Thank you for your help, it is much appreciated!No, I'm saying it's more risk than I would want given a recently "shaky" non-Federal pension, so I would not cut the bonds.So you're advising not to cut out the bonds?A) Or you could treat your expected pension as an offset to what your portfolio needs to provide an choose an AA and target-balance supporting that lower amount (not all of your post-retirement expenses), with the AA chosen independently (as if you had no pension). Any assets in excess of that target-balance could certainly be 100% stocks. As an example, if you need $100K/yr, the pension provides $60K and your portfolio needs to provide the other $40K. If you have a 30-year withdrawal phase (typical for retirement at 65 and survival to age 95), then the 4% rule applies and you need 25 x $40K = $1,000K (where 1/0.04 = 25). If by age 55, you have $1,200K, then $1,000K is invested with an appropriate AA as if you had no pension. The other $200K can be 100% stocks as that's money "beyond what you really need" to support your retirement plans.
B) Of course you could assume you have a $900K bond holding in your portfolio labeled as "pension" and then make the rest of your portfolio fit your desired AA (e.g., for 60/40, then up to $1.3M could be stocks while $900K is the phantom-bond due to pension), but that's more risk than I would want if the pension benefits get cut at any point before you both pass (higher risk since both you and your wife's pension would be cut at the same time).
I'm not saying what your risk-tolerance is, only you can say whether you: 1) understand the risk of your specific state pension paying less than what they estimated (doubled because both you and your wife are counting on the same pension source); and 2) you accept that risk.
Choose B) if you think there's less than an X% chance your pension will not give 100% of what you expect, and you're comfortable with X% risk. Then you can assume the pension is like having $900K in bonds, and with a target AA of 80/20, that's room for up to $3.6M in stock in your portfolio (if your portfolio is smaller than that, then it's 100% stocks).
Choose A) if you reject the X% risk that's been estimated. Anyone on the Financial Independence Retire Early (FIRE) plan is not going to be counting on a pension nor on SocSec (both of which are subject to benefits reductions, or elimination in the case of a state pension going bust), so the FIRE mindset folks would likely choose A). That might not be you, which is fine.
My advice is only to consider the risk of really using the present value approach to valuing the annuity to influence your portfolio AA (when they're not all your assets under your control). Read the article form Journal of Accountancy I linked earlier. Do you own research, esp. about the financial health of your specific pension system (my mom's state pension welched on her) and what insurance there is, if any, that will protect plan participants in the case of default. Make an informed decision about the estimated risk and whether or not to accept it. Again, don't do what Bogleheads tell you, listen to what we say, consider it with other information sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
Best of luck in your research & decision!
Statistics: Posted by 71GTO — Wed Jun 19, 2024 6:08 am — Replies 38 — Views 2279