Last month’s column “18 Social Security Surprises Facing Advisors, Clients” generated some interesting e-mails. A few advisors asked similar questions about how to treat Social Security and pensions when constructing a portfolio. Their premise is basically this:

Social Security is an income stream that has value, so shouldn’t that value be accounted for when constructing a portfolio?

The answer is much more often “No” than “Yes.”

Why “No”?

Some readers were struggling with how to calculate the present value of the Social Security income stream. They would then use that figure as part of the client’s fixed-income allocations. I was asked what discount rate I use and how long I assume the income to last. Some suggested various rates based on Treasury yields or bond indexes. Some suggested various actuarial tables and online tools to assess life expectancy.

I don’t subscribe to this approach and I believe few advisors do. Accounting for Social Security as a bond can be problematic in many ways. First, Social Security bears little resemblance to a bond. 

An income stream from a bond continues until maturity. Social Security stops at the recipient’s death. 

A bond owner can sell or gift the bond. By law, no one can sell their Social Security payments or gift payments not yet received.

A bond owner’s heirs can continue to receive the income until maturity or leave the bond to their heirs or sell the bond on the open market. Not so with Social Security.

Second, a few readers were concerned that allocating the present value of Social Security would push the actual investment portfolio toward equities. They are right to be concerned. Few people, and fewer retirees, are comfortable with a portfolio laden with stocks.