SS & the PP

[Hal]

Does this make sense?

"Bogle also suggests that, during the retirement distribution phase, you include as a bond-like component of your wealth and asset allocation the value of any future pension and Social Security payment you expect to receive."

So... If you worked out the 10 year bond equivalent of SS and added half that amount in gold plus another half in the TSM (ie 50% 10 year bond equivalent, 25% Gold & 25% Shares) would you have a functional permanent portfolio?

The only issue I could see is how to rebalance. I suppose if you were working you could add to the lagging asset class, but cannot see how you could draw down on this portfolio.

All opinions welcome

[pp4me]

Does this make sense?

"Bogle also suggests that, during the retirement distribution phase, you include as a bond-like component of your wealth and asset allocation the value of any future pension and Social Security payment you expect to receive."

So... If you worked out the 10 year bond equivalent of SS and added half that amount in gold plus another half in the TSM (ie 50% 10 year bond equivalent, 25% Gold & 25% Shares) would you have a functional permanent portfolio?

The only issue I could see is how to rebalance. I suppose if you were working you could add to the lagging asset class, but cannot see how you could draw down on this portfolio.

All opinions welcome

I'm currently receiving about $45k/year in SS benefits, pretty close to the max you can get.

I don't treat it as any part of my portfolio but just like the salary I received when I was working. I'm assuming it could end at any time and/or be reduced which they say might be the case when the trust fund runs out or congress changes laws.

[Mark Leavy]

My spreadsheet accounts for my sometime in the future SS payments only as a component of my net worth. I add to my other net worth components the equivalent value/capital that could produce the monthly SS payment at 3.65% annual withdrawal rate.

I then - in a sort of circular reasoning, use 3.65% of my total net worth as my safe expenditure rate.

[vnatale]

Does this make sense?

"Bogle also suggests that, during the retirement distribution phase, you include as a bond-like component of your wealth and asset allocation the value of any future pension and Social Security payment you expect to receive."

So... If you worked out the 10 year bond equivalent of SS and added half that amount in gold plus another half in the TSM (ie 50% 10 year bond equivalent, 25% Gold & 25% Shares) would you have a functional permanent portfolio?

The only issue I could see is how to rebalance. I suppose if you were working you could add to the lagging asset class, but cannot see how you could draw down on this portfolio.

All opinions welcome

I'm currently receiving about $45k/year in SS benefits, pretty close to the max you can get.

I don't treat it as any part of my portfolio but just like the salary I received when I was working. I'm assuming it could end at any time and/or be reduced which they say might be the case when the trust fund runs out or congress changes laws.

In May I will start collecting about the same. Overjoyed that the CARES Act added two more years for when I will have to start taking those Required Minimum Distributions.

Unlike you I have full confidence I will collect it all. Congress will always be completely unwilling to take on the Baby Boomers. However, if I make my plans to make it to 100+, there probably may not be too many Baby Boomers left by that time...therefore what you predict could possibly happen at that time.

[mathjak107]

Non liquid assets that are income streams like pension , social security ,alimony ,etc are just that ....they are not your portfolio...they cannot be rebalanced , sold or swapped for different assets .

Trying to play that game will result in a severely unbalanced portfolio way too equity heavy.

All income streams do is reduce your portfolio draw rate ....they should never be considered a portfolio asset .

https://www.kitces.com/blog/valuing-soc ... nce-sheet/

[blue_ruin17]

LTT's are a safe haven asset that hedge against periods of deflation, economic contraction, and fear. During a deflationary crisis, LTTs spike, compensate for losses in stocks and/or gold, and provide the capacity to rebalance capital into those assets at discount prices.

SS is not a flight-to-safety in any compareable sense. It isn't even an "asset" that capital can even flee to. Substituting SS for LTTs totally breaks the PP in the same way that taking a wheel off a car totally breaks the vehicle.

All income streams do is reduce your portfolio draw rate ....they should never be considered a portfolio asset .

[barrett]

Thanks for posting the Kitces piece, mathjack. As always he looks at the issue from many angles. Really excellent.

My one tiny nitpick with Kitces is that he loves himself some good exclamation points and I always end up thinking about this scene from Seinfeld:

https://www.youtube.com/watch?v=VSKn8RlD7Is

[mathjak107]

He is one hell of a smart guy and is likely the most respected researcher in retirement planning the industry has had

[vnatale]

He is one hell of a smart guy and is likely the most respected researcher in retirement planning the industry has had

Plus, it seems like no one in the world has a bad thing to say about him!

I discovered him about 15 years ago when somehow I stumbled across his email address in some forum and asked him a tax question I'd been wrestling with when working for a CPA firm.

He sent me back an extremely detailed response with all kinds of tax codes references and NO CHARGE!.

I've seen asked him two more times for my own personal purposes and same response.

I had a client on my own (outside of the CPA firm) that was above my experience in solving. I wanted to get him on the case (for pay this time) but when I asked him he declined. Either he was not taking on new clients or he was going to assign someone to me. I only wanted the best!

[Xan]

Wouldn't your SS payments go up in real terms in a deflation?

[vnatale]

Wouldn't your SS payments go up in real terms in a deflation?

They sure would. Social Security payments go up according to some CPI but they are never reduced.

[mathjak107]

The colas are really not cost of living adjustments..but they are better than nothing ...most of it goes for Medicare increases

[sophie]

Not in favor of considering SS or pension income as part of an allocation, because you don't have direct control over it and certainly can't use it in a rebalance.

I just regard it as an income source that reduces what the portfolio needs to provide. I wouldn't be comfortable relying on, say, a 100% stock portfolio at the hairy edge of a 4% withdrawal rate for part of my basic income.

We had a thread once discussing how the PP or one of its variants could form a safe core portfolio, and that above a certain level of savings you can switch to a 100% stock portfolio to get those optimal returns without fear of having to dip into the principle at a bad time. I think the consensus was that if you had saved 1.5-2x the amount needed to provide needed retirement income at a 4% withdrawal rate, you'd be well justified putting the excess savings into stocks.

[pors]

LTT's are a safe haven asset that hedge against periods of deflation, economic contraction, and fear. During a deflationary crisis, LTTs spike, compensate for losses in stocks and/or gold, and provide the capacity to rebalance capital into those assets at discount prices.

SS is not a flight-to-safety in any compareable sense. It isn't even an "asset" that capital can even flee to. Substituting SS for LTTs totally breaks the PP in the same way that taking a wheel off a car totally breaks the vehicle.

All income streams do is reduce your portfolio draw rate ....they should never be considered a portfolio asset .

I can see that it shouldn't be used instead of LTT, but why not instead of cash? (still learning about the PP)

[mathjak107]

Because income streams are not cash ...

Income streams are social security,pension , annuity , alimony , rental income etc .

That money gets subtracted off our yearly needs .

Hypothetically if one needs 100k and ss , pension , and other income add up to 60k , then we need our portfolio to fill the gap .

So in this case to get a safe withdrawal rate of 4% we need 1 million in a diversified portfolio of our choosing that shows at least a 90% chance of success .

You can see the portfolio is stress tested on its own for what it needs to bring to the party .

All other income just reduces demand on what the portfolio needs to supply but in no way or form has a thing to do with that portfolio other than add the income stream to what you portfolio capability is

[pors]

Thanks, @mathjak107, that is very well explained!

[mathjak107]

Wouldn't your SS payments go up in real terms in a deflation?

No, because I am referring to deflation in terms of interest rates set by central banks.

For example. The last decade, we had “deflation” as central banks lowered interest rates. But housing has gone up 10% a year on average. Healthcare has gone up 10% or so per year.

Interest-rate manipulation based “Deflation” is an important scenario the PP because during those times, the cash portion will result in a negative real return. Because real price inflation is still occurring. Because the method of achieving “deflation” here is when central banks print a ton of money to buy treasury bonds. So the money supply is increasing simultaneously with interest rates going down.

We’ll never ever never ever never have an actual price deflation environment that lasts more than a few months ever again. Because as soon as there’s any liquidity problems, we’ll go to the money press.

Brrrrrrrrrrrrrrrrrrr

And we lower interest rates while increasing prices. But the CPI-U stays flat because the government manipulates it because they can’t afford to increase pensions and SS with actual price inflation, so they claim money printing isn’t inflationary.

And idiots parrot that in spite of housing, healthcare and education going up every year by 10%. In spite of housing being over 50% of the average persons overall cost of living, and in spite of healthcare being 20% of spending (based on GDP) and in spite of millennials having $50k+ of student loan debt that they’ll be paying off for 20 years...

But milk went down 5 cents a gallon and a flat screen TV dropped 20% so CPI-U is negative.

And look the cost of beef went from $10 a pound down to $4 a pound over the last 30 years! Wow! Except the “beef” is now full of steroids, antibiotics, roundup glyphosate residue from the corn the cows are fed, the lipid profile is horrible for you. And if you want grass fed organic it’s $15 a pound, which is a price increase, and is actually closer to to what beef was 30 years ago.

But no, no, no, beef has been dropping in price, so CPI-U is flat or even negative! In spite of my rent going up 15% per year, year over year, which is half of my total cost of living.

And also, if I haven’t complained about the housing market this week, the fed lowering interest rates is what caused price inflation on assets like houses that can be bought on debt.

So no, “deflation” doesn’t mean your money goes further, it might mean it goes even less. And long-term treasuries are the only way to combat that.

The housing bubble in 2007 had 7% mortgages , so you can’t blame low rates for housing prices .. in fact when I bought my first investment property in 1987 , real estate was soaring in nyc ...i was so happy I got a mortgage at 8-1/4% ..

Housing is a local supply and demand issue ...we had a home in the poconos , we sold it in 2012 for what we paid in 2007 ...it fell 60k over the years and today still is slightly below the original cost when built in 2005 .

So until rates get way high , local economies determine values not interest rates .

In fact rising rates tend to spur demand as the thinking becomes we better buy now before we can afford even less house

[glennds]

Wouldn't your SS payments go up in real terms in a deflation?

No, because I am referring to deflation in terms of interest rates set by central banks.

For example. The last decade, we had “deflation” as central banks lowered interest rates. But housing has gone up 10% a year on average. Healthcare has gone up 10% or so per year.

Interest-rate manipulation based “Deflation” is an important scenario the PP because during those times, the cash portion will result in a negative real return. Because real price inflation is still occurring. Because the method of achieving “deflation” here is when central banks print a ton of money to buy treasury bonds. So the money supply is increasing simultaneously with interest rates going down.

I believe you have it backwards. Or maybe you're commingling two different kinds of inflation/deflation.

The combination of interest rate reductions and easing liquidity has injected inflation, not deflation, into the economy. In the post GFC years the purpose was to combat asset deflation and avoid a deflationary depression. When you think about it, most marketable assets are valued based on cap rates or a variation thereof. Thus when interest rates are dropping, cap rates are doing the opposite to prices. Whether the Fed should be prioritizing asset values in the way they have or not is a matter of opinion.

Consumer price inflation is a different story. As you point out, there are pockets where prices have deflated, and there are others, like healthcare, where they have increased dramatically, and other areas where prices have marched upwards in traditional escalations of 2-3% year. Same goes for wages across different industries.

In my mind, it is critically important for people to participate in appreciating assets as much as possible. The societal wealth divide seems to me to be based mostly on a division between those people who are participating in appreciating assets and those who are not (or cannot). The latter are getting left behind, and further priced out of participating in assets like homes as each day goes by. This is because asset prices and wages have become more dislocated as a result of Fed policy.

The main reason cash is trash under these conditions is not as much due to real buying power of the cash on a consumer level, but it's value in relation to the appreciating assets.
Bottom line, I'm saying there is a disconnect between consumer price inflation and asset price inflation and when we talk about inflation (or deflation), it is important to separate the two.

[mathjak107]

Much of consumer price inflation is caused by us ...we are over using something beyond supply ..cut the demand and prices will fall

[glennds]

Much of consumer price inflation is caused by us ...we are over using something beyond supply ..cut the demand and prices will fall

Or suppliers will increase output and prices will fall.
In the US markets are pretty efficient that way. A lot of weird dislocation happened at the early stage of the pandemic. Most of it was for the reason you point out, consumers hoarding and panic buying. But even a historic disruption like that leveled off and normalized..

[mathjak107]

Many times suppliers can’t increase supply ..weather , strikes , political issues prevent it or just plain ole new usages for stuff we did not have before .

Major things like housing is extremely difficult to increase and reducing usage is rarely an option