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Moving to 100% in Stocks

I decided to move our portfolio into 100% stocks. But it’s not a scary as it might sound.

I’ve been maintaining a 88/12 stock/bond asset allocation [1] for awhile now.

But we have a few components to our portfolio that haven’t been included. I want to include them for a more holistic picture.

Pension Plan. The first is my husband’s pension. (Mine has since been converted to my IRA as I took a lump sum when I left my job). It has grown significantly over the last few years since it’s formula based (and because he earns a full year of service working just 25 hours per week), to the point where it should be included in the management of our portfolio.

Social Security. Whether or not you believe Social Security will be around in it’s entirety is a whole other can of worms, but there will be an impact to your asset allocation. I’ve always ignored Social Security to this point, but feel it does at least deserve the analysis.

Phantom Bond Allocation

I’ve been researching the “phantom bond” allocation and decided that I would convert the pension into present value and include it as a bond portion in our portfolio. I used to ignore the pensions since I can’t control them, but I’ve always felt uncomfortable with that. What convinced me, was when I read a thread at the early retirement forum where haha pointed out that this logic is unassailable [2]; I’ve started to evolve my asset allocation.

I made a shocking discovery, we’re significantly overweighting our bond portion of our portolio. If you convert the pension and our social security to net present value (and discount the Social Security based on the risk of Social Security actually being around then), we’re more than double overweighting our bond portion.

Example Phantom Bond Allocation

Here’s a quick example. A $50,000 pension per year is worth roughly $700,000 in a future lump sum. If you discount it today from 20 years at 3%, it makes the NPV about $390,000.

Let’s say you originally had a $500k portfolio and you were doing a 50/50 stock/bond split. If you include the npv of the pension, all of a sudden you have 28/72 stock/bond split! It’s much more conservative than the 50/50 split you were targeting.

How to Convert Income Streams

To convert income steams to npv, I first calculated what the monthly income stream would be if you purchased an equivalent annuity [3] in the future. Or a quick rule of thumb is to take the annual income stream times 14 to get a rough estimate.

If you don’t know the current income stream of your Social Security, you can use the SS calculator [4]. (I further discounted our Social Security estimates to account for the changes I believe will come in the future.)

Once you know the lump sum amount in the future, you can convert it to net present value [5].

Going 100% into Stocks

So I’m selling our tips [6] and bonds, and going 100% stocks. Of course we still hold more than enough bonds with the phantom bond allocation to maintain a portfolio that is even more conservative than we would like.

It will mean that the accounts I can manage are more volatile, but I’ll have to remind myself that the overall picture is what counts. I’m still going to work on going back and inputting the npv’s of the pension during the dip in 2008/2009 to see how much it softened the blow.

Now that I’ve accounted for the phantom bonds, the next step in my evolving portfolio is to try to find a way to include real estate and business investments so I can manage our entire net worth as one big picture.

Do you include pension npv in your portfolio?


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