Author Topic: Using Social Security as your Bond allocation  (Read 8815 times)

Mr. Green

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Using Social Security as your Bond allocation
« on: June 11, 2015, 11:54:00 AM »
This is a really interesting question that I hadn't thought about before. I'm interested in what the folks here think about this.

The idea is that since SS is essentially a Bond, once you're started drawing on it you might shift your portfolio to 100% stocks. Odds are high that SS would provide more than 10-20% of a Mustachian yearly spend so even at 100% stocks you would still be heavy in bonds if you considered SS to be one. Thoughts?

http://money.cnn.com/2015/06/11/retirement/retirement-social-security/index.html?iid=SF_LN

matchewed

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Re: Using Social Security as your Bond allocation
« Reply #1 on: June 11, 2015, 11:57:39 AM »
I prefer to ignore social security. Not out of any sort of conspiracy theory that it won't be there, but more that it would then be a built in resilience factor come my 60's.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #2 on: June 11, 2015, 12:16:06 PM »
I prefer to ignore social security. Not out of any sort of conspiracy theory that it won't be there, but more that it would then be a built in resilience factor come my 60's.
I ignore it now as well. However this specifically refers to someone who is in their 60's or 70's and is drawing on SS. That that point it's part of your "portfolio" whether you ignore it or not.

matchewed

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Re: Using Social Security as your Bond allocation
« Reply #3 on: June 11, 2015, 12:23:53 PM »
Well then I still wouldn't think of it as a bond but as a cashflow. Bonds have different risks and aren't guaranteed. Once you start receiving Social Security, barring a government collapse or other unpredictable events, you will continue to receive that amount. The same cannot be said for bonds.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #4 on: June 11, 2015, 12:41:35 PM »
Well then I still wouldn't think of it as a bond but as a cashflow. Bonds have different risks and aren't guaranteed. Once you start receiving Social Security, barring a government collapse or other unpredictable events, you will continue to receive that amount. The same cannot be said for bonds.
I get that it's not really a bond and the writer of the article acknowledges that fact but it follows the idea of why we have bonds in our portfolios. Safer, less risk. You might argue that SS is the ultimate "bond" since it would probably take a government collapse for it to go away. You can't sell it but it exhibits many of the same characteristics that make bonds attractive for portfolio diversification.

Take a real life example. You're 70 and you spend 40k a year. You get 10k from SS, representing 25% of your yearly spend. Why would you bother keeping any of your portfolio in bonds? You already have 25% of your income coming from a source that is bond-like in it's risk characteristics. It never goes up or down at all, unless Congress cuts benefits.

That's the part I'm interested in.

matchewed

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Re: Using Social Security as your Bond allocation
« Reply #5 on: June 11, 2015, 12:50:17 PM »
Well then I still wouldn't think of it as a bond but as a cashflow. Bonds have different risks and aren't guaranteed. Once you start receiving Social Security, barring a government collapse or other unpredictable events, you will continue to receive that amount. The same cannot be said for bonds.
I get that it's not really a bond and the writer of the article acknowledges that fact but it follows the idea of why we have bonds in our portfolios. Safer, less risk. You might argue that SS is the ultimate "bond" since it would probably take a government collapse for it to go away. You can't sell it but it exhibits many of the same characteristics that make bonds attractive for portfolio diversification.

Take a real life example. You're 70 and you spend 40k a year. You get 10k from SS, representing 25% of your yearly spend. Why would you bother keeping any of your portfolio in bonds? You already have 25% of your income coming from a source that is bond-like in it's risk characteristics. It never goes up or down at all, unless Congress cuts benefits.

That's the part I'm interested in.

It is decidedly not bond-like in it's risk characteristics is my point. The author of the article basically just says "Let's assume we treat it like a bond, then your AA is out of wack." Fine, if you take that assumption sure. But you can take your SS and invest it in equities or do anything you want with it. That's why I say just treat it as cash flow.

Furthermore even if I just ignore everything I just said; as you get older and you are closer to having "won the game" is there a reason to keep playing? In other words as long as you have your needs and goals covered there is not much of a reason to pursue risk and returns. If $1mil fell into my lap today I'd probably not be socking it into the stock market but would do more w/ bonds because I wouldn't be able to use all that money.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #6 on: June 11, 2015, 01:15:24 PM »
Well then I still wouldn't think of it as a bond but as a cashflow. Bonds have different risks and aren't guaranteed. Once you start receiving Social Security, barring a government collapse or other unpredictable events, you will continue to receive that amount. The same cannot be said for bonds.
I get that it's not really a bond and the writer of the article acknowledges that fact but it follows the idea of why we have bonds in our portfolios. Safer, less risk. You might argue that SS is the ultimate "bond" since it would probably take a government collapse for it to go away. You can't sell it but it exhibits many of the same characteristics that make bonds attractive for portfolio diversification.

Take a real life example. You're 70 and you spend 40k a year. You get 10k from SS, representing 25% of your yearly spend. Why would you bother keeping any of your portfolio in bonds? You already have 25% of your income coming from a source that is bond-like in it's risk characteristics. It never goes up or down at all, unless Congress cuts benefits.

That's the part I'm interested in.
Furthermore even if I just ignore everything I just said; as you get older and you are closer to having "won the game" is there a reason to keep playing?
Because you can? I'm mustachian by choice but if I had the opportunity to spend more without working longer I would certainly take advantage of that. If I stay heavy in stocks, the better chance I have of being able to spend more in "retirement."

matchewed

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Re: Using Social Security as your Bond allocation
« Reply #7 on: June 11, 2015, 01:16:32 PM »
Well then I still wouldn't think of it as a bond but as a cashflow. Bonds have different risks and aren't guaranteed. Once you start receiving Social Security, barring a government collapse or other unpredictable events, you will continue to receive that amount. The same cannot be said for bonds.
I get that it's not really a bond and the writer of the article acknowledges that fact but it follows the idea of why we have bonds in our portfolios. Safer, less risk. You might argue that SS is the ultimate "bond" since it would probably take a government collapse for it to go away. You can't sell it but it exhibits many of the same characteristics that make bonds attractive for portfolio diversification.

Take a real life example. You're 70 and you spend 40k a year. You get 10k from SS, representing 25% of your yearly spend. Why would you bother keeping any of your portfolio in bonds? You already have 25% of your income coming from a source that is bond-like in it's risk characteristics. It never goes up or down at all, unless Congress cuts benefits.

That's the part I'm interested in.
Furthermore even if I just ignore everything I just said; as you get older and you are closer to having "won the game" is there a reason to keep playing?
Because you can? I'm mustachian by choice but if I had the opportunity to spend more without working longer I would certainly take advantage of that. If I stay heavy in stocks, the better chance I have of being able to spend more in "retirement."

And risk having to spend less than you planned in retirement? Fair enough, your call.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #8 on: June 11, 2015, 01:23:47 PM »
Well then I still wouldn't think of it as a bond but as a cashflow. Bonds have different risks and aren't guaranteed. Once you start receiving Social Security, barring a government collapse or other unpredictable events, you will continue to receive that amount. The same cannot be said for bonds.
I get that it's not really a bond and the writer of the article acknowledges that fact but it follows the idea of why we have bonds in our portfolios. Safer, less risk. You might argue that SS is the ultimate "bond" since it would probably take a government collapse for it to go away. You can't sell it but it exhibits many of the same characteristics that make bonds attractive for portfolio diversification.

Take a real life example. You're 70 and you spend 40k a year. You get 10k from SS, representing 25% of your yearly spend. Why would you bother keeping any of your portfolio in bonds? You already have 25% of your income coming from a source that is bond-like in it's risk characteristics. It never goes up or down at all, unless Congress cuts benefits.

That's the part I'm interested in.
Furthermore even if I just ignore everything I just said; as you get older and you are closer to having "won the game" is there a reason to keep playing?
Because you can? I'm mustachian by choice but if I had the opportunity to spend more without working longer I would certainly take advantage of that. If I stay heavy in stocks, the better chance I have of being able to spend more in "retirement."

And risk having to spend less than you planned in retirement? Fair enough, your call.
I don't understand your math. I FIRE in 94 weeks. Statistics say I'm set for life at a 80/20 or 90/10 stock/bond mix. At 70, I shift to 100% stocks because SS is my "bond" allocation. I fail to see how this puts me in worse shape. For one, 30 years of my life has already passed and my stash is still going strong. At 70, CFireSim calculations show the change from mostly all stocks to all stocks has no impact to my ability to continue my current rate of spending. Why would I not do this? For the 0.000001% chance that the world ends or the US Government collapses? If that happens my 10-20% bond allocation certainly isn't going to save me.
« Last Edit: June 11, 2015, 01:25:33 PM by Sir Hikes-A-Lot »

matchewed

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Re: Using Social Security as your Bond allocation
« Reply #9 on: June 11, 2015, 01:31:43 PM »
You keep changing the scenario, are we talking about you or the 70 year old?

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #10 on: June 11, 2015, 01:43:31 PM »
You keep changing the scenario, are we talking about you or the 70 year old?
I wasn't interested in the specific 70 year old in the article, rather a mustachian 70 year old who had FIRE'd decades before that. Maybe I should have made that clearer.
« Last Edit: June 11, 2015, 01:45:39 PM by Sir Hikes-A-Lot »

TheBuddha

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Re: Using Social Security as your Bond allocation
« Reply #11 on: June 11, 2015, 01:46:55 PM »
I read on Bogleheads that Jack Bogle recommended considering SS as part of fixed income in retirement along with bonds, annuities, pensions, etc.

But most people don't, so their portfolios are too conservative.

matchewed

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Re: Using Social Security as your Bond allocation
« Reply #12 on: June 11, 2015, 01:48:27 PM »
Then I'd keep the AA still conservative when I'm 70, mind you SS isn't going to provide much for the average mustachian. You haven't put all that much into it to begin with so you don't get much out when your calculation comes up.

Another reason to go more conservative is wealth preservation is more important to a 70 year old than wealth generation. Wealth preservation is a thing of more conservative portfolios.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #13 on: June 11, 2015, 01:56:46 PM »
Another reason to go more conservative is wealth preservation is more important to a 70 year old than wealth generation. Wealth preservation is a thing of more conservative portfolios.
Doesn't wealth generation automatically equal wealth preservation? If I'm wealthy and generating more wealth then I'm definitely preserving the wealth I already have. If I went into preservation mode at 70, wouldn't I basically be making the assumption that equities were going to perform poorly from the age of 70 until my death? That's the only assumption I can think of that would make me want to move money out of equities. A CFireSim calculation shows that becoming more conservative at a later age actually decreases my chances of maintaining my spending until I die, assuming I'm not contributing additional money to my stash.

According to SS, if I stopped working right now I'll still see 10k at retirement age since I've paid the max for the last decade. Same for my wife. So in the example I gave I halved that to account for whatever SS changes might occur in the future. That 10k combined, which is half the projected amount, is still 25% of what we spend a year. That's a substantial amount of our spending. And I halved it. This is what makes me ask about considering that our conservative "bond-like" allocation and moving to 100% stocks after we take SS. But it could apply to any mustachian who has FIREd.
« Last Edit: June 11, 2015, 02:01:56 PM by Sir Hikes-A-Lot »

sol

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Re: Using Social Security as your Bond allocation
« Reply #14 on: June 11, 2015, 02:02:35 PM »
I view both ss and my pension as bondlike investments.

But I just subtract their "guaranteed" income off of my projected expenses and then apply my chosen AA to the rest of my investment portfolio to cover the residual. 

This makes much more sense to me than trying to cover 100 percent of my future expenses with a modified AA that includes some hypothetical net present value of my ss and pension payments.

matchewed

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Re: Using Social Security as your Bond allocation
« Reply #15 on: June 11, 2015, 02:50:47 PM »
Another reason to go more conservative is wealth preservation is more important to a 70 year old than wealth generation. Wealth preservation is a thing of more conservative portfolios.
Doesn't wealth generation automatically equal wealth preservation? If I'm wealthy and generating more wealth then I'm definitely preserving the wealth I already have.

Wealth generation strategies like investing in equities come with the inherent risk that you can experience a drop of 40%. That isn't wealth conservative at all. The smaller the time frame the more impactful that risk can be.

When I'm 70 I'm going to want to ensure I suffer no losses, I've already won the game by then presumably. I don't have as much time to recover from large financial shocks. Or to put it another way I need a portfolio that is more resilient, rather than a portfolio that is more volatile.

NorCal

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Re: Using Social Security as your Bond allocation
« Reply #16 on: June 11, 2015, 02:57:02 PM »
Thinking of SS or any pension as part of your fixed income (not necessarily bond) part of your portfolio is a smart move.

But context and individual situations matter greatly.  Are you in a situation where SS will cover 110% of your living expenses starting today?  Or are you in a position where SS will cover 20% of your expenses 25 years from now?

It's a piece of the puzzle.  It can either be a predominant piece, or a non-material piece depending on your personal situation.

The important piece of math you need to figure out is how much you need to withdrawal from your portfolio.  The less you have to withdrawal, the more risks you can take.

Retire-Canada

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Re: Using Social Security as your Bond allocation
« Reply #17 on: June 11, 2015, 03:13:33 PM »

Because you can? I'm mustachian by choice but if I had the opportunity to spend more without working longer I would certainly take advantage of that. If I stay heavy in stocks, the better chance I have of being able to spend more in "retirement."

Then you are not a mustachian. You are just being frugal as a function of your circumstance.

If you were a mustachian you wouldn't increase your spending just because you can.

Jeremy E.

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Re: Using Social Security as your Bond allocation
« Reply #18 on: June 11, 2015, 03:15:52 PM »
One of the reasons for bonds in a portfolio, is being able to rebalance, so when there is a significant drop in the stock market, you can sell some bonds and buy some stocks. You can't do that with Social Security.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #19 on: June 11, 2015, 03:21:39 PM »
Thinking of SS or any pension as part of your fixed income (not necessarily bond) part of your portfolio is a smart move.

But context and individual situations matter greatly.  Are you in a situation where SS will cover 110% of your living expenses starting today?  Or are you in a position where SS will cover 20% of your expenses 25 years from now?

It's a piece of the puzzle.  It can either be a predominant piece, or a non-material piece depending on your personal situation.

The important piece of math you need to figure out is how much you need to withdrawal from your portfolio.  The less you have to withdrawal, the more risks you can take.
I suppose I was looking at this from the standpoint of a FIRE'd mustachian. If I'm FIRE and spending 40k a year, at 70 years old a 10k addition from SS would represent 25% of my spending, assuming I didn't just spend more. Since I built my stash with the object of supporting a 40k spend rate, the automatic 10k from SS would be the equivalent of 25% of my (newly improved) stash being in "bonds" (i.e. well protected). If I had been running at an 80/20 stock bond ratio before hand, it would seem logical to me to move to a 100% stock portfolio.

Consider, my $1 million stash provides 40k a year @ 4% SWR. At 80/20, the makeup of my 40k looks like 32k of stocks and 8k of bonds. I know, I know, you're not necessarily withdrawing the money that way. I'm just showing the spend as a representation of your allocation. As soon as my 10k SS kicks in, my spend rate now looks more like 24k of stocks, and 16k of bonds (6k from my stash and 10k from SS). So my "asset allocation" now is much more like 60/40. Sure, it changes based on one's SS benefit, spending, etc.

Sounds like the opinions here match what I anticipated (that it would be considered like a bond or fixed income and might merit moving more of my traditional stash to equities to compensate once that income begins). I simply hadn't thought of SS in that light before and was interested in the mustachian take on it (because often the mustachian take is different than the normal take).

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #20 on: June 11, 2015, 03:24:35 PM »

Because you can? I'm mustachian by choice but if I had the opportunity to spend more without working longer I would certainly take advantage of that. If I stay heavy in stocks, the better chance I have of being able to spend more in "retirement."

Then you are not a mustachian. You are just being frugal as a function of your circumstance.

If you were a mustachian you wouldn't increase your spending just because you can.
So a guy who, at 65, realizes his stash has grown so ridiculously large because of the exceptional returns he's seen decides to take a world tour trip he's always wanted to do, and it costs him $20,000 (in today's dollars). He wouldn't have done it otherwise because he enjoyed freedom and his stash wouldn't allow it when younger, since he FIREd with a certain spend in mind. That guy all the sudden isn't mustachian? I have the throw the BS flag on that one.
« Last Edit: June 11, 2015, 03:30:50 PM by Sir Hikes-A-Lot »

Retire-Canada

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Re: Using Social Security as your Bond allocation
« Reply #21 on: June 11, 2015, 03:46:31 PM »

So a guy who, at 65, realizes his stash has grown so ridiculously large because of the exceptional returns he's seen decides to take a world tour trip he's always wanted to do, and it costs him $20,000 (in today's dollars). He wouldn't have done it otherwise because he enjoyed freedom and his stash wouldn't allow it when younger, since he FIREd with a certain spend in mind. That guy all the sudden isn't mustachian? I have the throw the BS flag on that one.

Your statement was you were mustachian by choice, but you'd spend more if you could. That's contradictory.

If you can't spend more because you are limited by your finances than you are not mustachian by choice. You are being forced into frugality by circumstance.

MMM living on $25k/yr when he has millions is mustachian. There is no limitation on his spending yet it doesn't increase.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #22 on: June 11, 2015, 04:04:46 PM »

So a guy who, at 65, realizes his stash has grown so ridiculously large because of the exceptional returns he's seen decides to take a world tour trip he's always wanted to do, and it costs him $20,000 (in today's dollars). He wouldn't have done it otherwise because he enjoyed freedom and his stash wouldn't allow it when younger, since he FIREd with a certain spend in mind. That guy all the sudden isn't mustachian? I have the throw the BS flag on that one.

Your statement was you were mustachian by choice, but you'd spend more if you could. That's contradictory.

If you can't spend more because you are limited by your finances than you are not mustachian by choice. You are being forced into frugality by circumstance.

MMM living on $25k/yr when he has millions is mustachian. There is no limitation on his spending yet it doesn't increase.
Allow me to refine my statement. I'm mustachian by choice because I want to FIRE in 94 weeks and stay that way. But if my stash grew well enough that I ended up being able to do some extra things that were completely unplanned for based on my FIRE assumptions I would do them. That expanded statement fits within the generality of my earlier statement. I just didn't want to type all that.

TheOldestYoungMan

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Re: Using Social Security as your Bond allocation
« Reply #23 on: June 11, 2015, 04:20:59 PM »
The answer the OP is looking for is:  Yes.

The answer he got was:  We deny the premise of the question.

This is a frustrating place to have hypothetical discussions.
-----------------------------
Lets suppose (hypothetically) that instead of social security being what it is, there was some massive change where the government just handed you (at 65, 70, 99.5 whatever) a bond portfolio that *could* provide that amount of cash every month.

Then yes, it would make sense to treat the remainder of the portfolio as you would given the total assets and their classifications and your desired allocation.

However, social security is decidedly different.  So people on here are going to be reluctant to engage too heavily in discussing it.
-------------------------------------
Consider that the 80/20 split on bonds is subtly different than what you think it is.  I'm not sure I fully understand exactly how much it benefits an investor.  I thought I understood it completely, but then I got some new information, and now I'm wondering how much more is out there that I don't know yet.

But I think it boils down to:  noobie investors try to maximize returns, veteran investors try to minimize risk.

A lot of discussion around the topic led me to believe that it was somehow safer, but you were buying safety at the cost of returns.

I'm thinking now that it is actually totally unrelated to safety, except insofar as the risk is better distributed.  It has the potential to offer vastly superior returns.

And you don't get that with social security.  So even once SS kicks in, I probably won't be changing my allocation based on it.  It is probable that I would reduce my withdrawals though, insofar as that is up to me.
« Last Edit: June 11, 2015, 04:22:51 PM by TheOldestYoungMan »

NorCal

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Re: Using Social Security as your Bond allocation
« Reply #24 on: June 11, 2015, 04:33:18 PM »
Thinking of SS or any pension as part of your fixed income (not necessarily bond) part of your portfolio is a smart move.

But context and individual situations matter greatly.  Are you in a situation where SS will cover 110% of your living expenses starting today?  Or are you in a position where SS will cover 20% of your expenses 25 years from now?

It's a piece of the puzzle.  It can either be a predominant piece, or a non-material piece depending on your personal situation.

The important piece of math you need to figure out is how much you need to withdrawal from your portfolio.  The less you have to withdrawal, the more risks you can take.
I suppose I was looking at this from the standpoint of a FIRE'd mustachian. If I'm FIRE and spending 40k a year, at 70 years old a 10k addition from SS would represent 25% of my spending, assuming I didn't just spend more. Since I built my stash with the object of supporting a 40k spend rate, the automatic 10k from SS would be the equivalent of 25% of my (newly improved) stash being in "bonds" (i.e. well protected). If I had been running at an 80/20 stock bond ratio before hand, it would seem logical to me to move to a 100% stock portfolio.

Consider, my $1 million stash provides 40k a year @ 4% SWR. At 80/20, the makeup of my 40k looks like 32k of stocks and 8k of bonds. I know, I know, you're not necessarily withdrawing the money that way. I'm just showing the spend as a representation of your allocation. As soon as my 10k SS kicks in, my spend rate now looks more like 24k of stocks, and 16k of bonds (6k from my stash and 10k from SS). So my "asset allocation" now is much more like 60/40. Sure, it changes based on one's SS benefit, spending, etc.

Sounds like the opinions here match what I anticipated (that it would be considered like a bond or fixed income and might merit moving more of my traditional stash to equities to compensate once that income begins). I simply hadn't thought of SS in that light before and was interested in the mustachian take on it (because often the mustachian take is different than the normal take).

I think that's a decent conceptual way of looking at it.  I'm ~30 years from having to even think about SS, so it's not really a factor in my decision making at this point.

When I get as close to RE as you, I would want to actually learn to calculate an individual SWR for myself.  The math behind it is a little complex, but not unmanageably so.  There's a lot of value in understanding the sensitivities and assumptions behind the X% SWR that you can't get from just reading articles.

Being able to withdraw ~25% less (although don't forget about taxes) than planned will absolutely change your ideal allocation.


Jeremy E.

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Re: Using Social Security as your Bond allocation
« Reply #25 on: June 11, 2015, 05:16:40 PM »
But I think it boils down to:  noobie investors try to maximize returns, veteran investors try to minimize risk.

A lot of discussion around the topic led me to believe that it was somehow safer, but you were buying safety at the cost of returns.

I'm thinking now that it is actually totally unrelated to safety, except insofar as the risk is better distributed.  It has the potential to offer vastly superior returns.

And you don't get that with social security.  So even once SS kicks in, I probably won't be changing my allocation based on it.  It is probable that I would reduce my withdrawals though, insofar as that is up to me.
http://www.gocurrycracker.com/path-100-equities/
here's a post about people aiming to maximize their return, they must be noobie investors... The investors I look up to most recommend putting at least 90% into stocks, and most say 100% into stocks.

DavidAnnArbor

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Re: Using Social Security as your Bond allocation
« Reply #26 on: June 11, 2015, 07:29:17 PM »
Finance blogger Michael Kitces also writes about "Valuing Social Security Benefits As An Asset On The Household Balance Sheet"

https://www.kitces.com/blog/valuing-social-security-benefits-as-an-asset-on-the-household-balance-sheet/

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #27 on: June 12, 2015, 06:47:46 AM »
But I think it boils down to:  noobie investors try to maximize returns, veteran investors try to minimize risk.

A lot of discussion around the topic led me to believe that it was somehow safer, but you were buying safety at the cost of returns.

I'm thinking now that it is actually totally unrelated to safety, except insofar as the risk is better distributed.  It has the potential to offer vastly superior returns.

And you don't get that with social security.  So even once SS kicks in, I probably won't be changing my allocation based on it.  It is probable that I would reduce my withdrawals though, insofar as that is up to me.
http://www.gocurrycracker.com/path-100-equities/
here's a post about people aiming to maximize their return, they must be noobie investors... The investors I look up to most recommend putting at least 90% into stocks, and most say 100% into stocks.
I'm not necessarily pressing the argument for maximizing returns. I'm stepping back from the hard numbers and asking about the concept. Why does CFireSim show slightly better results from a 90/10 mix over 100% equities? The concept is that in a down market bonds perform better than stocks and the bit of bonds you do have in your portfolio enable a better recovery. From that standpoint, SS is is similar to bonds; having 25% of your spend coming from a fixed annuity (with inflation protection) will certainly help you weather a down market better.

Maybe a better example would be you turn 70, and the govt says here's XX thousand dollars. Go buy yourself a fixed rate lifetime annuity that covers 25% of your spending. If I had just walked out of my local SS office with that check in my hand, would I still leave bonds in my investment accounts (which now only accounts for 75% of my total stash)? I'm thinking no. I get it that at 70 if your stash is still going strong and you just got 25% of your spend as free income it really doesn't matter. You could leave your stash the way it is and all would be fine. I just thought the concept was interesting.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #28 on: June 12, 2015, 07:02:44 AM »
Finance blogger Michael Kitces also writes about "Valuing Social Security Benefits As An Asset On The Household Balance Sheet"

https://www.kitces.com/blog/valuing-social-security-benefits-as-an-asset-on-the-household-balance-sheet/
This is essentially what I was talking about. Only for FIRE folks it seems like the mix of stock/bonds is much more equity heavy than the traditional AA advice given to retirement age (65-70) people. If you're running 90/10 and want to "adjust" for SS there's not much room left. Hence my question about all equities in this situation.

I think I'm good at this point. I'll revisit this in 30 years. :)

matchewed

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Re: Using Social Security as your Bond allocation
« Reply #29 on: June 12, 2015, 07:13:26 AM »
I think I'm good at this point. I'll revisit this in 30 years. :)

And that's more my thought. As you age it is entirely possible that your risk tolerance changes and you should revisit and adjust your AA accordingly. It doesn't really matter if you view SS as bonds or as cash flow or whatever (within reason). As long as you're approaching it with a clear mind and understanding yourself and your circumstances it's all gravy.

Much like a 4% SWR not being a set in stone thing, neither is should be your AA.

Much Fishing to Do

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Re: Using Social Security as your Bond allocation
« Reply #30 on: June 12, 2015, 07:30:45 AM »
Though different in some ways I think this makes a lot of sense in some respects in thinking of the diversification and risk of your total wealth.  I paid off my home and, and though in monitoring portfolio and expenses it just means both get removed from the equation, in other ways I thought of paying off my house as 'diversifying' my wealth with a different and safer investment that grows with inflation (as practically speaking housing rental inflation is covered). This does help me feel better about my portfolio containing near zero bond allocation. I think I'll view SS as much the same when it eventually kicks in. 

brooklynguy

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Re: Using Social Security as your Bond allocation
« Reply #31 on: June 12, 2015, 07:37:44 AM »
Only for FIRE folks it seems like the mix of stock/bonds is much more equity heavy than the traditional AA advice given to retirement age (65-70) people. If you're running 90/10 and want to "adjust" for SS there's not much room left. Hence my question about all equities in this situation.

I think I'm good at this point. I'll revisit this in 30 years. :)

This is the key - for extremely early retirees retiring decades before earliest SS eligibility, it's sort of impossible to take SS into account in your planning (except as some amorphous level of safety margin to ensure that there may still be another income stream to count on during your traditional retirement years to pick up any shortfall in your non-SS income sources that occurs by then), because the amount you need to save in order to bridge the multi-decade gap until then is not materially different than the amount you need to save in order to cover your expenses indefinitely.

To address a few other points in this thread:

Well then I still wouldn't think of it as a bond but as a cashflow. Bonds have different risks and aren't guaranteed. Once you start receiving Social Security, barring a government collapse or other unpredictable events, you will continue to receive that amount. The same cannot be said for bonds.

The same can be said of US government bonds, which make up a significant portion of many (most?) investors' bond allocation (for example, US gov't bonds constitute the majority of Vanguard's Total Bond Market Index Fund).  In fact, it can even be argued that US gov't bonds are "more guaranteed" than social security payments, because bonds (unlike social security) represent a binding contractual agreement that the gov't can't unilaterally renege on.

mind you SS isn't going to provide much for the average mustachian. You haven't put all that much into it to begin with so you don't get much out when your calculation comes up.

I don't think this is true.  The average mustachian probably has a relatively high income during his/her working years and relatively low expenses forever, so SS is going to cover a meaningful portion of those expenses once it starts paying out (assuming the SS system does not change in a way that drastically reduces payout amounts, which, in my view, is a pretty good assumption).  Again, though, the problem is that this doesn't do much good for the average mustachian, because of the need to bridge the multi-decade gap until SS kicks in.

Jeremy E.

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Re: Using Social Security as your Bond allocation
« Reply #32 on: June 12, 2015, 08:44:29 AM »
mind you SS isn't going to provide much for the average mustachian. You haven't put all that much into it to begin with so you don't get much out when your calculation comes up.

I don't think this is true.  The average mustachian probably has a relatively high income during his/her working years and relatively low expenses forever, so SS is going to cover a meaningful portion of those expenses once it starts paying out (assuming the SS system does not change in a way that drastically reduces payout amounts, which, in my view, is a pretty good assumption).  Again, though, the problem is that this doesn't do much good for the average mustachian, because of the need to bridge the multi-decade gap until SS kicks in.
The average mustachian makes less in his working career than most people, because he works a MUCH shorter duration, and needs to save up a lot less to be able to retire. An example, if a Mustachian makes an average of 80k per year for 10 years and retires, he'll have a lot less in his SS than someone who makes an average of 65k per year and works 30 years.

brooklynguy

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Re: Using Social Security as your Bond allocation
« Reply #33 on: June 12, 2015, 09:00:02 AM »
The average mustachian makes less in his working career than most people, because he works a MUCH shorter duration, and needs to save up a lot less to be able to retire. An example, if a Mustachian makes an average of 80k per year for 10 years and retires, he'll have a lot less in his SS than someone who makes an average of 65k per year and works 30 years.

I know, and that doesn't contradict anything I said.  The average mustachian will certainly collect less in SS than someone who "paid in" more to the SS system overall, but the incremental benefit of working longer and "paying in" more to the system is less than many people imagine.  A decade of paying high FICA taxes will entitle a worker to SS benefits that go a long way towards covering mustachian-level expenses.  Check the numbers on the SS website's benefit estimation calculator and many people will be surprised to learn how large a portion of their projected expenses will be covered by the SS payout of a mere decade-long (relatively high paying) working career.  There are lots of threads in the forum that have discussed this in extensive detail.

Mr. Green

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Re: Using Social Security as your Bond allocation
« Reply #34 on: June 12, 2015, 09:42:39 AM »
The average mustachian makes less in his working career than most people, because he works a MUCH shorter duration, and needs to save up a lot less to be able to retire. An example, if a Mustachian makes an average of 80k per year for 10 years and retires, he'll have a lot less in his SS than someone who makes an average of 65k per year and works 30 years.

I know, and that doesn't contradict anything I said.  The average mustachian will certainly collect less in SS than someone who "paid in" more to the SS system overall, but the incremental benefit of working longer and "paying in" more to the system is less than many people imagine.  A decade of paying high FICA taxes will entitle a worker to SS benefits that go a long way towards covering mustachian-level expenses.  Check the numbers on the SS website's benefit estimation calculator and many people will be surprised to learn how large a portion of their projected expenses will be covered by the SS payout of a mere decade-long (relatively high paying) working career.  There are lots of threads in the forum that have discussed this in extensive detail.
I am in agreement because the numbers I used are real. That's why I thought it was a worthwhile exercise. I've maxed the FICA contributions for almost a decade, and I've run the calculator on the SS website that shows if I quit working and didn't pay in another dime in FICA taxes, I'll still see $900 a month. My wife is in a similar boat. So that's 20k a year between the two of us. I assume some changes may come so for safety I only took half that amount. We're FIREing with the idea of being able to spend 40k a year but our base spend with children will really be just under 30k. I wanted room for travel. So 10k is a significant percentage of our yearly spend.

Now imagine if SS didn't really change that much and we still ended up getting 20k, and we decided not to travel much in our old age so our spend is only 30k. At that point our SWR is only 1% of the original amount we FIREd on. I'm thinking it would be pretty safe to be 100% stocks at that point.