Hi,
Has anyone out there collecting a pension and/or Soc. Sec. calculated an
estimated capitalization, ie present value of the cash flow(s) and used
that amount as a 'bond' in their portfolio asset allocation? I've been
doing this for a few years now and was wondering how many others do and
what others think of the concept.
TIA
--
Had It
I'm a hypocrite, I'm intolerant of intolerance.
In article
<>,
Burr Man <> wrote:
> Hi,
>
> Has anyone out there collecting a pension and/or Soc. Sec. calculated an
> estimated capitalization, ie present value of the cash flow(s) and used
> that amount as a 'bond' in their portfolio asset allocation? I've been
> doing this for a few years now and was wondering how many others do and
> what others think of the concept.
>
I consider my pesion and social security as a bond valued using yields
of 10 year T bills when considering whether my portfolio allocation is
too rich in equities.
--
Avrum Lapin
Upland CA Remove NOSPAM from address
Burr Man wrote:
> Has anyone out there collecting a pension and/or Soc. Sec. calculated an
> estimated capitalization, ie present value of the cash flow(s) and used
> that amount as a 'bond' in their portfolio asset allocation? I've been
> doing this for a few years now and was wondering how many others do and
> what others think of the concept.
Another way to look at it might be to see how much you'd need to plunk
down right now in an annuity to get today's Social Security payment,
plus annual inflation adjustments. There are some web sites out there
that give quotes like this (you type in your age, gender, & state), I
don't recall exactly, they have names like annuity.com or
fixedannuities.com or something like that.
-Tad
<> wrote
> Tad Borek <> writes:
>> It would be interesting if they re-did the "survey of
>> consumer
>> finances" adding a present value for Social Security and
>> Medicare
>
> I've often thought that all of the screaming about the low
> US savings rate, etc. predicated on such surveys, would be
> quite a bit different if folks looked at the present value
> of
> those benefits.
Bread, don't you think one reason present value of Social
Security isn't factored in is because it's a pittance? Time
and again, I see planners and investing gurus counseling
that SS should not be relied upon to keep one of poverty. It
is a welfare program. It's probably a good one, but my point
is, it's not designed to make people well-off.
As for Medicare, given the rates of increase in medical
costs of late, as well as the unpredictability of one's own
health, I don't think making assumptions about its present
value (for portfolio planning purposes) represents rational
decision-making. The assumptions would be based on some
other, serious assumptions, as well. Margins of error would
be absurd, I'd bet.
So factoring into the previously cited survey the 'savings
rate' of SS and Medicare makes no sense to me, except as an
abstract exercise.
To the original poster: Are you trying to perfect your asset
allocation, or what? I have my doubts about the usefulness
of doing this. Seems to me you should forecast your expenses
as best you can. Calculate the income you need. Deduct from
this income SS. Allocate per your risk tolerance and the
remaining income needed. That's what the asset allocation
tools I've seen do.
> I also wonder if folks ought to be a bit more aggressive
> with their investments - and would be if they PV'd the
> values
> of their pensions and SS and such.
Is PV'd short for "privatized"? If, so, what exactly do you
mean by privatizing here?
Aside: Something like less than 20% of this country
participates in stock and mutual fund ownership. So
something like 80% can't be all that well-informed on
investing. So I don't know that most people could vote
intelligently on privatizing. They would be highly
vulnerable to finance industry lobbying sharks, who by
definition are looking out for themselves.
Elle wrote:
> Bread, don't you think one reason present value of Social
> Security isn't factored in is because it's a pittance?
It isn't though, it's a lot of...uh...bread.
Just a quick example: the average social security benefit for 2006 is
about $1,050 according to the SSA. Buying a $1050/month immediate
annuity might cost about $160k for a 65 year old male according to
immediateannuities.com (I can't vouch for the accuracy of the site but
the number seems reasonable). The maximum SS benefit of about $2k/month
would cost double that. Add in an inflation adjustment, and the cost
would be that much higher. Add in the value of Medicare...these
shouldn't be characterized as a pittance! Quite a few people are sitting
on an "asset" with a present value of perhaps $400k+.
I think Social Security gets a raw deal, as some kind of marxist plot.
It frees people up to invest their other money a bit more aggressively
than if $0/month were the expectation at retirement, and assures that at
least some money is directed into a form of savings.
>>I also wonder if folks ought to be a bit more aggressive
>>with their investments - and would be if they PV'd the
>>values
>>of their pensions and SS and such.
>
> Is PV'd short for "privatized"? If, so, what exactly do you
> mean by privatizing here?
I think he meant "assess the present value of". And I think it's a good
point...that to the extent you collect Social Security, you already have
a sort of inflation-indexed annuity providing income, and people can
invest a bit more aggressively than if that income wasn't coming in. And
those who don't collect Social Security should have a higher allocation
to cash & bonds.
-Tad
In article <4408f820$0$95946$>,
"Mark Freeland" <> wrote:
> I don't think this point can be emphasized strongly enough. It is not only
> that there is this additional asset (SS), but that it is an
> inflation-indexed annuity, meaning that both investment risk and inflation
> risk are assumed by the provider (the Fed government). This is major
> risk-shifting, and part of what enables investors to invest more
> aggressively.
'More aggressively' is a relative term however. If the PVs of a decent
pension and Soc. Sec. are say 1 million and one had a 1 mil portfolio to
start with then putting the entire mil into stocks would still be a
50-50 stock/bond allocation...not aggressive by traditional standards.
What would you do with your asset allocation if a rich uncle suddenly
left you with a 1 million dollar 20 yr Treasury bond?
A decent pension indexed for inflation and SS can easily exceed 1 mil so
a portfolio's allocation could/will undergo drastic revision if you
capitalize the income stream and added it to the portfolio. A few
financial advisors are starting to advocate this from what I've read.
--
Had It
I'm a hypocrite, I'm intolerant of intolerance.
Burr Man wrote:
>'More aggressively' is a relative term however. If the PVs of a decent
>pension and Soc. Sec. are say 1 million and one had a 1 mil portfolio to
>start with then putting the entire mil into stocks would still be a
>50-50 stock/bond allocation...not aggressive by traditional standards.
You've made the previous poster's point. If you capitalize your Social
Security benefits and consider that a fixed-income portion of your
portfolio, you can invest the part of your portfolio that you control
very aggressively.
If my rich uncle left me a 1 million dollar 20 year treasury bond, I'd
sell the dude and add the proceeds to my portfolio, which has an asset
allocation of 70% stock, 25% bonds, and 5% cash. Some people say that
that is too aggressive for an already-retired person. However, I note
from www.immediateannuities.com that a fixed annuity that matches my
social security benefit would cost about $223,000. An
inflation-adjusted annuity would cost 40-50% more, say $312,000 to
$350,000. Adding that to my portfolio dilutes my stock holdings to a
much more balanced 50%.
Dave