Non-Inflation Adjusted Pension

[Pkg Man]

MediumTex's post on the annuity-like character of the PP http://crawlingroad.com/forum/index.php?topic=327.0 made me think of something.  I have a defined-benefit pension plan where I work but it is not adjusted for inflation.  I was wondering if holding some extra gold (in the VP which would be purchased around my retirement date) might be desirable to hedge against inflation risk.  The question is how would one go about quantifying the amount of gold needed to adequately protect the pension? 

I don't think the 25% already held in the PP is sufficient, since the present value of the pension would be a sizable amount in relation to the expected size of the PP in a few years (being mindful not to count my chickens before they hatch ).

My initial thought is to take the PV of the pension and purchase 10-25% of that amount in gold.  This would be in addition to the amount held in the PP.

Any thoughts?

[6 Iron]

Pkg Man, in a world of underfunded pension plans, I might be more inclined to view any pension as I do my future social security benefits: theoretical. I would probably be more conservative, and have a smaller variable portfolio, rather than try to inflation protect the pension. 

[Pkg Man]

You may be right 6 Iron.  In my case we're pretty close to being fully-funded, and before 2008 we were actually over-funded, but I get your point.  It certainly is not a guarantee.  Realizing that was one of the things that pushed me to the more conservative PP approach. 

The VP will soon be down to about 10% as I have finally decided to rid myself, after much prodding, of most of my company stock.

[MediumTex]

Here is something to think about:  A traditional defined benefit pension plan does have built-in inflation protection up to the date you retire by being keyed to your compensation during your years of service immediately preceding retirement.

The problem is in maintaining the purchasing power of the defined benefit annuity after you retire and commence benefits.  In that case, it might make sense to buy some gold as a hedge against loss of purchasing power of future pension benefits.

Alternatively, if the pension plan offers a lump sum option, you could take the lump sum and invest it in a PP and it should provide a similar (or better) stream of income, though the matter of mortality risk (the possibility that you will live a LONG time in a low inflation environment) is something you are assuming if you go the lump sum route.

Another option is to take a lump sum and buy TIPS with it.  That's not something I would do, but that is another possible approach.

The main thing is to bear in mind that there is a sort of passive inflation protection during your working years through the plan's "high five", "high three" or similar methodology used to calculate your retirement benefits, since your salary will normally more or less reflect any underlying inflation.