401k asset allocation with pension

[Aristippus]

Hi all. Trying to find good answers to this question, without great success:

I've reached the age where investment gurus say I should begin tempering my 401k's 100% stock portfolio with some less volatile investments (e.g., bonds and cash). However, I will draw a pension upon retirement, and anticipate that it will account for about 50% of my retirement income (or 40% if I include social security, but given that program's uncertain future I'm not doing so).

So here's the question: were you me, would you consider the pension a huge, safe asset and thus keep the 401k 100% invested in stocks until the point when an overall stock holding of less that 50% is desireable? Or would you slowly decrease your stock holdings in the 401k regardless, in line with conventional wisdom and as if the pension didn't exist? Looking forward to your responses; thanks in advance.

[autoxer]

I think you are on the right track considering the pension as stable and keeping more riskier assets in the 401k. Just make sure you have considered the stability of your particular pension. If it is an auto industry pension or a state funded pension, it probably isn't as secure as social security. How well funded is your particular pension?

[Aristippus]

Just make sure you have considered the stability of your particular pension. If it is an auto industry pension or a state funded pension, it probably isn't as secure as social security. How well funded is your particular pension?

Good question. It's a federal pension (State Dept.), so it's not something likely to go away or even be restructured in my lifetime. To they extent anything about my retirement is secure, I would think that is.

[jIM_Ohio]

Hi all. Trying to find good answers to this question, without great success:

I've reached the age where investment gurus say I should begin tempering my 401k's 100% stock portfolio with some less volatile investments (e.g., bonds and cash). However, I will draw a pension upon retirement, and anticipate that it will account for about 50% of my retirement income (or 40% if I include social security, but given that program's uncertain future I'm not doing so).

So here's the question: were you me, would you consider the pension a huge, safe asset and thus keep the 401k 100% invested in stocks until the point when an overall stock holding of less that 50% is desireable? Or would you slowly decrease your stock holdings in the 401k regardless, in line with conventional wisdom and as if the pension didn't exist? Looking forward to your responses; thanks in advance.

You are thinking about problem well, the goal is to focus on income, and "what if" scenarios.

How will you generate income from the 100% stock portfolio if you retired today? Do you expect to "flip a switch" and go from 100% stocks to 60% stocks the day you retire? How long will 100% stock portfolio last? How much income could 100% stock portfolio generate (dividends)?

If you only had Pension+SS, could you live on that money?
What happens if you withdraw 100% stock portfolio for 3 straight down years? (meaning market drops 30%, you withdraw 4%, market drops 25% next year, you take out another 4%, then market drops 10% and you take out another 4%). This is the 1998-2000 and 2008-2010 type scenario. It does happen, and the biggest risk to an all stock portfolio is drawing down/ taking a distribution when the market is down.

The focus is not on 3-10 year returns, its on volatility year over year.

Ask yourself questions like that...


Here is what I would suggest-
1) At retirement minus 20 years, you want 20% bonds (minimum). Add 1% bonds each year as you approach retirement. (So 20 years before retirement is 80-20, and 0 years to retirement is 60-40). The goal is to sell stocks at a gain.
2) At minimum switch half of stock holdings to dividend payers
3) Focus on retirement income strategies- is it better to draw down stocks and delay SS or take SS early? Have you researched "claim and suspend" with a spouse' SS benefit?

The advantage of 60-40 is three fold:
1) If the market goes down, your retirement date does not change and income plan for the money does not change
2) You can rebalance to 60-40 if market tanks (buy low, an aggressive move for someone 5-10 years from retirement)
3) The income potential of a 100% stock portfolio in a down year could cripple plans, I would focus on the biggest risks and minimize them.

[feh]

Jim makes good points above.

To the original question - I don't consider pensions or SS when determining asset allocation. They reduce the withdrawals from your retirement accounts that you'll need to make, so treat them as cash flows/income. Your asset allocation should be based solely on your investments, IMO.

Go to firecalc.com and try some scenarios. That site allows you to model future income sources such as a pension.

ETA: you can also run a search for this topic on bogleheads.org. It has been discussed to death.

[Aristippus]

Thanks for the input all, and for the Bogleheads suggestion!

[jIM_Ohio]

Jim makes good points above.

To the original question - I don't consider pensions or SS when determining asset allocation. They reduce the withdrawals from your retirement accounts that you'll need to make, so treat them as cash flows/income. Your asset allocation should be based solely on your investments, IMO.

Go to firecalc.com and try some scenarios. That site allows you to model future income sources such as a pension.

ETA: you can also run a search for this topic on bogleheads.org. It has been discussed to death.

I think the green part above is a better way of stating problem succinctly. You do have an advantage with the pension- it lowers your required withdraws for the given income you decide you need.

I mentioned look at portfolio from an income perspective, and likely as you go to other forums they will focus more on "what income do you need" and less on "what is proper asset allocation".

Focus on requirements more than risk tolerance. You know your risk tolerance, and that suggests a given asset allocation, the reality is neither of those parameters suggest what income you need, or how the Pension+SS+portfolio contribute to meeting your needs.