Social Security and Pension Income

[Longstreet]

I read this article (http://online.wsj.com/article/SB122790995714865339.html) a few years back and was impressed enough with the rational that I saved the link.
The author suggests that the current value of the SS and Pension Income should be included under "bonds" in the standard 60/40 investment plan, thus allowing more funds to be allocated to stocks.  Obviously, the suggested definition of "bond" does not serve the function of the Long Term Treasury Bond in the HBPP (or does it?).
Have any of you considered this in your makeup of the HBPP, or is this strictly a consideration for the variable portfolio?
Please share your comments and thoughts.

[barrett]

Thanks for posting that, Longstreet. Interesting to read that article six years later with the knowledge that the stock market didn't bottom until about four months after it was written. Those were painful times.

Regarding SS payments, I would think of them as cash bonuses every month that they come in... and maybe overweight a bit in LTTs, gold & stocks but that depends on how the numbers look when the time comes.

No, SS doesn't serve the function of Long Term Bonds just because it doesn't react strongly to deflation (although if the payments continue to be COLAed, that is some pretty nice unintended deflation coverage.) Hmm. Gotta think about this more.

[rickb]

I think it's reasonable to think of SS or pension payments as dividends on a phantom investment in medium term bonds.  At prevailing 10-year Treasury interest rates that means a payment of $X/year is more or less the same as an investment of about $38*X .  If you choose this kind of approach, in PP terms I think you could count this as half cash and half long term bonds.

One issue is you can't rebalance out of this amount. 

[rickb]

I certainly would not consider it part of a PP, because (i) I don't see that is either a long bond or cash and (ii) as rickb said, you can't rebalance into or out of it.

IMO, this is an attempt by Wall Street at a Jedi mind trick to try to get people to put more money in stocks.

You can rebalance in (allocate more to cash and LT bonds), but you can't rebalance out.

To some extent, this is the same idea as treating your salary as an investment in your employer's stock (assuming you work for a company with publicly traded stock).  If you consider your salary as a dividend on a phantom investment in your employer's stock, you're probably incredibly undiversified (way too much stock overall, and way way too much of your employer's stock).  Of course your salary can go away in a heartbeat, so considering this phantom investment as part of your "permanent portfolio" is simply foolish.  SS or a pension is substantially different.  These are effectively lifetime annuities, with a market value equivalent to what such an annuity would cost.  What companies who offer annuities do with your money is basically put it in intermediate term bonds.  You don't have the money.  But you do have an income stream that is in some sense equivalent to the money.

I don't see any particular conceptual problem with treating SS or a pension as a phantom investment, split between cash and long term bonds.  We can quibble about the value you should attribute to the investment, but the cost of a lifetime annuity that pays what your SS or pension is paying is certainly in the right ballpark.

[PP67]

This then would be the Hotel California Portfolio...

[Libertarian666]

I think the proper way to consider Social Security is as an income stream that reduces the amount of money that you have to take out of your savings to live on.

[clacy]

I think the proper way to consider Social Security is as an income stream that reduces the amount of money that you have to take out of your savings to live on.

Bingo. It's a very safe and predictable salary (with now work necessary to earn they paycheck)