Burr Man wrote:
- quote -

You've made the previous poster's point. If you capitalize your Social
Security benefits and consider that a fixed-income portion of your
portfolio, you can invest the part of your portfolio that you control
very aggressively.

If my rich uncle left me a 1 million dollar 20 year treasury bond, I'd
sell the dude and add the proceeds to my portfolio, which has an asset
allocation of 70% stock, 25% bonds, and 5% cash. Some people say that
that is too aggressive for an already-retired person. However, I note
from www.immediateannuities.com that a fixed annuity that matches my
social security benefit would cost about $223,000. An
inflation-adjusted annuity would cost 40-50% more, say $312,000 to
$350,000. Adding that to my portfolio dilutes my stock holdings to a
much more balanced 50%.

Dave

In article <4408f820$0$95946$742ec2ed[at]news.sonic.net> ,
"Mark Freeland" <nNeEwTs[at]sonic.net> wrote:

- quote -

'More aggressively' is a relative term however. If the PVs of a decent
pension and Soc. Sec. are say 1 million and one had a 1 mil portfolio to
start with then putting the entire mil into stocks would still be a
50-50 stock/bond allocation...not aggressive by traditional standards.
What would you do with your asset allocation if a rich uncle suddenly
left you with a 1 million dollar 20 yr Treasury bond?

A decent pension indexed for inflation and SS can easily exceed 1 mil so
a portfolio's allocation could/will undergo drastic revision if you
capitalize the income stream and added it to the portfolio. A few
financial advisors are starting to advocate this from what I've read.
--
Had It
I'm a hypocrite, I'm intolerant of intolerance.

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -


You're right: I was being loose with "pittance." I agree SS
can be a substantial supplement to many people, even middle
class ones. On its own, it wouldn't be enough to keep most
people out of poverty, but it was never supposed to be the
sole income for the elderly (and disabled, etc.). It's fair
to look at it as a nice-sized annuity.

Re Medicare: I still don't see how it can be quantitatively
valued so as to be factored into one's portfolio.
Qualitatively, crudely sure.

Also, I suspect you might have been trying to say that the
survey of consumers' finances is misleading if we compare
the rate of savings today to the Depression era. Because
during much of the Depression, SS didn't even exist. Today
its existence does indeed represent some sort of individual
saving (just about everyone pays into it), albeit government
managed.

So today we have a savings rate said to be as low as
something like 1934. But in 1934, no one was paying into SS
or Medicare with his/her monthly paycheck. So today's
savings rate could be argued to be better.

- quote -

Yes, that's it. Doh on me.

- quote -

Sure, and ISTM many or all of the more detailed free online
retirement asset allocation tools already treat SS this way.

Elle wrote:
- quote -

According to the 2004 Fed Survey of Consumer Finances (link courtesy
Dave Dodson), nearly half (48.6%) of all families own stock, either
directly or indirectly.
http://www.federalreserve.gov/pubs/b...ancesurvey.pdf (table 6)

The ICI shows similar figures - it reports 48.1% of households owned
mutual funds in 2004.
http://www.ici.org/pdf/fm-v13n3.pdf

In terms of individuals, the ICI reports 92.3 million owners of funds in
2004. I'll leave it to others to look up the denominator (2004
population), though it was nowhere near 500 million.

- quote -

There's an alternative explanation for the rate of investing - the less
one has, the less one is likely to invest; first one saves. Again
referring to the ICI data, 8/11 of households with annual incomes over
$50K invested in mutual funds, while only 3/11 of those under $50K did.

(See also the Fed survey, showing that for cash equivalent accounts the
participation rate was over ~7/8, except for the poorest 20% of
households; while direct stock ownership rose fairly linearly by income,
and direct bond ownship was almost non-existent (under 3%) until one got
to the top 10% of households.)

Thus, one cannot conclude that a low rate of investing implies a lack of
understanding. As the saying goes, it takes money to make money.
--
Mark Freeland
nNeEwTs[at]sonic.net

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
news:1L3Of.65581$PL5.1882[at]newssvr11.news.prodigy.com...
- quote -

I don't think this point can be emphasized strongly enough. It is not only
that there is this additional asset (SS), but that it is an
inflation-indexed annuity, meaning that both investment risk and inflation
risk are assumed by the provider (the Fed government). This is major
risk-shifting, and part of what enables investors to invest more
aggressively.

--
Mark Freeland
nNeEwTs[at]sonic.net

"Elle" <honda.lioness[at]nospam.earthlink.net> writes:
- quote -

It's actually pretty huge. Suppose one's SS benefits are
currently $1000/mo. If we ignore inflation completely,
and assume interest rates of 4%, a 20-year annuity payout
at that level is worth about $163,000. Inflation adjustments
make it worth more. If 20 years seems aggressive - the
average 65-yr old will probably live a little less than
20 years (but not that much less - this is not life
expectancy at birth, but rather, life expectancy at 65
or 67 or wherever you want to start this calc) - a 15yr
immediate annuity at 4% paying $1000/mo is worth about
$133,000. This is far from a pittance.

- quote -

It shouldn't. Alone, even if one paid the max one's
whole working life, it'd not be an income which matched
what one was earning before. But it's a solid piece of
one's retirement. Ignoring it may lead to folks being
too conservative with their other investments.

- quote -

PV is standard jargon in finance for Present Value,
as in "Present Value of an Annuity". (FV = "future value").

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
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Elle wrote:
- quote -

It isn't though, it's a lot of...uh...bread.

Just a quick example: the average social security benefit for 2006 is
about $1,050 according to the SSA. Buying a $1050/month immediate
annuity might cost about $160k for a 65 year old male according to
immediateannuities.com (I can't vouch for the accuracy of the site but
the number seems reasonable). The maximum SS benefit of about $2k/month
would cost double that. Add in an inflation adjustment, and the cost
would be that much higher. Add in the value of Medicare...these
shouldn't be characterized as a pittance! Quite a few people are sitting
on an "asset" with a present value of perhaps $400k+.

I think Social Security gets a raw deal, as some kind of marxist plot.
It frees people up to invest their other money a bit more aggressively
than if $0/month were the expectation at retirement, and assures that at
least some money is directed into a form of savings.

- quote -

I think he meant "assess the present value of". And I think it's a good
point...that to the extent you collect Social Security, you already have
a sort of inflation-indexed annuity providing income, and people can
invest a bit more aggressively than if that income wasn't coming in. And
those who don't collect Social Security should have a higher allocation
to cash & bonds.

-Tad

<BreadWithSpam[at]fractious.net> wrote
- quote -

Bread, don't you think one reason present value of Social
Security isn't factored in is because it's a pittance? Time
and again, I see planners and investing gurus counseling
that SS should not be relied upon to keep one of poverty. It
is a welfare program. It's probably a good one, but my point
is, it's not designed to make people well-off.

As for Medicare, given the rates of increase in medical
costs of late, as well as the unpredictability of one's own
health, I don't think making assumptions about its present
value (for portfolio planning purposes) represents rational
decision-making. The assumptions would be based on some
other, serious assumptions, as well. Margins of error would
be absurd, I'd bet.

So factoring into the previously cited survey the 'savings
rate' of SS and Medicare makes no sense to me, except as an
abstract exercise.

To the original poster: Are you trying to perfect your asset
allocation, or what? I have my doubts about the usefulness
of doing this. Seems to me you should forecast your expenses
as best you can. Calculate the income you need. Deduct from
this income SS. Allocate per your risk tolerance and the
remaining income needed. That's what the asset allocation
tools I've seen do.

- quote -

Is PV'd short for "privatized"? If, so, what exactly do you
mean by privatizing here?

Aside: Something like less than 20% of this country
participates in stock and mutual fund ownership. So
something like 80% can't be all that well-informed on
investing. So I don't know that most people could vote
intelligently on privatizing. They would be highly
vulnerable to finance industry lobbying sharks, who by
definition are looking out for themselves.

Tad Borek <borekfm[at]pacbell.net> writes:
- quote -

I've often thought that all of the screaming about the low
US savings rate, etc. predicated on such surveys, would be
quite a bit different if folks looked at the present value of
those benefits.

I also wonder if folks ought to be a bit more aggressive
with their investments - and would be if they PV'd the values
of their pensions and SS and such.



--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
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Ron Peterson wrote:
- quote -

I haven't checked in awhile but it's a surprisingly large amount, a few
hundred $k. Much, much more than most people end up saving on their own.

It would be interesting if they re-did the "survey of consumer finances"
adding a present value for Social Security and Medicare benefits, at
least for those currently getting paid them.

-Tad

TB wrote:

- quote -

Good idea. http://www.stanford.edu/~wfsharpe/ws/ws_ann.htm will
calculate the annuity value if you enter amount per year and the
interest rate.

--
Ron

Burr Man wrote:
- quote -

Another way to look at it might be to see how much you'd need to plunk
down right now in an annuity to get today's Social Security payment,
plus annual inflation adjustments. There are some web sites out there
that give quotes like this (you type in your age, gender, & state), I
don't recall exactly, they have names like annuity.com or
fixedannuities.com or something like that.

-Tad

In article
<chainyanker60-AAD1BD.15071428022006[at]newsclstr02.news.prodigy.com> ,
Burr Man <chainyanker60[at]hotmail.com> wrote:

- quote -

I consider my pesion and social security as a bond valued using yields
of 10 year T bills when considering whether my portfolio allocation is
too rich in equities.
--
Avrum Lapin avrum223[at]nospam.verizon.net
Upland CA Remove NOSPAM from address

Hi,

Has anyone out there collecting a pension and/or Soc. Sec. calculated an
estimated capitalization, ie present value of the cash flow(s) and used
that amount as a 'bond' in their portfolio asset allocation? I've been
doing this for a few years now and was wondering how many others do and
what others think of the concept.

TIA
--
Had It
I'm a hypocrite, I'm intolerant of intolerance.