Public Pension part of investment portfolio?

[Cervelo123]

My wife of two years never really gave her finances much thought.  I recently discovered that she contributes 8% of her paycheck to her pension account and her employer also contributes an additional %.  The pension is invested (stocks, boonds, etc.) via the board of trustees and has a 3% compounded annual rate of return.  My question is, should her pension balance (35K) be considered as part of our investment portfolio or should we consider it as something else??

Thanks!

[warfreak2]

Yes, I think most here count pensions amongst their asset allocation. Some don't count state pensions.

[TrulyStashin]

I was a HS teacher and as a result I have a defined benefit state pension that is worth about $32,000.  I count it in my (meager) portfolio as if it were a bond fund or the equivalent.  My state's pension plan is secure -- unlike some -- and so I consider this my conservative investment.

With this in mind, my Roth IRA, currently worth $26k, is invested entirely in stocks.  In 2010, I converted a traditional IRA worth about $12k into a Roth and began investing it individual stocks.  It has done very well -- more than doubled in four years.  I can't wait until it hits $30k -- hopefully this year.

I'm happy with this take on my investments but perhaps more sophisticated investors will weigh in and give more insight.

[MrsPete]

I have a pension too, and it doesn't appear on the Excel sheet that tracks our financial accounts.  I'm not 'specially OCD about seeing all my figures lined up neatly. 

However, when we discuss income in retirement, we include the projected income from my pension and from Social Security as a part of that future income. 

Makes sense to me. 

[dude]

I do (federal pension). There is a school of thought out there (Bernstein is among them, i believe) which says you should treat a pension as part of the fixed income side of your investment portfolio, thus allowing you to be far more aggressive in equities with your invested funds.  I personally don't have the stomach to do this (I'd likely be 80-100% in stocks if I took this view).  I'm comfortable with a 65/35 mix.

[Rural]

I consider it in my asset allocation (for us, it means 100% equities otherwise), but I've never included the balance in net worth calculations for either of us -- we both have stable pensions.

[Ottawa]

I do (federal pension). There is a school of thought out there (Bernstein is among them, i believe) which says you should treat a pension as part of the fixed income side of your investment portfolio, thus allowing you to be far more aggressive in equities with your invested funds.  I personally don't have the stomach to do this (I'd likely be 80-100% in stocks if I took this view).  I'm comfortable with a 65/35 mix.

Yeah, we treat the federal pension as a AAA bond. 
We don't include it in net worth...mainly because I don't really know how to price it in.  Having said that, it is included in future income stream.  It kicks in at age 60 and is fully indexed.  Since we're retiring 15 years before we start collecting, we essentially pretend it doesn't exist.  We need enough cash at FIRE to live off 4% (talk about a safety net!!).

So, allocation to traditional bonds in the portfolio is fairly low at 7%.  Those are stashed in Registered accounts.  The other reason for not holding a lot of bonds is that we don't have tonnes of registered room.  When you work under federal public pension, the reg amount annually is not big ($9,000).  So, the traditional bond allocation is also fighting for space with high yields and REITs. 

[RetiredAt63]

I paid into my Canada Pension Plan all the time I worked, so it is another pension income (NOT a government handout, I contributed just as I would with any other pension plan) whenever I decide to start taking it.  That is the big question, when to start, the government has made it attractive to postpone starting it.  On the down side, the cash chunk to the survivors if you die young is pitiful.  My Old Age Security income will also be there when I hit 65.  I do count both of these in my projected income stream, and of course I also have to account for them in terms of income taxes.

I don't worry about how to value them in terms of an investment portfolio, they at least are two income sources that are relatively predictable.

[former player]

A public pension is part of your financial planning.  You can think of it in the same way as you think of social security: a safe income in retirement.  How much it will be worth depends on how long your wife intends to work, whether she will stay in the public sector, and the terms of the pension.

I don't think I'd call it part of an investment portfolio, because it is illiquid: you can't sell it or borrow against the capital value.  The fact that it is part of your financial planning changes the information on which you base your investment portfolio, though.

Once your wife gets near the age at which the pension kicks in and you know the amount she will get, you can amuse yourself by checking out how much it would cost to buy an equivalent pension as an annuity.  There is no practical purpose to this exercise, just the private pleasure of seeing your notional net worth skyrocket.

[dude]

I do (federal pension). There is a school of thought out there (Bernstein is among them, i believe) which says you should treat a pension as part of the fixed income side of your investment portfolio, thus allowing you to be far more aggressive in equities with your invested funds.  I personally don't have the stomach to do this (I'd likely be 80-100% in stocks if I took this view).  I'm comfortable with a 65/35 mix.

Yeah, we treat the federal pension as a AAA bond. 
We don't include it in net worth...mainly because I don't really know how to price it in.  Having said that, it is included in future income stream.  It kicks in at age 60 and is fully indexed.  Since we're retiring 15 years before we start collecting, we essentially pretend it doesn't exist.  We need enough cash at FIRE to live off 4% (talk about a safety net!!).

So, allocation to traditional bonds in the portfolio is fairly low at 7%.  Those are stashed in Registered accounts.  The other reason for not holding a lot of bonds is that we don't have tonnes of registered room.  When you work under federal public pension, the reg amount annually is not big ($9,000).  So, the traditional bond allocation is also fighting for space with high yields and REITs.

I do net worth calculations with and without it. When I include it, I use a figure that represents the sum required to produce a 4% SWR that equals my pension payment.

Similarly, when I calculate my savings rate, I do it with and without the pension contribution made annually by my employer.  It is after all part of my overall compensation package.  When I include it in the calculation though, it significantly increases my savings rate

[dude]

A public pension is part of your financial planning.  You can think of it in the same way as you think of social security: a safe income in retirement.  How much it will be worth depends on how long your wife intends to work, whether she will stay in the public sector, and the terms of the pension.

I don't think I'd call it part of an investment portfolio, because it is illiquid: you can't sell it or borrow against the capital value.  The fact that it is part of your financial planning changes the information on which you base your investment portfolio, though.

Once your wife gets near the age at which the pension kicks in and you know the amount she will get, you can amuse yourself by checking out how much it would cost to buy an equivalent pension as an annuity.  There is no practical purpose to this exercise, just the private pleasure of seeing your notional net worth skyrocket.

Good point, I've done this as well, using the link Scott Burns frequently refers to on his blog:

www.immediateannuities.com

[Ottawa]

I do net worth calculations with and without it. When I include it, I use a figure that represents the sum required to produce a 4% SWR that equals my pension payment.

Similarly, when I calculate my savings rate, I do it with and without the pension contribution made annually by my employer.  It is after all part of my overall compensation package.  When I include it in the calculation though, it significantly increases my savings rate

I could include pension value in net worth I suppose..but it would be misleading for us - in terms of FIRE.  I don't include the contribution I or the employer makes.  I know most people will think that is silly.  We will not have very big pensions (relative to what we could have if we did the typical 30-35 year gov't career).  Instead of a 70K pension (each) we will *only* have a 20K pension each.  In MMM company, 40K household pension kicking in at 60 (fully indexed to inflation) sounds ridiculous, I know.  Essentially we would only require enough cash to get to 60 by that measure. 

But, we are saving enough liquid cash to pull 40K annually starting at age 45 at 4% SWR.  Realistically, we won't even *need* the pension.  It is a total safety net...and may very well be used largely in a charitable capacity!

Total overkill for sure.

[zataks]

I do and I don't.  I forecast the assets I will need for 4% SWR for the rest of my life without a pension as well as with different pension amounts and I also figure out how much I actually need to bridge me from ER to when I can draw my pension (52-67 years old, value increasing).  Generally, for safety though, most calcs are without the pension so that as I get nearer retirement I'm not running short.

[bogart]

My DH has a pension, and as he is R (RE as compared to the usual target of 65, though he didn't retire until he qualified for his full pension benefits) and our state (it is a public pension) is one of the few rated as reasonably secure, I treat it as an annuity and use those online websites to ballpark what something similar would cost, though I always underestimate its as I never include the facts that (a) I have 100% survivorship and (b) it includes health insurance for him, and access to the group plan with subsidized premiums for me and DS. 

And yes, as a result, we keep virtually everything else we have invested (except our Efund) in stocks. 

Of course over time the value of the "annuity" (pension) is going down, and the stocks are going up, and we are getting older.  So eventually that will shift.  But for now we've still got about a 60/40 split even for the reduced estimated value of the "annuity."