## Social Security as Part of Bond Allocation

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Thesaints
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 2:51 pm
Thesaints wrote: Tue May 11, 2021 1:56 pm Personally, I don't give a fig about income and that's not one of my criteria for retirement.
If you don't have retirement income, you don't have a retirement.
Are you saying that a billionaire without a job is poor ?
Thesaints
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### Re: Social Security as Part of Bond Allocation

Ben Mathew wrote: Tue May 11, 2021 3:32 pm
Thesaints wrote: Tue May 11, 2021 12:55 pm
Ben Mathew wrote: Tue May 11, 2021 12:22 pm
Thesaints wrote: Tue May 11, 2021 12:10 pm
Ben Mathew wrote: Tue May 11, 2021 12:05 pm Total expected consumption = \$30,000 + \$32,812 = \$62,812.
??? You are spending your entire portfolio in one year ?
No, the question is focusing on age 75. So the \$20,000 is the portion of the portfolio allocated for that year. Assume away all other years (to focus discussion).
But if 20k is the money allocated for the year, why do you calculate its future return ?
To calculate expected consumption at age 75.

\$20K is what's in the portfolio now. It's expected to grow to \$32,812 by age 75. So expected consumption at age 75 is \$30,000 from SS + \$32,812 from portfolio = \$62,812.
Not sure I understand. Expected consumption does not depend on how well the portfolio does.
willthrill81
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 12:07 pm
willthrill81 wrote: Tue May 11, 2021 11:54 am
Thesaints wrote: Tue May 11, 2021 11:42 am Maybe because SS payments also are an asset ?
They only become an asset once you receive them.
So a bond is not an asset until it matures ?
Why do they call the stocks/bonds ratio asset allocation ?
You can sell most bonds before maturity. Not so with SS benefits.
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vineviz
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 3:48 pm
vineviz wrote: Tue May 11, 2021 2:51 pm
Thesaints wrote: Tue May 11, 2021 1:56 pm Personally, I don't give a fig about income and that's not one of my criteria for retirement.
If you don't have retirement income, you don't have a retirement.
Are you saying that a billionaire without a job is poor ?
No, but I am saying a billionaire who refuses to convert some of his wealth into can't buy anything.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
AlohaJoe
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### Re: Social Security as Part of Bond Allocation

willthrill81 wrote: Tue May 11, 2021 4:08 pm
Thesaints wrote: Tue May 11, 2021 12:07 pm
willthrill81 wrote: Tue May 11, 2021 11:54 am
Thesaints wrote: Tue May 11, 2021 11:42 am Maybe because SS payments also are an asset ?
They only become an asset once you receive them.
So a bond is not an asset until it matures ?
Why do they call the stocks/bonds ratio asset allocation ?
You can sell most bonds before maturity. Not so with SS benefits.
You can absolutely sell your Social Security benefits. It is just a future income stream. Lots of people will give you a lump sum for that. Same way people do it for annuities and pensions and lottery payouts and royalties and other streams of income.

Modern financial engineering can do anything
Thesaints
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 4:19 pm No, but I am saying a billionaire who refuses to convert some of his wealth into can't buy anything.
We agree. People who have enough money don't reason in terms of income, nor retire based on it. They instead tend to have targets in terms of capital/wealth.

If I have 5 millions, I may decide that a suitable asset allocation is, let's say, 3.5 millions in stocks and 1.5 millions in bonds.
If I have 4 millions and a pension with a present value of 1 million, I'd still do 3.5 millions in stocks. It would be financially awkward to reason in terms of expenses covered by the pension.
Ben Mathew
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### Re: Social Security as Part of Bond Allocation

Ben Mathew wrote: Tue May 11, 2021 12:05 pm A question to help illustrate some of the issues.

Let's focus on a single year's consumption: consumption at age 75. Investor is 50 years old now, so this is 25 years away.

Expected real return
Bonds: 0%
Stocks: 4%

Funded by:
(1) SS of \$30,000
(2) Portfolio that currently has \$20,000 allocated 50/50. Expected real return = .5 * 0% + .5 * 4% = 2%. So expected payout = \$20,000*1.02^25 = \$32,812

Total expected consumption = \$30,000 + \$32,812 = \$62,812.

Stock market crashes 50%.

(1) SS still \$30,000.
(2) Portfolio down to \$10,000 bonds + \$5,000 stocks = \$15,000.

Question: What should the new allocation of the \$15,000 portfolio be?
Here are two strategies for calculating the new AA:

A. Maintain AA on the savings portfolio: 50/50 is defined on the savings portfolio. SS doesn't figure in. So savings portfolio rebalanced back to \$7,500/\$7,500.

B. Maintain AA on the total portfolio: 50/50 defined on the total portfolio. SS counted as bond. So AA before was actually \$40K bonds/\$10K stocks = 20/80. So rebalance total portfolio (\$30K SS + \$15K savings = \$45,000) back to 20/80 (\$9K stocks/\$36K bonds).

Strategy A led to rebalancing back to \$7,500 in stocks and strategy B led to \$9,000. So which is right? Depends on your preferences. A is right for someone for whom an LMP of \$30K is right. B is right for someone who does not want an LMP. Neither is right for someone who wants an LMP of \$15K or \$45K. So if you are doing A, make sure it is intentional and matches your preferences. A simple check is to ask yourself--if you didn't have SS but instead had a lump sum payout of equal value, would you use that lump sum to recreate an LMP equal to SS payouts? If not, then why are you rebalancing as if you would?
Last edited by Ben Mathew on Tue May 11, 2021 5:53 pm, edited 1 time in total.
JoeRetire
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 12:54 pm Your objection "Social security is this. Bonds are not" is not correct. Some bonds have exactly the same characteristics (in some cases even better) than those you list for SS.
We'll have to agree to disagree.

Bonds are like social security income in some ways, and unlike it in others.

Tell me which bonds have the spousal and survivor benefits that social security has.
Tell me which bonds have delayed retirement credits.
Tell me where I could sell my social security benefits if I wanted the money for something else.
Last edited by JoeRetire on Tue May 11, 2021 5:24 pm, edited 2 times in total.
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Thesaints
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### Re: Social Security as Part of Bond Allocation

JoeRetire wrote: Tue May 11, 2021 5:14 pm
Thesaints wrote: Tue May 11, 2021 12:54 pm Your objection "Social security is this. Bonds are not" is not correct. Some bonds have exactly the same characteristics (in some cases even better) than those you list for SS.
We'll have to agree to disagree.

Bonds are like social security income in some ways, and unlike it in others.
You know that you can in principle build a treasury ladder that exactly replicates (on a statistical basis, at least) your SS payments flow ?
JoeRetire
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 5:16 pm
JoeRetire wrote: Tue May 11, 2021 5:14 pm
Thesaints wrote: Tue May 11, 2021 12:54 pm Your objection "Social security is this. Bonds are not" is not correct. Some bonds have exactly the same characteristics (in some cases even better) than those you list for SS.
We'll have to agree to disagree.

Bonds are like social security income in some ways, and unlike it in others.
You know that you can in principle build a treasury ladder that exactly replicates (on a statistical basis, at least) your SS payments flow ?
Statistical basis by definition means it isn't the same as social security. That's at least one in the "unlike" category.

You can bend, twist, and tie it in a know to make it kinda, sort, at least on a statistical basis similar if you are inspired. I suppose that true of anything.
Last edited by JoeRetire on Tue May 11, 2021 5:19 pm, edited 1 time in total.
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vineviz
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 4:48 pm
vineviz wrote: Tue May 11, 2021 4:19 pm No, but I am saying a billionaire who refuses to convert some of his wealth into can't buy anything.
We agree. People who have enough money don't reason in terms of income, nor retire based on it. They instead tend to have targets in terms of capital/wealth.
Want to guess how people know if they “have enough money”?

Hint: it has a lot to do with the rate and level at which the wealth can be turned into income.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
vineviz
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### Re: Social Security as Part of Bond Allocation

JoeRetire wrote: Tue May 11, 2021 5:17 pm
Thesaints wrote: Tue May 11, 2021 5:16 pm
JoeRetire wrote: Tue May 11, 2021 5:14 pm
Thesaints wrote: Tue May 11, 2021 12:54 pm Your objection "Social security is this. Bonds are not" is not correct. Some bonds have exactly the same characteristics (in some cases even better) than those you list for SS.
We'll have to agree to disagree.

Bonds are like social security income in some ways, and unlike it in others.
You know that you can in principle build a treasury ladder that exactly replicates (on a statistical basis, at least) your SS payments flow ?
Statistical basis by definition means it isn't the same as social security.
Also, you can’t replicate a Social Security stream using bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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### Re: Social Security as Part of Bond Allocation

scguy613 wrote: Tue May 11, 2021 8:49 am Should Social Security income be treated as part of your bond allocation since it’s guaranteed income. If so, what % rate should it be used to calculate the total value. For example, \$46,000 annual social security income. Is 3% a good value, so \$46,000/0.03 = \$1,533,333 bond equivalent. Higher or lower rate?
If you have a job that pays an income do you try to include that as part of your bond allocation?

An asset allocation is for your liquid, investable, assets. Trying to shoehorn other things into that scheme simply makes the whole thing meaningless.
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 5:16 pm You know that you can in principle build a treasury ladder that exactly replicates (on a statistical basis, at least) your SS payments flow ?
I have never seen a TIPS ladder for an individual that provides monthly income exactly the same as SS benefits. I am aware of ladders providing annual income at a point in time each year equal to the annual income from SS, but I have never seen anyone try to construct real inflation-adjusted income from a ladder for an individual, which precisely matches monthly real income from SS.

And since SS provides the income until you die, the TIPS ladder replicating SS for a 103 year old would be prohibitively expensive for someone starting benefits at age 62.

BobK
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vineviz
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### Re: Social Security as Part of Bond Allocation

bobcat2 wrote: Tue May 11, 2021 5:30 pm And since SS provides the income until you die, the TIPS ladder replicating SS for a 103 year old would be prohibitively expensive for someone starting benefits at age 62.
Agreed. And it would be prohibitively expensive even if 50 year TIPS magically appeared on the scene.
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### Re: Social Security as Part of Bond Allocation

Bogle to Retirees: Don‘t Do Something: Just Stand There! - AssetBuilder / October 25, 2003 / Scott Burns
Jack Bogle wrote:Think about everything, not just your investment program. That means think about Social Security. If you're fortunate, it can be \$25,000 a year. It's great money. When you do your asset allocation you want to include that. … As a life income it's more like \$350,000. That should be part of your calculation.
Bogle seems to use a 14x multiplier on the annual Social Security income to go from \$25k to \$350k bond-ish value. If someone was already 50/50 asset allocation with \$1 million invested, the net asset allocation is closer to 37/63 when including SS as bonds. If one actually wanted to have a net 50/50 asset allocation, the gross allocation could be shifted to 68/32, so if this investor was 50 years old following "age"-in-bonds, then starting to receive Social Security payments would allow this person to shift towards "age - 18"-in-bonds.
Thesaints
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 5:34 pm
bobcat2 wrote: Tue May 11, 2021 5:30 pm And since SS provides the income until you die, the TIPS ladder replicating SS for a 103 year old would be prohibitively expensive for someone starting benefits at age 62.
Agreed. And it would be prohibitively expensive even if 50 year TIPS magically appeared on the scene.
The chances of getting to age 103 for a 60yo is 1 in 360. You can multiply the amount of the 2064 bond by that much and you'll see it is not that expensive.
vineviz
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 8:17 pm
vineviz wrote: Tue May 11, 2021 5:34 pm
bobcat2 wrote: Tue May 11, 2021 5:30 pm And since SS provides the income until you die, the TIPS ladder replicating SS for a 103 year old would be prohibitively expensive for someone starting benefits at age 62.
Agreed. And it would be prohibitively expensive even if 50 year TIPS magically appeared on the scene.
The chances of getting to age 103 for a 60yo is 1 in 360. You can multiply the amount of the 2064 bond by that much and you'll see it is not that expensive.
And if you DO live to 103, your probability of receiving an inflation adjusted Social Security check is 100%.

The last time I checked, 100% is greater than 0.3%.

No bonds have the same features that Social Security has, and anyone who tries to convince you that "Social Security can be replicated with a bond ladder" either doesn't understand Social Security or doesn't understand bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 1:34 pm
Thesaints wrote: Tue May 11, 2021 12:54 pm Your objection "Social security is this. Bonds are not" is not correct. Some bonds have exactly the same characteristics (in some cases even better) than those you list for SS.

It is not rocket science: SS payments, properly discounted and accounting for one's probability of death, are precisely bonds. People here are making all sorts of conceptual contortions in order to deny a very simple truth.
It's literally true that "Social Security is not a bond", so whenever someone is wondering whether to treat Social Security as if it were a bond two questions must be asked and (satisfactorily) answered IMHO:

1) CAN it be accurately modeled as a bond?
2) Does modeling it as a bond IMPROVE the financial decision making process?

Social Security is an annuity which is similar to, but not exactly like, annuities offered by insurance companies. As such, backing into the parameters necessary to accurate estimate the PV of Social Security is much more difficult to do than I think most people believe. The answer to question #1 is, therefore, "probably not".

As for question #2, the answer is a much less ambiguous "no". The reason people save and invest for retirement is to have an income after they stop working. Since the goal is defined by income, and the amount of income provided by Social Security is directly calculable there is no reason to estimate the PV of that income. It's already in the right unit of measure: it's the stocks and bonds that are in the "wrong" units.

The challenge is in generating an estimate for the income our investment portfolios will provide, but Social Security and other annuity streams are already expressed in the units we care about (\$/year). Nothing is gained, and possibly much is lost, by converting the income stream into an estimated PV only to turn around and convert that PV back into an income stream.
I would suggest reading Jack Bogle’s thoughts on allocating the capitalized value of Social Security and consider that as part of your bond allocation. It is an eye opener.

This will allow portfolios to be more aggressive.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 2:51 pm
Thesaints wrote: Tue May 11, 2021 1:56 pm Personally, I don't give a fig about income and that's not one of my criteria for retirement.
If you don't have retirement income, you don't have a retirement.
Exactly Vince! Build a passive income stream now! Dividends matter!

It works!

Tony
John C. Bogle: “Simplicity is the master key to financial success."
vineviz
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### Re: Social Security as Part of Bond Allocation

abuss368 wrote: Tue May 11, 2021 8:42 pm I would suggest reading Jack Bogle’s thoughts on allocating the capitalized value of Social Security and consider that as part of your bond allocation. It is an eye opener.
I've read it, and if you think it makes sense then more power to you.

The holes in the logic are too large for me to recommend that anyone else read it, though.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
typical.investor
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### Re: Social Security as Part of Bond Allocation

CyclingDuo wrote: Tue May 11, 2021 2:20 pm
https://www.kitces.com/blog/valuing-soc ... nce-sheet/

He summarizes...

Ironically, though, as most retirees tend to rely on Social Security payments first (at least once they begin) and allow the portfolio to grow to the extent possible, the distortion of the household balance sheet towards a bond-heavy allocation actually resolves itself over time. As the years go by, the remaining value of the Social Security asset depletes (as it self-liquidates with payments), while the retirement portfolio tends to grow (especially in the first half of retirement when withdrawals are still modest); accordingly, the equity allocation of the household balance sheet actually glides higher on its own throughout retirement (as the equities in the portfolio comprise a larger percentage of total wealth) even if the portfolio itself remains 50/50 in stocks and bonds.
That's weird and introduces a distortion which I think is misleading.

The value of your Social Security never really depletes. It's the same every year.

So in terms of budgeting, you want to set an AA where you can safely meet required expenses even in the face of a prolonged equities decline (so you don't have to sell volatile assets at a low).

That at age 65 you have 20 years or so of expected social security payments doesn't really affect your desire to have safe withdrawals at age 65-70 (for instance).

To get a 50%-50% portfolio under Kitces then, you are 100% stocks. OK, stocks tank age 65-70 and you still have to make withdrawals to fund your retirement. Not a great plan to me.

I really don't see the value of social security as decreasing. Whether of not you have 1 year in your life left or 30, the yearly value is the same.

I want to target my stock/bond portfolio to be able to safely meet the needed spending from it. A secured safe future payment simply can not be translated into a safe payment if needed today. I think his thinking is distorted.
vineviz
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### Re: Social Security as Part of Bond Allocation

abuss368 wrote: Tue May 11, 2021 8:50 pm
vineviz wrote: Tue May 11, 2021 2:51 pm
Thesaints wrote: Tue May 11, 2021 1:56 pm Personally, I don't give a fig about income and that's not one of my criteria for retirement.
If you don't have retirement income, you don't have a retirement.
Exactly Vince! Build a passive income stream now! Dividends matter!
With all due respect, I don't think you understand what I wrote.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
typical.investor
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 8:50 pm
abuss368 wrote: Tue May 11, 2021 8:42 pm I would suggest reading Jack Bogle’s thoughts on allocating the capitalized value of Social Security and consider that as part of your bond allocation. It is an eye opener.
I've read it, and if you think it makes sense then more power to you.

The holes in the logic are too large for me to recommend that anyone else read it, though.
Bogle's view in effect is to make the portfolio very much more vulnerable in market downdrafts. If you have a need or desire to take such a risk in exchange for the higher expected returns so be it. But there is no denying the additional risk.

As always, if you expect to be able to ride out a market downturn (and perhaps reduction in dividends) in equities even with a higher allocation, then sure why not! Future social security payments can't be used for today's spending though. It simply doesn't matter how much they are promising you in the future.
Last edited by typical.investor on Tue May 11, 2021 8:58 pm, edited 1 time in total.
abuss368
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 8:52 pm
abuss368 wrote: Tue May 11, 2021 8:50 pm
vineviz wrote: Tue May 11, 2021 2:51 pm
Thesaints wrote: Tue May 11, 2021 1:56 pm Personally, I don't give a fig about income and that's not one of my criteria for retirement.
If you don't have retirement income, you don't have a retirement.
Exactly Vince! Build a passive income stream now! Dividends matter!
With all due respect, I don't think you understand what I wrote.

Vince -

Fortunately I have seen it first hand and not had to read about it online or on a forum. Incredible! Not sure you understand the point being made.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
vineviz
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### Re: Social Security as Part of Bond Allocation

typical.investor wrote: Tue May 11, 2021 8:51 pm That's weird and introduces a distortion which I think is misleading.
I agree.

I mean, yes, actuarily speaking the NPV of Social Security drops over time. But neither the trend nor the volatility in the NPV of Social Security have any relevance to the retired investor: what matters is the rock-solid inflation-indexed cashflows.

This distortion is precisely WHY treating the NPV of Social Security as a bond is completely wrong: it takes the most risk-free source of income available and treats it as a volatile asset which sinks in value. It's backwards.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
vineviz
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### Re: Social Security as Part of Bond Allocation

abuss368 wrote: Tue May 11, 2021 8:57 pm
vineviz wrote: Tue May 11, 2021 8:52 pm
abuss368 wrote: Tue May 11, 2021 8:50 pm
vineviz wrote: Tue May 11, 2021 2:51 pm
Thesaints wrote: Tue May 11, 2021 1:56 pm Personally, I don't give a fig about income and that's not one of my criteria for retirement.
If you don't have retirement income, you don't have a retirement.
Exactly Vince! Build a passive income stream now! Dividends matter!
With all due respect, I don't think you understand what I wrote.
Fortunately I have seen it first hand and not had to read about it online or on a forum. Incredible! Not sure you understand the point being made.
I know the point I was making. I made it, after all, and my point was not "dividends matter". My point had NOTHING to do with "passive income" or "dividends".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
typical.investor
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 9:00 pm
abuss368 wrote: Tue May 11, 2021 8:57 pm
vineviz wrote: Tue May 11, 2021 8:52 pm
abuss368 wrote: Tue May 11, 2021 8:50 pm
vineviz wrote: Tue May 11, 2021 2:51 pm

If you don't have retirement income, you don't have a retirement.
Exactly Vince! Build a passive income stream now! Dividends matter!
With all due respect, I don't think you understand what I wrote.
Fortunately I have seen it first hand and not had to read about it online or on a forum. Incredible! Not sure you understand the point being made.
I know the point I was making. I made it, after all, and my point was not "dividends matter". My point had NOTHING to do with "passive income" or "dividends".
Dividend payments were generally cut in 2020. If you are counting on only dividends + SS to meet expenses (and not holding bonds since you figure SS is your bond), then what do you do to make up the short fall? Sell stocks at depressed prices?
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### Re: Social Security as Part of Bond Allocation

typical.investor wrote: Tue May 11, 2021 9:05 pm
vineviz wrote: Tue May 11, 2021 9:00 pm
abuss368 wrote: Tue May 11, 2021 8:57 pm
vineviz wrote: Tue May 11, 2021 8:52 pm
abuss368 wrote: Tue May 11, 2021 8:50 pm

Exactly Vince! Build a passive income stream now! Dividends matter!
With all due respect, I don't think you understand what I wrote.
Fortunately I have seen it first hand and not had to read about it online or on a forum. Incredible! Not sure you understand the point being made.
I know the point I was making. I made it, after all, and my point was not "dividends matter". My point had NOTHING to do with "passive income" or "dividends".
Dividend payments were generally cut in 2020. If you are counting on only dividends + SS to meet expenses (and not holding bonds since you figure SS is your bond), then what do you do to make up the short fall? Sell stocks at depressed prices?
I have seen: dividends, Social Security, Bond dividends monthly, no debt. It works well.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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### Re: Social Security as Part of Bond Allocation

typical.investor wrote: Tue May 11, 2021 9:05 pm
vineviz wrote: Tue May 11, 2021 9:00 pm
abuss368 wrote: Tue May 11, 2021 8:57 pm
vineviz wrote: Tue May 11, 2021 8:52 pm
abuss368 wrote: Tue May 11, 2021 8:50 pm

Exactly Vince! Build a passive income stream now! Dividends matter!
With all due respect, I don't think you understand what I wrote.
Fortunately I have seen it first hand and not had to read about it online or on a forum. Incredible! Not sure you understand the point being made.
I know the point I was making. I made it, after all, and my point was not "dividends matter". My point had NOTHING to do with "passive income" or "dividends".
Dividend payments were generally cut in 2020. If you are counting on only dividends + SS to meet expenses (and not holding bonds since you figure SS is your bond), then what do you do to make up the short fall? Sell stocks at depressed prices?
Selling stock in retirement is perfectly fine.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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### Re: Social Security as Part of Bond Allocation

willthrill81 wrote: Tue May 11, 2021 9:39 pm
typical.investor wrote: Tue May 11, 2021 9:05 pm
vineviz wrote: Tue May 11, 2021 9:00 pm
abuss368 wrote: Tue May 11, 2021 8:57 pm
vineviz wrote: Tue May 11, 2021 8:52 pm

With all due respect, I don't think you understand what I wrote.
Fortunately I have seen it first hand and not had to read about it online or on a forum. Incredible! Not sure you understand the point being made.
I know the point I was making. I made it, after all, and my point was not "dividends matter". My point had NOTHING to do with "passive income" or "dividends".
Dividend payments were generally cut in 2020. If you are counting on only dividends + SS to meet expenses (and not holding bonds since you figure SS is your bond), then what do you do to make up the short fall? Sell stocks at depressed prices?
Selling stock in retirement is perfectly fine.
Of course it is.

I simply question if you want to be 100% stocks in retirement. Are you saying that selling stocks in a crash is ideal? Ok, whatever.

The point was the Kitces is saying use future SS as a bond. Ok, so if that's 50% of your portfolio and you want to be 50% stock 50% bonds, then you should hold 100% stocks.

So all I am saying is that future social security can't really be sold to fund expenses, and that in terms of sequence of return risks, that counting social security as your bond will increase that risk.

Yeah, I plan to sell stocks in retirement, but I also plan to not to have to do so at depressed prices. Counting social security as my bond won't let me do that. If you have a very large portfolio, perhaps the point is moot because you will have bonds in addition to SS. For the example cited of Kitce's where SS is half your total, then I don't see going 100% equities in the other half as addressing sequence of return risk.

And maybe this is all moot if the Fed backstops everything every drop and we never see a prolonged equities downturn. Who needs bonds if that is never a risk anyway.

I plan to claim SS at 70. I am not going to count SS as a bond from ages 62 (or whenever I retire) until 70 because I can't sell it like I could a bond. Sure, I will be selling stocks during that time to fund retirement, but I still need safe assets in case the period coincides with an equities downturn. I'm adverse to selling equities at depressed prices.
willthrill81
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### Re: Social Security as Part of Bond Allocation

typical.investor wrote: Tue May 11, 2021 9:48 pm
willthrill81 wrote: Tue May 11, 2021 9:39 pm
typical.investor wrote: Tue May 11, 2021 9:05 pm
vineviz wrote: Tue May 11, 2021 9:00 pm
abuss368 wrote: Tue May 11, 2021 8:57 pm
Fortunately I have seen it first hand and not had to read about it online or on a forum. Incredible! Not sure you understand the point being made.
I know the point I was making. I made it, after all, and my point was not "dividends matter". My point had NOTHING to do with "passive income" or "dividends".
Dividend payments were generally cut in 2020. If you are counting on only dividends + SS to meet expenses (and not holding bonds since you figure SS is your bond), then what do you do to make up the short fall? Sell stocks at depressed prices?
Selling stock in retirement is perfectly fine.
Of course it is.

I simply question if you want to be 100% stocks in retirement. Are you saying that selling stocks in a crash is ideal? Ok, whatever.
It depends on what the retiree is trying to maximize. If it's the historic safe withdrawal rate, then around a 70/30 AA has been ideal. If it's highest average spending or highest average terminal wealth, 100/0 has been ideal.

Selling some of one's stock in a crash certainly isn't ideal, but the alternative is to hold bonds with a significantly lower expected long-term return. Bonds have an opportunity cost associated with them. So again, it depends on what the retiree is trying to maximize.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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### Re: Social Security as Part of Bond Allocation

willthrill81 wrote: Tue May 11, 2021 9:55 pm
typical.investor wrote: Tue May 11, 2021 9:48 pm
willthrill81 wrote: Tue May 11, 2021 9:39 pm
typical.investor wrote: Tue May 11, 2021 9:05 pm
vineviz wrote: Tue May 11, 2021 9:00 pm

I know the point I was making. I made it, after all, and my point was not "dividends matter". My point had NOTHING to do with "passive income" or "dividends".
Dividend payments were generally cut in 2020. If you are counting on only dividends + SS to meet expenses (and not holding bonds since you figure SS is your bond), then what do you do to make up the short fall? Sell stocks at depressed prices?
Selling stock in retirement is perfectly fine.
Of course it is.

I simply question if you want to be 100% stocks in retirement. Are you saying that selling stocks in a crash is ideal? Ok, whatever.
It depends on what the retiree is trying to maximize. If it's the historic safe withdrawal rate, then around a 70/30 AA has been ideal. If it's highest average spending or highest average terminal wealth, 100/0 has been ideal.

Selling some of one's stock in a crash certainly isn't ideal, but the alternative is to hold bonds with a significantly lower expected long-term return. Bonds have an opportunity cost associated with them. So again, it depends on what the retiree is trying to maximize.
100% stocks is ideal, and then the downturn and panic hits and people sell out to preserve what they have left.

For me, I think holding bonds will give me the confidence to spend normally in a downturn instead of seeing 100% stocks drop having to count on a strong future rebound. I wouldn't panic but my spouse would.

So yeah, bonds are an insurance premium protecting against panic and insurance costs.
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 8:27 pm And if you DO live to 103, your probability of receiving an inflation adjusted Social Security check is 100%.
Yes. That is called "conditional probability". The probability of a 60yo to receive 100% of his 2064 SS payment is 100% conditional to him living to be 103yo.
The probability of a 60yo to live to age 103 is 1 in 360.
Therefore, the probability of a 60yo of cashing 100% of his 2064 SS payment is 1 in 360, or the expected value of his 2064 SS payment is whatever he is going to be paid divided by 360.
QED
No bonds have the same features that Social Security has, and anyone who tries to convince you that "Social Security can be replicated with a bond ladder" either doesn't understand Social Security or doesn't understand bonds.
In principle there is no obstacle in building a bond ladder with the same expected value of future SS payments. The ladder will have lower volatility, of course...
This distortion is precisely WHY treating the NPV of Social Security as a bond is completely wrong: it takes the most risk-free source of income available and treats it as a volatile asset which sinks in value. It's backwards.
As if safer bonds than future SS payments did not exist !
Do you think Savings Bonds are less or more risky, for instance ?
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### Re: Social Security as Part of Bond Allocation

typical.investor wrote: Tue May 11, 2021 10:04 pm
willthrill81 wrote: Tue May 11, 2021 9:55 pm
typical.investor wrote: Tue May 11, 2021 9:48 pm
willthrill81 wrote: Tue May 11, 2021 9:39 pm
typical.investor wrote: Tue May 11, 2021 9:05 pm

Dividend payments were generally cut in 2020. If you are counting on only dividends + SS to meet expenses (and not holding bonds since you figure SS is your bond), then what do you do to make up the short fall? Sell stocks at depressed prices?
Selling stock in retirement is perfectly fine.
Of course it is.

I simply question if you want to be 100% stocks in retirement. Are you saying that selling stocks in a crash is ideal? Ok, whatever.
It depends on what the retiree is trying to maximize. If it's the historic safe withdrawal rate, then around a 70/30 AA has been ideal. If it's highest average spending or highest average terminal wealth, 100/0 has been ideal.

Selling some of one's stock in a crash certainly isn't ideal, but the alternative is to hold bonds with a significantly lower expected long-term return. Bonds have an opportunity cost associated with them. So again, it depends on what the retiree is trying to maximize.
100% stocks is ideal, and then the downturn and panic hits and people sell out to preserve what they have left.

For me, I think holding bonds will give me the confidence to spend normally in a downturn instead of seeing 100% stocks drop having to count on a strong future rebound. I wouldn't panic but my spouse would.

So yeah, bonds are an insurance premium protecting against panic and insurance costs.
Some can handle the volatility, while others cannot. My parents are 100% stock because all of their essential spending needs are covered by SS benefits, leaving their portfolio for discretionary spending and potentially LTC expenses.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
Thesaints
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### Re: Social Security as Part of Bond Allocation

willthrill81 wrote: Tue May 11, 2021 10:18 pm Some can handle the volatility, while others cannot. My parents are 100% stock because all of their essential spending needs are covered by SS benefits, leaving their portfolio for discretionary spending and potentially LTC expenses.
In the hypothetical situation in which they had an additional capital equal to the PV of their SS payments, but no SS benefits, what would you imagine would their AA be like ?
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 10:05 pm In principle there is no obstacle in building a bond ladder with the same expected value of future SS payments. The ladder will have lower volatility, of course...
"No obstacle" besides it being impossible, you mean? Sounds like a pretty big obstacle to me.

Social security isn't a bond. It's not "like" a bond. It's an annuity, which is a form of insurance, and is already expressed in the units that are relevant: dollars of income per period.

It's not possible to accurate calculate the present value of it, no need to calculate the present value of it, and no benefit to calculating the benefit of it.

Thesaints wrote: Tue May 11, 2021 10:05 pm
This distortion is precisely WHY treating the NPV of Social Security as a bond is completely wrong: it takes the most risk-free source of income available and treats it as a volatile asset which sinks in value. It's backwards.
As if safer bonds than future SS payments did not exist !
Do you think Savings Bonds are less or more risky, for instance ?
More risky, clearly, since savings bonds are not guaranteed to produce an income stream as long as you live.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Thesaints
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 10:59 pm More risky, clearly, since savings bonds are not guaranteed to produce an income stream as long as you live.
You are confusing bonds risk with the risk of dying too late Also, I would argue that enough Savings Bonds would guarantee the holder an income stream to support their lifestyle of choice and buy a yacht on top of that.
btw SS payments are not guaranteed. Savings Bonds are backed by the full faith and credit of the United States of America.
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 11:05 pm
vineviz wrote: Tue May 11, 2021 10:59 pm More risky, clearly, since savings bonds are not guaranteed to produce an income stream as long as you live.
You are confusing bonds risk with the risk of dying too late Also, I would argue that enough Savings Bonds would guarantee the holder an income stream to support their lifestyle of choice and buy a yacht on top of that.
btw SS payments are not guaranteed. Savings Bonds are backed by the full faith and credit of the United States of America.
Outliving one's assets is a real risk, and not one which can be dismissed by handwaving. Instead, it's a risk which is ideally ameliorated through some form of longevity insurance and - for Americans - Social Security is objectively the best form of such insurance available.

There is no other way for retirees to get a guaranteed lifetime inflation-indexed income stream: bonds can't do that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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### Re: Social Security as Part of Bond Allocation

bertilak wrote: Tue May 11, 2021 5:22 pm
scguy613 wrote: Tue May 11, 2021 8:49 am Should Social Security income be treated as part of your bond allocation since it’s guaranteed income. If so, what % rate should it be used to calculate the total value. For example, \$46,000 annual social security income. Is 3% a good value, so \$46,000/0.03 = \$1,533,333 bond equivalent. Higher or lower rate?
If you have a job that pays an income do you try to include that as part of your bond allocation?

An asset allocation is for your liquid, investable, assets. Trying to shoehorn other things into that scheme simply makes the whole thing meaningless.
Bertilak,
While one generally wouldn't consider income to be part of the bond allocation, I think the OP's real point/question (& many comments) acknowledge that income streams absolutely do & should influence AA. For instance, many people advocate a more aggressive AA while working (earning income) vs. when retired (portfolio-generated income). So in my mind, income streams (from all sources) & their assumed confidences very much should affect one's AA.

The question about whether SS should be considered a bond leads to quibbling over semantics. Is it a bond, is it even an asset... ugh! Why is it so difficult to focus on the real point... should one consider SS (& other "guaranteed" income streams) when deciding upon your personal AA? And semantics aside, IMO the answer is YES.

And to engage in my own semantics: human capital, home equity, annuities, SS, timeshares, grandmother's tea set are all assets; however, only some of these should influence your AA (but not actually be part of it)
Living The Dream
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 11:43 pm There is no other way for retirees to get a guaranteed lifetime inflation-indexed income stream: bonds can't do that.
I understand some people manage to survive on SS payments. In my case they will be pocket change and even if I maximized them it would be but an afterthought. On the other hand, an appropriately sized safe bond portfolio...
As you see it is a matter of size.
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### Re: Social Security as Part of Bond Allocation

Thesaints wrote: Tue May 11, 2021 11:59 pm
vineviz wrote: Tue May 11, 2021 11:43 pm There is no other way for retirees to get a guaranteed lifetime inflation-indexed income stream: bonds can't do that.
I understand some people manage to survive on SS payments. In my case they will be pocket change and even if I maximized them it would be but an afterthought. On the other hand, an appropriately sized safe bond portfolio...
As you see it is a matter of size.
Your personal earnings history has no bearing on the nature of either Social Security or of bonds.

In fact, your plight illustrates a key distinction between Social Security and a true marketable security: the only way to get more of the former is to work harder, work longer, or be blessed with talents for which employers are willing to pay dearly.

Anybody with a bank account can buy more bonds but there’s no way to directly convert dollars into Social Security benefits.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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### Re: Social Security as Part of Bond Allocation

If you are still in the accumulation phase and have a job, should not your current income affect your current bond holdings according to your thinking?

For me (collecting SS for many years), it does not change my 60/40 AA target. My AA is measured against my current stock/bond-cash holdings without consideration of any other forms of income. SS is a form of current income - just like my SPIA, VA disability and cash contributions to my retirement medical HRA given by my former employer. It has nothing to do with my current retirement portfolio. That is set to cover the income gap not provided for by my other income sources.

FWIW,

- Ron
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### Re: Social Security as Part of Bond Allocation

Ron wrote: Wed May 12, 2021 7:23 am If you are still in the accumulation phase and have a job, should not your current income affect your current bond holdings according to your thinking?
The amount of your current earned income probably shouldn't affect asset allocation, but the nature of it might. Workers whose income is more stable and/or less correlated with economic cycles (e.g. tenured professors, government employees) should probably allocate more to stocks during accumulation than workers with more economic sensitive (e.g. performing artists, investment managers).

The level of income comes into play somewhat indirectly, in that the ratio of Social Security benefits to expected portfolio income tends to be higher for workers with lower household incomes.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
CyclingDuo
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### Re: Social Security as Part of Bond Allocation

vineviz wrote: Tue May 11, 2021 11:43 pmThere is no other way for retirees to get a guaranteed lifetime inflation-indexed income stream: bonds can't do that.
31% in the US have a pension. Many of those include a COLA.

CyclingDuo
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### Re: Social Security as Part of Bond Allocation

LivingTheDream wrote: Tue May 11, 2021 11:52 pm The question about whether SS should be considered a bond leads to quibbling over semantics. Is it a bond, is it even an asset... ugh! Why is it so difficult to focus on the real point... should one consider SS (& other "guaranteed" income streams) when deciding upon your personal AA? And semantics aside, IMO the answer is YES.
Because that's what online forums do - argue points over and over again when a) it's a personal decision and b) the real answer (which you noted) they don't want to accept.
CyclingDuo wrote: Wed May 12, 2021 8:06 am 31% in the US have a pension. Many of those include a COLA.

CyclingDuo
That figure implies something, i.e. that the 31% with a "pension" have something that's worth enough to impact their retirement strategy.

Many pensions are garbage. My father in-law's pension was \$230 a month. My wife has just completed 10 years with a school district as a paraprofessional (she didn't work for the money, she did it to work with kids, and for the benefits). Her pension is amazingly close to her father's - and he retired over 30 years ago. It's literally a joke.
Last edited by RickBoglehead on Wed May 12, 2021 8:25 am, edited 1 time in total.
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### Re: Social Security as Part of Bond Allocation

bertilak wrote: Tue May 11, 2021 5:22 pm
scguy613 wrote: Tue May 11, 2021 8:49 am Should Social Security income be treated as part of your bond allocation since it’s guaranteed income. If so, what % rate should it be used to calculate the total value. For example, \$46,000 annual social security income. Is 3% a good value, so \$46,000/0.03 = \$1,533,333 bond equivalent. Higher or lower rate?
If you have a job that pays an income do you try to include that as part of your bond allocation?
Swedroe's book Your Complete Guide to a Successful and Secure Retirement mentions thinking about your human capital job as bond like or stock like depending on the industry you are working in and how cyclical it is.

Not to stir the pot any more, but for whatever reason there are analogies used regarding bond like and stock like when it comes to capital - be it human, or an income stream. I do not know the full history of why those analogies have been used, but I am just acknowledging their use.

How that impacts one's asset allocation and the ability to prepare the portfolio to deliver an income stream that will cover what other income streams (SS, pension, annuities, rental income, royalties, etc...) do not cover in retirement is indeed very important to get as close to right as possible.

That being said, the option exists for those in retirement age years that have the ability and good enough health to derive income from their human capital to bring in some income if the other income streams do not cover all of their expenses. There may be a limit on the years this could be done, but it does exist - especially in the part-time world of working.

CyclingDuo
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### Re: Social Security as Part of Bond Allocation

CyclingDuo wrote: Wed May 12, 2021 8:25 am
bertilak wrote: Tue May 11, 2021 5:22 pm
scguy613 wrote: Tue May 11, 2021 8:49 am Should Social Security income be treated as part of your bond allocation since it’s guaranteed income. If so, what % rate should it be used to calculate the total value. For example, \$46,000 annual social security income. Is 3% a good value, so \$46,000/0.03 = \$1,533,333 bond equivalent. Higher or lower rate?
If you have a job that pays an income do you try to include that as part of your bond allocation?
Swedroe's book Your Complete Guide to a Successful and Secure Retirement mentions thinking about your human capital job as bond like or stock like depending on the industry you are working in and how cyclical it is.

Not to stir the pot any more, but for whatever reason there are analogies used regarding bond like and stock like when it comes to capital - be it human, or an income stream. I do not know the full history of why those analogies have been used, but I am just acknowledging their use.

How that impacts one's asset allocation and the ability to prepare the portfolio to deliver an income stream that will cover what other income streams (SS, pension, annuities, rental income, royalties, etc...) do not cover in retirement is indeed very important to get as close to right as possible.

That being said, the option exists for those in retirement age years that have the ability and good enough health to derive income from their human capital to bring in some income if the other income streams do not cover all of their expenses. There may be a limit on the years this could be done, but it does exist - especially in the part-time world of working.

CyclingDuo
Well said. Note that while Swedroe uses analogies such as human capital he is also the champion of need, ability, and willingness in setting asset allocation. For him having human capital is part of the ability evaluation but he does not try to tabulate human capital as part of the actual allocation to actual bonds. An implication is that a person with high ability to take risk would hold less in actual bonds. But I think he would say it is more rational to get there by thinking through need and ability than by capitalizing future income, tabulating it as a bond, and then using some as yet not specified rule for arriving at stock allocation to go with it. Don't forget that tabulating anything as if it is a bond still leaves the question of what you do to decide on the right asset allocation. For Mr. Bogle that was age in bonds. But for Swedroe it is the total outcome of need, ability, and willingness.
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### Re: Social Security as Part of Bond Allocation

CyclingDuo wrote: Wed May 12, 2021 8:06 am
vineviz wrote: Tue May 11, 2021 11:43 pmThere is no other way for retirees to get a guaranteed lifetime inflation-indexed income stream: bonds can't do that.
31% in the US have a pension. Many of those include a COLA.
The latest data I have found from the BLS says that about 7% of people who have a definite benefit plan in private industry get an automatic cost-of-living adjustment. Federal retirees with a pension/annuity are more likely to have a COLA, but not all such retirees are eligible for Social Security.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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### Re: Social Security as Part of Bond Allocation

RickBoglehead wrote: Wed May 12, 2021 8:23 am
LivingTheDream wrote: Tue May 11, 2021 11:52 pm The question about whether SS should be considered a bond leads to quibbling over semantics. Is it a bond, is it even an asset... ugh! Why is it so difficult to focus on the real point... should one consider SS (& other "guaranteed" income streams) when deciding upon your personal AA? And semantics aside, IMO the answer is YES.
Because that's what online forums do - argue points over and over again when a) it's a personal decision and b) the real answer (which you noted) they don't want to accept.
CyclingDuo wrote: Wed May 12, 2021 8:06 am 31% in the US have a pension. Many of those include a COLA.

CyclingDuo
That figure implies something, i.e. that the 31% with a "pension" have something that's worth enough to impact their retirement strategy.

Many pensions are garbage. My father in-law's pension was \$230 a month. My wife has just completed 10 years with a school district as a paraprofessional (she didn't work for the money, she did it to work with kids, and for the benefits). Her pension is amazingly close to her father's - and he retired over 30 years ago. It's literally a joke.
Those are your two examples. You didn't give the reasoning behind what led to only \$230 a month for your FIL. Regarding your wife, I agree that there is indeed a hook that is utilized - especially when it comes to government/education state pensions - that requires a set number of years of service for an individual to be rewarded with the better pension amounts. I don't see that as a bad thing when it comes to addressing retention and turnover for the organization. In other words, the more service years you give to the organization, the higher the pension reward.

Our state uses what are called the rule of 88, rule of 20 years, or rule of age 65 as the qualifying points for various levels of the pension payout amount. To get well beyond what you call a pension known as a joke, you have to satisfy one of the rules (or more) to maximize your individual pension. In addition, the option to purchase 5 additional years of service exists if one saves in their 403b/457b/IRA and uses that to purchase the additional years of service.

So for many who have had careers in fields that include a pension, there is a path to satisfy rules for the amount one receives as not a joke.

CyclingDuo
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