There is no accepted methodology for calculating the value of life incomes as asset equivalents.
My wife and I are in our mid-70s and are allocating our assets between stocks and bonds. A few years ago, we decided that by the time we were 80, we should have 80 percent bonds and 20 percent equities. This method would now require a substantial move from stocks to bonds, which we don’t want to do.
You have mentioned John Bogle, for whom I have a great deal of respect. He advises that Social Security and pensions should be considered in determining the allocation.
In his example, he “capitalizes” the Social Security amount by multiplying it by 14 in order to arrive at an amount that should be allocated to a bond equivalent. Would you tell me how he arrived at the number 14 and whether it is age-related?
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The usual rule of thumb for life annuities is 15 to 17 times the annual income stream. It would definitely be age-related, but I believe Bogle was using a “generic” example for people in their mid-60s. In the case of Social Security, some would argue that it should have a higher multiple because the income is indexed to inflation.
As a practical matter, you’ll never get real precision in this because there is no accepted methodology for calculating the value of life incomes as asset equivalents. So pick a number — I’d pick 15 — and do your calculations. Many people find that it makes a significant shift in their de facto asset allocation.
The average couple, for instance, receives about $1,500 a month from Social Security, or $18,000 a year. At a multiple of 15, that’s the equivalent of a $270,000 bond portfolio. That means you’d need to have $67,500 in equities to get to an 80/20 mix.
Our country has terrible international balance-of-payment deficits and national budget deficits. I keep hearing them mentioned as if they are the same problem (and maybe they do both stem from the same maturity deficits of the populace).
Which is the bigger problem in regard to a possible continued, marked drop in the dollar? What steps are available to Uncle Sam to stem our purchase of foreign goods?
Both are major problems. They are also related in a perverse way. Our trade deficit means that we keep exporting large quantities of dollars in exchange for goods. As long as other nations have a use for those dollars — to use as their reserve currencies, to use in financing expanding trade, to use as a substitute for a weak local currency — we can continue to spend beyond our means.
Our federal deficit also works to recycle some of those exported dollars when foreign governments and investors buy Treasury securities with their dollars.
As long as others continue to have a use for our currency (or our Treasury obligations), we can continue doing what we are doing — consuming more than we produce at home, saving little, and supporting a major military effort overseas.
If foreigners decide that they have too many dollars and would rather hold another currency, or gold, then the value of our currency will continue to sink. Interest rates will rise eventually, as the Treasury is forced to pay enough interest to create and attract domestic savings.
Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at firstname.lastname@example.org. Questions of general interest will be answered in future columns.