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New Take On Asset Allocation: Include Your House And Social Security

Monday, June 23, 2014 - 6:10 PM
From The Wall Street Journal:
When deciding how to divide a portfolio between stocks and bonds, many investors simply subtract their age from 100 to determine what percentage to put into stocks, and invest the rest in bonds.

But new research indicates that before doing the math, it's important to consider something many investors and financial advisers overlook: the value and riskiness of your other assets—specifically, any pension and Social Security benefits you stand to receive, your future employment income and your home equity.

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pearlbrownpearlbrown1,469 posts since
Nov 2, 2010
Rep Points: 6,380
1. Monday, June 23, 2014 - 8:47 PM
I agree that one should always include (for our generation) Social Security benefits and any pensions in assets but not your home.  It cannot definitely be counted on as being an asset since it can be destroyed and taken from you overnight.  Don't count on all your insurances covering it for you.  So I would not put it in with assets I can count upon from what I have experienced.
paoli2paoli21,400 posts since
Aug 10, 2011
Rep Points: 6,132
2. Monday, June 23, 2014 - 9:14 PM
As they say, it's complicated. One should obviously consider Social Security projections in one's risk analysis. That said, for folks under age 40, the likelihood of fully-COLA'd S/S payments in their dotage is getting problematic. With respect to home equity, the poster-child of illiquidity, don't count it at all. Reverse mortgages are fraught with "gotchas", despite what Fred Thompson might pitch. Sell the house, you get the issue of capital gains (if over the exclusion), then the issue of "where do we live now?" Future employment income? Try finding a job at 66. Best to plan your retirement as a retirement.
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 944
3. Monday, June 23, 2014 - 10:22 PM
Most people wish they had the problem of the example cited in the article:
"So, for a 65-year-old woman who receives $25,000 in annual benefits, the value of those payments as an asset is about $500,000. Next, she would add that $500,000 to the bond portion of her investment portfolio. If she has $1 million of investments—with 65%, or $650,000, in bonds and 35%, or $350,000, in stocks—the inclusion of Social Security raises the total portfolio's value to $1.5 million and increases the amount in bonds from $650,000 to $1.15 million, or 77% of the total. To get back to a 65/35 mix, this investor would need to reduce her bondholdings to $475,000 from $650,000 and raise her equity holdings to $525,000 from $350,000."
ShorebreakShorebreak2,674 posts since
Apr 6, 2010
Rep Points: 14,510
4. Monday, June 23, 2014 - 11:26 PM
I don't believe in mechanical formulas to determine one's AA, even though most financial advisers will try to convince you of their utility. If you are receiving more than enough interest income from CDs and bonds to support your family in retirement (even without SS), I don't see the need to own equities. The bottom line is that it depends on personal circumstances rather than some contrived formula.
loulou552 posts since
Aug 3, 2010
Rep Points: 3,431
5. Tuesday, June 24, 2014 - 8:29 AM
#4  Exactly or in my terms "whatever works for "you"!    We must not forget that many of those making up those "formulas" are also selling the products. :)
paoli2paoli21,400 posts since
Aug 10, 2011
Rep Points: 6,132