pension is probably fairly secure (like fixed income), you could go, as arebelspy, says all bonds for the rest or all equities. I would regard the pension present value as fixed income/bond like though as it has legal protections, unlike an equity fund.
Here's a couple different ways to view your pension, including the COLA:
http://the-military-guide.com/2011/03/17/present-value-estimate-of-a-military-pension/I'm retired on an active-duty O-4 pension, and we have a rental property that's finally flowing a little cash. These two income streams cover the majority of our spending, and if we had to we could cut back our lifestyle to survive on "only" my pension. After more than a decade of retirement (including two recessions) I don't see any cutbacks in our future.
The rest of our investments are >90% equities and ~8% cash. The cash covers two years of expenses (beyond my pension & our rental income) because that's how long most bear markets have hammered equities. Our safety factor is our ability to cut our spending, so I disregard cjottawa's concern about SWR failures. In fact, the main reason for an annuity is to hedge the risk of SWR failure. Once you've hedged that risk you can be more aggressive with the remaining assets. By "aggressive" I mean Berkshire Hathaway stock, a small-cap value ETF (IJS), a dividend ETF (DVY), and an international dividend ETF (EFV). Lots of equities, yes, but not exactly crazy.
One could claim that you have no reason to take risks with money that you don't need. You could also claim that you should shoot for the moon with money that you don't need. I can appreciate both sides of the debate, but my inclination has been to use the excess to explore different types of investments. Over the last decade I've run the gamut of investing styles, yet every year I trade less and return to value/index investing. Everything else is either too much research work or too much tracking labor. I've even learned how to do angel investing and selling put/call options specifically so that I don't get tempted to try either of them when I'm 82 years old. Both of those areas seem to be doing satisfactorily so far (no bankruptcies and only one exercise) but they're also both more work than I care to keep up with. I'm looking at peer-to-peer lending with a skeptical/cynical eye, but that's a couple of blog posts for another time.
One could claim that end-of-life medical expenses will cause the SWR to fail. However military retirees have Tricare and Tricare For Life, so medical expenses are "likely" to remain under control. Military retirees can also purchase cheap(er) long-term care insurance through the federal program, although personally I'd wait until the big insurers figure out what they're doing with their new hybrid products. But either way military retirees are also hedged against healthcare expenses, which gives them even more justification for a high-equity investment portfolio.
Between 2007-09, our investment portfolio (~92%/8% equities/cash) declined over 50% from its stupid-high peak to its Great Recession pit. (Today it's recovered and returning to that 2007 high.) Ironically for that period, our equities moved pretty much in black-swan lockstep both going up and coming down (and going up again). I was looking for any excuse to rebalance by selling one equity to buy another, but they never got far enough out of balance to hit a limit. In fact they fell so fast that our cash percentage was rising by comparison. In retrospect I wish I'd had the guts to plunk a bunch of cash into the market in early 2009, but I think we all recognize how we felt about that idea back in early 2009. During the roller-coaster ride the only trading we did was tax-loss swapping along with selling a few call options. By the time we reached the end of our two-year cash stash, our equities had recovered enough to sell some gains to replenish the stash.
In early 2009, I decided to look at our investment portfolio as part of an overall asset allocation that included our pension and our rental income. I chose to view the pension as I bonds and the rental income as a CD (although you could make a case for it being a bond). When our equity investments were compared to those bond/cash assets, our actual asset allocation was mostly bonds. At the 2007 peak it was 10% equities, 85% bonds, and 5% cash. At the 2009 pit it was about 5% equities, 90% bonds, and 5% cash. In other words, our 50% drop in the value of our investment portfolio was barely a 5% blip in the overall view of our lifetime income (or "net worth" or "human capital").
Our investment portfolio is probably going to hover around the current peak for a while, but we have no plans to change anything. Our asset allocation is well within its bands, and we'll rebalance if necessary. If the market rises or drops 10% either way then I might sell a few more put/call options, but there's no reason to get greedy. If the portfolio continues to rise then we'll probably stay the course. We may boost our charity donations but I don't see us expanding our lifestyle. From now on we're going to get more comfortable by viewing the volatility as part of the big picture, not just the periscope view inside our investment portfolio.
Besides, I only have enough rack storage for four surfboards and wax is cheap...