Not that Rob Berger is the final word on any of this, but I just watched his video explaining this approach: How Social Security Should Affect Asset Allocation during Retirement. I'm nervous about the inaccuracy of the NPV calculation, both the interest rate and end-of-retirement age. At least when using OSS's default discount rate, the NPV interest rate is decided for me.To remain consistent with the OSS's discount rate, you would calculate the present value of Social Security using that rate and simply count that as a bond in your asset allocation. The present value of Social Security can be calculated using the NPV function in Excel. Include that as a bond in your asset allocation. So if you have a target of 40/60, count the present value of Social Security as part of the 60% you're planning to hold in bonds. Keep rebalancing back to 40/60, always including the PV of SS in the 60% bonds.
What makes me most nervous is I'd be including SS's NPV in my asset allocation during a long pre-SS period -- potentially 20 years from ages 50-69. SS's NPV would be affecting the asset allocation of the non-SS investment portfolio I'm living off of, increasing my stock percentage, including during ages 50-61 when I have no access to SS even at a lower payout amount.
Unless you are saying I wouldn't include SS's NPV from ages 50-61, but I don't think that's what you are saying, or what TPAW is saying when I change my retirement age from your example's 60 to my example's 50.If you follow this process, during the gap years from age 62-69, you will find that the stock allocation will tend to rise during the gap years. This is because you need extra bonds early on in the gap years to cover the missing Social Security during the gap years.
Personally, I think I'm more comfortable treating SS as an income stream instead of an asset that's part of my portfolio, especially as an early retiree. That means managing my asset allocation without regard for SS. As for the OSS real discount rate, that means using the average annual return I think my non-SS portfolio will grow above inflation during the gap years.
Statistics: Posted by Mr.Anderson — Tue Apr 09, 2024 12:54 am — Replies 6 — Views 1129