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CTinker

Asset Allocations

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First of all thanks for helping me find NEA Direct Invest with Security Benefit.  My account is up and running and it seems to be a good deal so far.  I've made it through the Boglehead's books and realize I could make a simple three fund portfolio and want to follow their investment philosophy (mostly).  The Direct Invest Plan has the following Vanguard funds:

  • VBILX -  Intermediate Bond Index
  • VTIAX-  Total International Stock
  • VTSAX- Total Stock Market (US)
  • VIMAX- Mid Cap Index 
  • VSMAX - Small Cap Index.

Now I could create a simple Lazy Portfolio out of these but I am 34 and don't feel I need a lot of bonds because I have a pension that is pretty well funded.  I put together a spreadsheet with the Maine Pension calculation that gives me the piece of mind that if I work til 65 I believe I could retire without extra contributions. A snaps of the table is below and I used the current contract and today's dollars for assumptions.

Age Years of Service Pension Monthly
40 12 $14,035 $1,170
50 22 $36,211 $3,018
55 27 $49,530 $4,128
60 32 $64,735 $5,395
65 37 $81,740 $6,812

Am I misguided if I think this allows me to take more risk?  My current Asset Allocation is 47%US Stock, 48% International, and 5% bonds.  Now I have briefly looked into the possibility of adding the small cap index into my 403b because they have been historically better than the Total Stock Market.  Two Questions:

How do you factor in your pension into your investment strategy?

Do you all prefer simplicity or do you dabble in factor investing?

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I have the same Direct Invest option as you and it's great. I'm 5 years older and have it set up to 60/40 and it rebalances on my birthday.  ( Great feature direct invest!). I couldn't decide on a allocation so I went with 60/40 figuring I could be doing MUCH worse in a hideous high fee 403b.  I don't mess with small cap in fact I barely pay attention to the account at all and try myself busy with other things :).  Have a pension too and am planning on using my roth 403b and 457 in around 5-6 years because I m thinking with two pensions (wife) that our retirement tax bracket could be similar to our working tax bracket.

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The Callan Period Table of Investment Returns shows how the returns of the various asset classes varies from year to year.  https://www.callan.com/research/2020-classic-periodic-table/ It makes sense to me to concentrate on the Total Stock Market fund and not bother trying to guess what will outperform it. The 3 Fund Portfolio also is very diversified and adding a small cap index fund is a bet that may or may not pay off.

I’ve been investing (and retired almost) for over 30 years and don’t have  one of the Lazy Portfolios, but often wish I did. Our funds are mostly index funds and I try to keep the asset classes balanced close to that of TSM (growth/value, large cap/small cap). I’ve often seen TSM, which I have a lot of, beat the return of many of my funds.

I don’t think you need to factor your pension into your asset allocation. Your pension is not a certainty. Hopefully not, but it’s possible that you won’t be able or want to work for a full pension. Your pension will factor in to when it and your investments will support you in retirement. Your asset allocation should be based on years to retirement, and your risk profile. How nervous are you when the stock market drops 50%? Most of don’t know how we’ll react until we experience it, so that’s something to think about.

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Hi CT,

Below is my pie chart AA for a 73 year old retiree with a teachers pension. As I said in my PM to you, I have 50% of my money in the 3 fund portfolio.  It looks complicated because I have different types of bonds, muni bonds for tax purposes, Treasury Direct for inflation protection, and international bonds for more diversification. 

1. I do not factor my pension into my asset allocation. However, I constructed a conservative portfolio because my pension is not enough to fund my retirement, and so I need my investments. Also, if you look at this Vanguard chart (https://investor.vanguard.com/investing/how-to-invest/model-portfolio-allocation) where I made the decision to have a 30/70 stock bond split, you will see that the past returns are 7.7%. I can live with that! 

2. I use the simple strategy. I do not dabble in factor investing. Too time consuming, too complicated because it encourages risk taking to "beat the market." Here is a lengthy discussion on the topic: https://www.bogleheads.org/forum/viewtopic.php?t=199165

Good luck,

Steve

End of 2020 Allocation.jpg

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22 hours ago, krow36 said:

The Callan Period Table of Investment Returns shows how the returns of the various asset classes varies from year to year.  https://www.callan.com/research/2020-classic-periodic-table/ It makes sense to me to concentrate on the Total Stock Market fund and not bother trying to guess what will outperform it. The 3 Fund Portfolio also is very diversified and adding a small cap index fund is a bet that may or may not pay off.

I checked out that table when you posted it before and it visually illustrates how unpredictable the markets can be but then I averaged all the years together and small cap came out with an average  9.4% return and Large cap came out as  7.68%.

*Past performance is no guarantee of future results

Thank you for the replies.  From reading through that thread and your statements it seems to me that the argument to not tilt towards Small cap is to avoid behavioral mistakes, it creates anxiety, and requires research/decisions. 

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I think there's a volatility drag that your averaging of the yearly rates doesn't take into consideration. A 50% loss of 100k results in a 50k balance. A subsequent 50% gain on the 50k only gets you back to 75k. 

If you compare the rate of return of TSM and Small cap Index over 5 and 10 years, TSM comes out a bit ahead, about 1%. As you say, the past doesn’t necessarily predict the future!

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The deal with factors is that if you are persuaded by the research and you want to try it, you need to commit to that allocation no matter what.  Factors are "expected" to outperform in the long haul, but they can underperform the total market for stretches of twenty years or more.

I think it's ok to "tilt," (I do a bit of that, am sticking with it but don't advise others do it), but your returns will be much more affected by the amount you contribute, the ratio of stocks v bonds and being smart about taxes.

At your age, if you contribute steadily and a little more than your comfortable limit until 65, you should be in great shape, with or without a small cap or value fund.

 

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On 2/15/2021 at 1:26 PM, CTinker said:

How do you factor in your pension into your investment strategy?

Do you all prefer simplicity or do you dabble in factor investing?

We'd probably need to know more about you pension to optimize or leverage it and overall financial situation to give accurate advice (as accurate as a rando on the internet can provide.) I'm 38 and have been using the lazy portfolio style setup consistently for a few years. I try to mirror the target date fund investments 90/10:

2020.jpg.b1d4c44bb2bd87b0c5de61fea84dfd33.jpg

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6 hours ago, ScottO said:

We'd probably need to know more about you pension to optimize or leverage it and overall financial situation to give accurate advice (as accurate as a rando on the internet can provide.) I'm 38 and have been using the lazy portfolio style setup consistently for a few years. I try to mirror the target date fund investments 90/10:

2020.jpg.b1d4c44bb2bd87b0c5de61fea84dfd33.jpg

 

LIKE MINDED randos!

What would you need to know about the pension?  The calculation is years of service average of 3 last years salary .02.  It is 89.6% funded.

The more I think about it the more I realize I should write down a workable plan or investment policy statement.  I can be impulsive and even now am fighting the urge to buy stock in a solid state battery company.

I like that visualization.  Vanguard is upgrading their portfolio watch: 

image.png.d679be718516d51a70360e95bc76c607.png

image.thumb.png.f1d1a69510d567be37d7939d06640f05.png

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1 hour ago, CTinker said:

LIKE MINDED randos!

What would you need to know about the pension?  The calculation is years of service average of 3 last years salary .02.  It is 89.6% funded.

The more I think about it the more I realize I should write down a workable plan or investment policy statement.  I can be impulsive and even now am fighting the urge to buy stock in a solid state battery company.

*high five*

CalPERS members get COLAs after they've retired. I've heard of some pensions that don't. I'm a "classic" member, so my pension is based off the highest single year, .02 @ 55 which grows gradually to .025 @ 63. Sick leave can be used toward years of service if you retire with the district and collect from the pension within a set # of months. It's worth sitting in on a retirement workshop to hear the options you have. Early on when I was hired there was the option to purchase years of service, but that has since gone away. There could be some unique things you can take advantage of. The COLA with my pension is kinda special because our district hasn't been giving COLAs to current employees due to financial shortfalls, so you can get raises that you otherwise wouldn't.

What does the 89.6% funded mean? Is that where you need a number of years of service in order to collect? With CalPERS I need a minimum of 5 years to collect.

My wife holds me accountable for investment practices we've agreed upon:

  1. Maintain 6 months expenses of emergency fund
  2. Credit card statement balances paid monthly
  3. Contribute to tax deferred retirement plans
  4. Contribute monthly to Roth IRAs
  5. Anything over that goes into our taxable account monthly

There's a set day of the month when the Roths and taxable buys happen... if I'm persistent I get to do it a day early 🙂 I appreciate that she helps keep us on track - consistency is key. DCA. Stay the course. Live long and prosper.

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1 hour ago, ScottO said:

What does the 89.6% funded mean? Is that where you need a number of years of service in order to collect? With CalPERS I need a minimum of 5 years to collect.

That just means I expect them to be able to pay out what they promise. Many Pensions are underfunded, which is why the plans have changed.  For example here is a quote from Illinois,

"TRS, like many other pension systems throughout the United States, carries an “unfunded liability,” which at the end of fiscal year 2020 was $80.7 billion. Because of this unfunded liability, TRS currently has 40 cents in the bank for every dollar owed to all 427,000 members for the rest of their lives."

Similar to how I don't know if Social security will be around when I retire.

I am already vested.

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Nice! You're ahead of CalPERS - 71% funded 

I have co-workers who are more stock heavy with their allocations due to having a pension. I know retirees who've never utilized 403b/457 accounts and take home more than 100% of their working salary in retirement (classified staff get social security.) Dan & Scott get asked the question quite a bit during Q&As... I feel like they treat it as a separate component, neither a stock nor a bond, with no affect on asset allocation. Some articles I see argue that the stable income means you have the ability to be more conservative to achieve your desired outcomes, but it probably depends on your timeline, years of service, etc. (it's pretty common for most personal finance questions to be answered with "it depends.")

I wish I could find something from Vanguard or the Bogleheads wiki (not the forum) with advice on the topic. I may have to flip through a few books to see if there's advice in them... "Teach and Retire Rich" or ""The Intelligent Asset Allocator"" might mention it. Perhaps the topic is omitted and treated the way you're looking at social security? 

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Bogle advised that the present value of Social Security be considered as part of one's "bond" allocation. 

I don't have a specific reference for this offhand; I think he discusses it in his "Little Book," and there's a good chance you could find him talking about it in one of his many interviews that are archived on You Tube.  I don't recall whether he specifically extended that principal to include state pensions, but it seems logical to me that pensions would be considered the same way, so long as there is good reason to believe that they will pay out for life.  

This is a topic that investing hobbyists like to disagree about, I'm sure you'll find threads putting forward different approaches to pension income if one were venture into the Bogleheads board. 

Of course nobody knows the future, but FWIW, my 2¢ on the future of Social Security and pensions:  barring outright collapse of the US government (very unlikely, though it seems closer to the realm of possibility after our encounter with Trumpism than it did in prior years), I think that you can count on some version of Social Security being there in twenty, fifty or a hundred years.  The pols may nibble at it— higher contribution rates, tax the benefits more heavily, "full" retirement age creeps up, COLA becomes less generous—but the basic benefit is overwhelmingly likely to persist.

State pensions are more vulnerable, in a few states in particular (if memory serves, New Jersey, Kentucky and Illinois have severe funding issues).  Like you, Scott, I'm expecting a pension in California, CalStrs as opposed to CalPers but I'm guessing their situations parallel each other pretty closely.  Under Gov. Jerry Brown a few years ago, California made  changes that erode benefits a little and help out the solvency of the pensions a lot.  (This included significantly increased contributions from both employers and employees and  changes that effectively reduced benefits for those who entered the system after a certain date.)  I'm confident that the pension will be there--in California's case, I believe that the state constitution mandates the state to guarantee pension payments, even if that means diverting funds from other government priorities.  So barring collapse of the state government, the pension should remain, subject to being nibbled at as I described above.

 

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PS: Here's a view that dissents from Bogle, suggesting that Social Security (again, I assume any pension would be treated the same way) should be viewed not as a bond asset but as income, and that asset allocation should be determined, in part at least, by one's need for portfolio-based income (in combination with that coming from other sources).  https://paulmerriman.com/social-security-asset/

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