Here's How a Pension Should Change Your Investment Strategy
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- Опубліковано 3 жов 2024
- James debunks common misconceptions about retirement portfolio allocation and explains how to factor in your pension, social security, and other fixed-income sources into your plan.
He discusses the importance of dividends in assessing investment performance, risk capacity and tolerance, and how mastering them can help determine your optimal retirement portfolio allocation.
Questions answered:
How should you allocate your portfolio in retirement, considering pensions, social security, and other fixed-income sources?
What is risk capacity, and how does it factor into portfolio allocation in retirement?
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⏱Timestamps:⏱
0:00
3:34 The wrong way
5:09 The right way
5:14 Example 1
7:59 Risk capacity
14:53 Example 2
19:05 Another consideration
21:00 Risk tolerance
21:40 Example 3
22:28 The emotional side
24:35 Outro
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I count my teacher pension as a guaranteed income like a bond. Therefore we have 100% of our portfolio in stocks and ETFs with a cash holding for emergencies and 2 years of gap coverage. Dividends more than cover the gap between our guaranteed income and our budgeted spending.
That’s my plan…
This is very similar to what I’ve done, except I’ve got enough cash to cover about 5 years of expenses after the pension, and about the same amount in a balanced fund, Vanguard Wellington.
yea we will have my federal pension and subsidized healthcare for life, so I am thinking 5 years cash, rest VTI
Perfect timing, put my paperwork in this week for retirement in December, and start my pension in January!
Thanks James
Recently retired with a pension.
Your content is my go to for my retirement information 👍🏻
Great walkthrough with the example.
Appreciate the discussion between risk capacity and risk tolerance.
Good discussion, exactly! We need their expected annual expenses/spending needs to answer this question - but they were not in the question!
We have a similar financial structure situation, but are already phasing into retirement. Because Social Security + our Pension covers our base spending + travel/discretionary spending, we only need our retirement funds to for one time buys like cars, new roof, etc…. So we do not intend to spend much of our retirement funds - we look at them as primarily a future inheritance for our kids + perhaps helping with grandkid college expenses. In our situation, we intend to leave most of our retirement funds invested for growth + a portion in near-cash for one time purchases. If we do not anticipate needing the money, leaving it invested too conservatively would be a waste of family resources.
The factor we will be refining - the widow(er) tax trap and and Social Security/Pension hit when one of us dies. That event might require using some of our retirement funds for routine spending.
So basically what you are saying is that if my wife’s pension and my social security are more than enough to cover our annual expenses that I should keep my 401k completely in stocks? Do I move it from 60/40 immediately or gradually?
My pension is 6200 a month net. I’m 49 and contracting my services for 85-90k a year gross.
I only have a house note of 1,400 a month and boat at 3,00 a month.
I really want to quit work altogether. I just have to get my spending under control (eating out, Amazon shopping etc).
We’re pretty much in the same boat although not doing any extra work and we have no mortgage. We retired a couple years ago at 54 and 52. I don’t want to stop eating out, shopping,etc. My thought is, we worked too long and too hard (plus invested wisely and consistently) to limit ourselves. This is the time to enjoy what we worked so hard to accomplish. Good luck to you!!
Take a look at maybe selling the boat, and joining a boat club instead (Freedom boat club for example). It may be cheaper going the boat club route as opposed to owning and maintaining a boat.
Why are you even listening to financial podcasts? Holy cow, you’re set for life
I don't know if I missed it, but they didn't let you know both of their pensions are inflation protected and will increase with inflation. I'm a military retiree with a really good VA disability compensation and my wife is a Federal Government employee who will also have a pension. If I use a 2.5% inflation rate between now ( I'm collecting mine) and when she will collect hers, we will have, sans Social Security, about $15k a month in pension income. This allows us to be 100% stocks today, tomorrow, and in and through retirement! I don't intend to have any bonds, etc! We have plenty of income and investments, just as this couple does!
Excellent information as usual!! I really appreciate your expertise, especially factoring pensions, social security and investment accounts.
Very good information, thanks
Just got done telling some folks today how my retirement will work due to me having 2 pensions, SS, a small pension from my state, 2 traditional 401k's, etc. I treat my fixed income sources like bonds, and am trying to figure out how much of my traditional 401k's I want to possibly Roth convert.
I treat my pension exactly like a bond. I also have a DROP account that is exactly the same. 456b is 100% equity.
Excellent as always
Wow, really good info on a topic I haven't seen covered much as well as being very pertinent to me.
😊lookin Good😊
Great podcast & Information, Thanks 🎉
Excellent video, very informative
I am mostly stocks at the moment. A few years from retirement, I plan to stop reinvesting my dividends to build up cash in each retirement account. My goal is 2yrs of cash (making interest) in each retirement account. This along with my pension should be easily make it through big 30-40% drops/recoveries, with the ability to buy the market low if the opportunity is right.
I am on a pension, so this is a perfect episode.
Excellent show, again. Thank you.
Thank you
Great podcast! Question for you- how would you classify rental income we receive?
My pension and SS is enough to cover my living expenses. My house is paid for and I have no debts. My assets is mainly in cash and money market and I have neglected them in my 23 years of retirement. I just worry about my health and not my wealth.
I have done exactly the same thing for the past ten years.
Risk is loss of purchasing power over a decade. So stocks (10%/year) are far better than bonds ... which are better than nothing.
I think of my Social Security & pension as a bond fund and my QQQM as a cash machine!
except with high interest rates, long bond capital appreciation is a surer bet than stocks for upcoming capital gains when rates decline.
Enjoy the podcast. However, I disagree that a retiree (us) can be invested 100% in stocks during retirement if you have a pension, regardless of age. The big issue you ignore are RMDs when you hit 73, 74, 75 in the coming years. When your RMDs kick in, you will forced to take out assets and, thus, in a stock market that plummets 46% in one year, you’re forced taking your RMD from stocks. That’s why 5 years in cash/bonds is a must, especially when your age dictates RMDs.
I don't think a 100% stock portfolio is right for most retirees. But in your example what's stopping you from taking those RMDs and reinvesting them in a non retirement account? In a 46% plummet you're selling but then you're rebuying.
You’re correct, IF your plan is to reinvest vs. taking the cash to live on. In our case, the RMD’s will be used in our year-end annual cash flow to not only fund QCD’s, but also cash to children/grandchildren.
But I’m sure there are listeners who reinvest their RMDs, it’s just not in our plan. Mind you, we’re 9 years from taking RMD’s at 74, so maybe our perspective will change.
@@timandcindyjacobson2953 I'm retiring at age 56 with a pension. I plan to start doing a Roth conversion (from my 457b) at age 59.5 until I reach age 65 (when I plan to collect SS). My thought process is not to have to deal with RMD's and those taxes in my later years. I'll pay those taxes before I collect SS. As I convert my 457b to a Roth, I'll do a 90/10 split (90% stocks, ETF's and 10% bonds)
Which is why I adhere to the 200 Day MA rule. As long as the Index is above its 200MA I stand pat. If it drops below and continues its downtrend I move to cash or bonds. This limits losses to 10-20% depending. Once the Index crosses back above the 200MA, buy back in. This worked for me in 2007-8 and from 2020-2023 during the covid swings. I did not suffer the 20-45% losses that occurred during each.
Also the problem with the TSP is dividends get baked into fund share prices so you never really derive an “income” stream if you stay in it. This is why many transfer their tsp to an IRA after they retire. I plan to leave some in it for a monthly payment and move the larger portion to an IRA.
I'm confused. Yes, your portfolio does experience the same temporary drop as everyone else, but aren't you locking in losses?
That sounds a lot like timing the market, which is has been proven, to be next to impossible. You're at least losing, at minimum, 3-5% each time you do this. Also, if this is in an IRA, no tax issues, but if in a brokerage account, you're creating a possible taxable situation, which will cost you more money. Better to just let it ride, but have some cash/non-stock liquid assets that cover 2-3 years of living expenses, to ride out the down periods.
Social Security and pensions are not bonds as the payments end on your or your spouse's death. Other fixed-income investments can be inherited by beneficiaries. Social Security and pensions are incomes that should be matched to liabilities, with the difference between "guaranteed income streams" and liabilities to be matched to the investment portfolio. High-yield bonds have equity-like risk which shows up at the wrong time. Bonds should be high-quality and short to intermediate-term maturities. These types of high-quality bonds have a low to negative correlation with equities.
Ouch on the pulsating circle. Distracting and annoying
I had to stop watching because of it!
3.5 minutes of pre-ramble. How about just getting to the point.
Risk risk risk if you dont put a number on it your fooling youself! Figure out how much income you need from the market and do not invest a penny more in equities. Its also better to invest 1/2 your market money in a 9% dividend then go for the the 4% ers. The cash lowers the beta of you portfolio by 1/2, and will make you feel better since when the black swan comes all stocks sink. You need so money to pick up bargins.
Oh you dont have the capacity? Just have 2 years of cash and stay 90% stocks. Durrpa durkkka durrr. Better yet buy 10% bitcoin and own the best yielding asset over the last decade.
I think that most people are FAR too complacent about so-called "guaranteed" pensions, and even Social Security. The comments here, suggest that, clearly. From people I've known throughout my life, from all sorts of different backgrounds; the most "secure" are NOT people who sit around with the illusion of security, that they derive from the thought that some governmental entity is going to provide them with their "daily bread", once they are no longer working; but people who have worked VERY hard, lived below their means; and avoided stupid, wasteful behavior, for the entirety of their working lives. Then..they have built respectable net-worth, by prudently building potfolios consisting of businesses, stock-portfolios, and real estate; with the money that everyone around them was always WASTING.
@jamesmorris913 wait, what? Are you saying people who worked in a pensionable job didn't work as hard as others who worked in the private sector and are going to sit back with a false illusion the Govt will take care of them? Nothing is guaranteed in life with the exception of taxes and death. In life, you have to have a plan A, plan B, and a plan C. I have a job with a pension (plan A). I have investments (plan B). I have Social Security (plan C), and if need be, I have many talents that can generate income if plans A, B, and C fail. If that doesn't work, I can sell/trade off everything I own.
Goverment workers made the high lifestyle you enjoy, and your still speaking English. Through a stable country the gov takes about 90% credit for your so called self made wealth. Try what you did in another county such as Mexico.
I always love to take my retirement advice from middle aged white men with lots of acronyms behind their names. This one isn't even old enough to remember life before QE....was still in diapers. Anyone agreeing with him in the comments is just confirming their "confirmation bias".
You sound like an old, angry white straight guy without a college education. You voted for Trump, right?
Yikes
James knows what he is talking about. Wise beyond his years.
and yet, here you are.
What a bigoted comment.