Impact of Pension on PP Theory?

[goodasgold]

I retired last summer, and I am fortunate that my pension, with some scrimping, covers my basic expenses.

How should this be factored into the PP? While I need to set aside some cash for emergencies, does the pension allow me to minimize the cash portion of the portfolio? In other words, instead of 25% divided among four PP components, can I effectively omit the cash portion and allot 33% of my portfolio equally between stocks, bonds and gold?

Your comments would be appreciated.

[Pointedstick]

For me, the appeal of the PP is the smooth, stable, inflation-beating ride that makes it easy to live off of. But if your pension already does that on its own, maybe it's not so important that the rest of your investment portfolio also does the same thing. If I were in your enviable situation, I'd take a good long hard look at the stability of the pension provider and if it were safe and stable enough, I might not use the PP at all in favor of a PP-like VP. Say, 40% small-caps, 30% 5-year treasury bond ladder, 30% gold. Historically, it's produced some pretty impressive returns with low, PP-like volatility:

http://www.riskcog.com/portfolio-theme2.jsp#5bd58jd8j8

[notsheigetz]

Congratulations on belonging to the dying breed of retired pensioners. Mine was cashed out several years ago.

I had not actually thought about this until you brought up the subject but I will be retiring in a few years and I'm wondering if I should make some kind of adjustment to the PP based on the fact that Social Security money is already invested in LTT's?

[MediumTex]

I'm wondering if I should make some kind of adjustment to the PP based on the fact that Social Security money is already invested in LTT's?

I wouldn't say that SS money is invested in long term treasuries.

If treasury rates fall, your SS benefits won't go up, and vice versa.

The bonds held by the SS Administration are not really bonds.  They can't be traded, their value doesn't rise and fall with interest rate fluctuations.  It's more of a bookkeeping trick than anything else, IMHO.

Old people vote, and thus SS benefit promises to current old people will never be broken.  The promises that will be broken are those that are made to future old people who are not yet old.

[Pointedstick]

Old people vote, and thus SS benefit promises to current old people will never be broken.  The promises that will be broken are those that are made to future old people who are not yet old.

I think this is true. I'm 25, and I'd gladly opt out of the system if I could, even if I had to forfeit all the money I'd paid into it.

Of course being forced to pay in even more while getting nothing in return is what I'm expecting, given the voting habits of old people that MT mentioned and the "third rail"-ness of Social Security in a society with a great deal of poverty.

[KevinW]

The PP is for money you can't afford to lose.  Assuming that you are OK with the volatility that is inherent in the PP, I would decide how much of your savings you put in that category, and invest that in the 4 components.  The rest of your savings will be your variable portfolio.  Make that decision separately.

+1

...I'd gladly opt out of the system if I could, even if I had to forfeit all the money I'd paid into it.

+1

[notsheigetz]

Well, the good news is that based on a 78 year life expectancy the now-retiring baby boomer generation should start dying off in only 11 more years (1946 + 78 = 2024) and maybe that will start easing things a bit for you younger folks.

But back to the original point, whether the social security trust fund bonds are considered LTT's or not, they still constitute long term government debt so I am going to be giving some thought to having such a significant portion of my future livelihood being dependent on the full faith and credit of the U.S. government. Or I can just hope that the MMT'ers are right and the government can't go bankrupt.

(Whoops. I originally posted it as 12 more years forgetting it was 2013. Must have been a senior moment).

Old people vote, and thus SS benefit promises to current old people will never be broken.  The promises that will be broken are those that are made to future old people who are not yet old.

I think this is true. I'm 25, and I'd gladly opt out of the system if I could, even if I had to forfeit all the money I'd paid into it.

Of course being forced to pay in even more while getting nothing in return is what I'm expecting, given the voting habits of old people that MT mentioned and the "third rail"-ness of Social Security in a society with a great deal of poverty.

[melveyr]

I wouldn't try to incorporate the pension income into the PP framework. It is kind of its own thing. If you want to be strictly Harry Browne about it I would just call it part of your VP.

What company is funding your pension?

[goodasgold]

What company is funding your pension?

The company is called the Taxpayers of New York State.

John Bogle, who is no slouch when it comes to understanding investing and life in general, has stated that the only way the federal government, and the states and localities, can avoid bankruptcy is to cut pensions. As the younger generation begins to comprehend the horrendous burden placed on them by my fellow Boomers, a public revolt to demand pension cuts is inevitable, and needs to be taken into consideration when planning my future.

[AgAuMoney]

I wouldn't try to incorporate the pension income into the PP framework. It is kind of its own thing. If you want to be strictly Harry Browne about it I would just call it part of your VP.

Agree 100%.

In a traditional portfolio management model, a pension is a fixed income asset (as are social security and annuities) and can replaced a portion of the fixed income allocation (bonds, cash) in your portfolio.

The role of these fixed income assets in a traditional portfolio is to lower the overall volatility of the portfolio and thereby to shield against or reduce the need to sell assets when the price is (temporarily, hopefully) depressed.  A pension fulfills that same end need by providing spending money so you don't need to touch the portfolio (as much anyway).

However the bonds and cash in the permanent portfolio have a different or at least an additional role.  As inversely correlated assets they provide a counterbalance so assets can be shifted from temporarily high classes to temporarily low ones as the economic cycles change.  You cannot do that with a pension.

As MediumTex pointed out re. social security, the pension isn't going to go up when interest rates fall and allow you to take excess off the top.  It isn't going to go down when interest rates rise and let you buy in to get higher yield.

A pension is an asset permanently in isolation, and the permanent portfolio only works as intended when assets can work together.

[sophie]

I retired last summer, and I am fortunate that my pension, with some scrimping, covers my basic expenses.

Sounds to me like you still need a reliable source of income in retirement.  Your pension might not keep up with day to day expenses, or something unexpected might come up.  In fact you should probably count on both of those things to be true.

I'd just regard the pension as income, decide how much of your savings you want to keep as a core portfolio, and then you can do what you like with the rest.  In other words, use the PP/VP concept.  It's amazingly useful.

[modeljc]

I am in retirement also.  For me, cash serves the purpose of lowering the possible draw down of the total portfolio. If we get a 2% or 3% spike in interest rates or have a another tight money recession cash will be the only asset that does not decline in value. 

The second purpose of cash, is to be able to handle a big decline.  You would have to use your cash to re balance.

With historical inflation running above 4% for 41 years it is easy for me to believe that zero interest rates will not work forever. 

[Pointedstick]

Old people vote, and thus SS benefit promises to current old people will never be broken.  The promises that will be broken are those that are made to future old people who are not yet old.

Don't those people vote, too? Why do they allow this?

No, we don't vote; at least not in the proportions that the middle-aged and elderly do. A secondary reason is that Congress--and especially the Senate--is mostly made up of people aged 60 and older, so even if a majority coalition of young whippersnappers were in favor of it and voted, overcoming the inherent age bias of their elected officials would make it a tough sell.

[AgAuMoney]

maybe if enough people voted for new voices, some things would change.

I believe if "enough" people voted for new voices, some things would change.  The problem is "enough" and who they vote for.

Ford: On its world, the people are people. The leaders are lizards. The people hate the lizards and the lizards rule the people.
Arthur: Odd, I thought you said it was a democracy.
F: I did. It is.
A: So why don't the people get rid of the lizards?
F: It honestly doesn't occur to them. They've all got the vote, so they all pretty much assume that the government they've voted in more or less approximates to the government they want.
A: You mean they actually vote for the lizards?
F: Oh yes, of course.
A: But why?
F: Because if they didn't vote for a lizard, the wrong lizard might get in.

I know many people who voted against a candidate during the last presidential election, by voting for whom they thought had the best chance of beating the candidate they wanted least.  If everyone had voted for the candidate they thought best represented their idea of good government, it may well have turned out differently.

[smurff]

Pension income comes from assets controlled by someone else.  Your PP assets should be under your own control.  As someone else (sorry, I'm typing this post with one finger on a small tablet, so I can't go back to see who) mentioned it's best to consider the pension as its own entity and treat your OWN assets as either PP or VP.

Pensions of all kinds have been disappearing in the USA, completely under the noses of congress, the executive (agencies and departments), and the courts.  I'm referring to pensions that were fully earned and even fully vested.  Congress permitted financiers to skim away large chunks of the assets and pay them to themselves in leveraged buyouts and similar shenanigans, and when fake insurance companies set up to annuitize what was left of the pensions went bust, retirees lost out.  Punishments did not happen, or were trivial compared to the crimes.  Retirees in those cases wound up with pennies on the dollar compared to the pensions they have earned.

The difference with large government pension funds is that there are more eyes on the pot to challenge a lot of these things, and the sheer numbers of employees and monies set aside for them mean if any wrongdoing is discovered the day of reckoning will be far into the future. 

There is another reality--the baby boom generation was so large in terms of numbers of individuals born that it disrupted every institution it went through.  Hospitals were not ready for the births, schools were not ready for the numbers of students, universities had to pile them up like logs in dorms.  Fortunately innovations and technology combined with capitalism make it possible to grow companies and absorb them into the workforce so there was not massive unemployment when they came of age.  But there are predictions that the pension systems--Social Security, public defined benefits, what's left of private defined benefits, contribution pensions of all kinds--will suffer from the numbers as well.

I vote for keeping PP and VP separate from pensions, which are supposed to be payouts of deferred earnings.  If you have excess at the end of the month you can make it your asset by allocating it to either the VP or the PP pot (no euphemistic pun intended).