Author Topic: Portfolio allocation w/ a pension (inflation adjusted)  (Read 3317 times)

Villanelle

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Portfolio allocation w/ a pension (inflation adjusted)
« on: April 05, 2016, 09:37:10 PM »
DH should be getting an pension when he retires from the military, and that would be inflation adjusted. He's only a few years out and has orders to get him to 19.5 years, so this is a fairly certain thing.  He starts collecting the day he retires from the military, not at 60, if that matters.  Mentally, I sort of put that in the same category as bonds when thinking about our stache and our allocation, though they specific type of bond is fuzzy and vague. :lol  TIPS?  Government and higher grade corporate Bonds?  Right now my target allocation is about 13% bonds, based on somewhat arbitrarily picking a number :lol that is less than the 40 of the Boglehead's 3 fund portfolio, which I don't follow exactly but I use as a starting point.

I'm wondering what others who have or can reasonably expect an inflation-adjusted pension do as far as portfolio allocation.  The standard 40/20/40 of a the basic 3 fund portfolio seems way too bond heavy based on the pension.  What says the MMM hive mind? 

Villanelle

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #1 on: April 07, 2016, 04:40:44 PM »
Anyone have any thoughts on allocation with an inflation-adjusted pension?

beltim

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #2 on: April 07, 2016, 05:24:13 PM »
I think it depends on what your purpose is. If you're trying to figure out how you should allocate your portfolio for retirement savings, I would not include the pension and simply subtract the pension from the amount you need to live on.  Is that why you're asking, or is it some other reason?

forummm

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #3 on: April 07, 2016, 05:26:51 PM »
It's a very personal decision. What do you spend? How much will the pension be? How much savings do you have?

Another Reader

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #4 on: April 07, 2016, 06:03:59 PM »
Nords over at the-military-guide.com has a lot of discussion of this issue.

Villanelle

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #5 on: April 07, 2016, 06:18:21 PM »
I think it depends on what your purpose is. If you're trying to figure out how you should allocate your portfolio for retirement savings, I would not include the pension and simply subtract the pension from the amount you need to live on.  Is that why you're asking, or is it some other reason?

That's the method I've used to figure out a FIRE amount for our stache Target--subtract the annual pension from the number I need from a 4% withdraw..  I'm trying to figure out an investment allocation for pre-FIRE. How much should be in stock (large and small cap), International stocks, and bonds, as we work toward retirement, regardless of dollar amounts.  It is definitely a personal thing, but I'm hoping to hear what others have done.  I think we need far less in bonds than someone without that pension, but I'm not sure what that should look like in terms of specifics. 

Villanelle

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #6 on: April 07, 2016, 06:20:01 PM »
Nords over at the-military-guide.com has a lot of discussion of this issue.

Don't know why I didn't think of that.  Thanks!

beltim

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #7 on: April 07, 2016, 06:22:58 PM »
I think it depends on what your purpose is. If you're trying to figure out how you should allocate your portfolio for retirement savings, I would not include the pension and simply subtract the pension from the amount you need to live on.  Is that why you're asking, or is it some other reason?

That's the method I've used to figure out a FIRE amount for our stache Target--subtract the annual pension from the number I need from a 4% withdraw..  I'm trying to figure out an investment allocation for pre-FIRE. How much should be in stock (large and small cap), International stocks, and bonds, as we work toward retirement, regardless of dollar amounts.  It is definitely a personal thing, but I'm hoping to hear what others have done.  I think we need far less in bonds than someone without that pension, but I'm not sure what that should look like in terms of specifics.

So there are two arguments with opposite conclusions.

Argument 1: Treat pension like a bond.  It's guaranteed and it's inflation adjusted, thus you can take more risk with the rest of your portfolio and invest in stocks.

Argument 2: When you've won the game, stop playing.  Having a pension account for a large amount of your retirement income means that you have to save less money to retire.  If you don't need the growth of stocks, why take the risk of owning stocks?

Ultimately, it's up to your personal risk tolerance.  I guess my approach is in the middle, and to consider the pension as a subtraction from expenses, and then make your asset allocation determination independent of whether or not you receive a pension.  The arguments above are also perfectly fine, so it really is just dependent on your risk tolerance.

GregO

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #8 on: April 07, 2016, 06:49:12 PM »
I guess my approach is in the middle, and to consider the pension as a subtraction from expenses, and then make your asset allocation determination independent of whether or not you receive a pension. 
This is what i was going to say.  I think this is a great way to do it.  But if I was personally in your situation, I would invest everything in stocks and use the pension as my fallback plan if stocks fall.

Nords

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Re: Portfolio allocation w/ a pension (inflation adjusted)
« Reply #9 on: April 09, 2016, 11:16:13 AM »
I'm wondering what others who have or can reasonably expect an inflation-adjusted pension do as far as portfolio allocation.  The standard 40/20/40 of a the basic 3 fund portfolio seems way too bond heavy based on the pension.  What says the MMM hive mind?
Nords over at the-military-guide.com has a lot of discussion of this issue.
Don't know why I didn't think of that.  Thanks!
It's why we wrote the book!

Here's the third part of a three-part post:
http://the-military-guide.com/asset-allocation-considerations-for-a-military-pension-part-3-of-3/

The short version is that (from an asset allocation perspective) you can invest the rest of your portfolio in 100% equities.  You don't need to choose micro-cap telcoms (unless you want to) but you could certainly put it all in a total stock market index or a large-cap blue-chip dividend fund.

If a 13% asset allocation to bonds helps you sleep better at night then that's what you should do.  But mathematically your inflation-adjusted pension renders volatility irrelevant, and you already have the world's best income stream. 

If you discuss this with a financial advisor (or run an asset-allocation calculator) then your military pension is the equivalent of a portfolio of I bonds.  If your pension is $24K/year and I bonds are paying 1.64% APY, then the hypothetical I bond part of your portfolio would be $24K / 0.0164 = $1.4M.

I don't know anything else about your assets, but you should take a good hard look at paying 6.5% of that pension for the Survivor Benefit Plan.  The only time you'd turn down SBP is if you feel that you don't need life insurance, or would need it only for a short period covered by term insurance.