White Coat Investor Tip on Pensions and Finance Friday Articles

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I’m including this tip of the month from WCI’s newsletter (with permission) since it is relevant to just about everyone who reads this (subscribe to his newsletter here).


White Coat Investor’s Newsletter Tip of the Month – Pensions and Your Asset Allocation

A lot of people wonder how to incorporate their various sources of guaranteed income into their asset allocation. These include:

  • Social Security,
  • Pensions, and
  • Immediate Annuities.

They wonder if because of their low risk that they should consider them “bond equivalents” and increase the stock:bond ratio in their portfolio to make up for the presence of these guaranteed sources of income. I believe there is a better way to look at this dilemma.

Rather than including them in your asset allocation and calling them bonds (which they are not), I recommend you leave them out of your asset allocation entirely. That’s right. Just leave them out. But when you go to calculate how much income you need from your portfolio, subtract the guaranteed income first. Let me explain:

Let’s say you need $120K to live on in retirement and are getting $40K from your Social Security. Instead of trying to calculate the present value of your Social Security income stream and adding that to your portfolio, just subtract that $40K from the $120K you need. Now you need your portfolio to provide $80K of income. Using the back of the napkin 4% rule to make the calculation you need a $2 Million portfolio in addition to Social Security. Easy peasy. If you also have a military or other pension or have purchased a Single Premium Immediate Annuity (SPIA) or two, you can subtract those too.

  • $120K income need minus
  • $40K Social Security minus
  • $20K Pension minus
  • $10K SPIA equals
  • $50K needed from the portfolio. ($50K/4% = $1.25 Million)

So how should the presence of this guaranteed source of income affect your asset allocation? Well, it can go two ways. First, you could decide that now that you have all or most of your fixed income needs covered by these guaranteed income sources that you now have the ability to take on more risk. Or, alternatively, you might decide that since you have guaranteed income sources covering so much of your spending needs that really don’t need as much from your portfolio and can afford to take less risk with it. Perhaps these two factors cancel each other out and it doesn’t change your asset allocation at all.

What about other assets? Should they go into your portfolio? A lot of people wonder about their home and their mortgages in particular. While a mortgage acts like a very safe, very short-term “negative bond” (paying off a mortgage provides a guaranteed return equal to the after-tax interest rate), I wouldn’t include it in the portfolio. Nor would I include the house. Or your practice. And maybe even not your side gig small business. The main reason why is that it really complicates portfolio management. You know, the buying and selling and rebalancing you do periodically. For example, let’s say you included your house. When you are young and relatively poor, that is going to make up a massive portion of your portfolio. And later, when you are older, hopefully it will make up a tiny portion. How’s that going to work with trying to keep percentages equal? Same thing with a mortgage or a small business. And imagine trying to rebalance? What are you going to do when stocks poorly, take out a HELOC? Do yourself a favor–leave that stuff out of your portfolio and just let the presence of those things affect your overall asset allocation only as they change your need, ability, and desire to take risk. Don’t try to actually put them into your asset allocation.


Here are my favorites this week:

Practice Minimalism To Improve Your Financial Health And Quality Of Life


When Does the Federal Deficit Matter?


Here are the rest of this week’s articles:

7 Things I Still Love About Turbo Tax in 2020

Considering a Syndicated Real Estate Investment Opportunity? What You Should Know

Crash Course in the Japanese Stock Market Collapse

From Great Fortunes to Gone

How one decision can help you save for retirement

How Should I Save for College? Plus a 529 Plan Hack

How to Generate Over $5,000 Per Month With One Airbnb Property

“I’ll Never Sell”

Important Details Investors Should Know About The Coronavirus

Portfolio Makeover

Stop worrying about where the stock market goes from here and read this post

The Worst Money Decisions I Could Make

Top States To Buy Real Estate In The New Decade

Trading Time

What Counts as Compensation (Earnings) for IRA Contributions?

Will Retiring Baby Boomers Crash the Stock Market?

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