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Does Social Security Fit Like A 'Bond' In Clients' Portfolios?

March 3, 2014 • Page 4 of 4

Nonetheless, the proper way to account for Social Security is not as an asset for a portfolio or a balance sheet, but as an income stream from an inflation-adjusted immediate annuity. The portfolio should be constructed to generate whatever cash flow is necessary to supplement Social Security to meet a client’s spending needs and accommodate their risk tolerance and preferences.

There are hundreds of studies and countless articles written about how long portfolios will last given various spending rates. Heck, I’ve written dozens myself. All of them start with what cash flow needs to be generated.

If a client needs $X a month from a portfolio in addition to Social Security, pensions, and whatever other income sources a client has, then the portfolio should be designed to generate that cash flow and adapt as cash flow changes over time.

As I alluded to at the beginning of this piece, yes, Social Security has value but planners may put their clients in a weaker financial position if they calculate its present value and use that figure ineffectively. Rather, planners are more likely to help clients by maximizing the value of Social Security’s annuity characteristics through good claiming decisions and supplementing the client’s benefits with smart portfolio construction, tax planning, prudent portfolio design and behavior management.

Dan Moisand, CFP, has been featured as one of the America’s top independent financial advisors by numerous national publications. He practices in Melbourne, Fla. You can reach him at [email protected]

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Bradengl 10 years ago

If the financial planning is for a couple in their retirement then to not consider the largest social security payment when building the allocation would be a significant omission as that payment will continue for the life of both spouses. Before setting up the actual allocation a good estimate of "three categories of expenses" needs to be done. Core expenses which are those expenses that need to be paid regardless what the markets are doing. Ideally core expenses should be paid using defined pensions, social security or possibly a indexed annuity with income rider as you want a fairly consistent cash flow. The second category of expense is what I call quality of life. In a perfect world a portion of these is expenses should be paid via fairly guaranteed income flow with the remainder drawn from the portfolio (liquidations can be modified during poor market conditions). The third category is "frills" that you do because you can (all dollars to children and grand children are in this category). In addition to the asset allocation there should be a "cash bucket" set up with 15 to 18 months supplemental income (hopefully only for quality of life expenses versus core expenses). When the markets move down for 90 days stop spending from the portfolio and supplement income needs from the bucket of cash (really a combination of things). Then when the markets recover start drawing from the portfolio again and fill the cash bucket up for the next time.
markrm 10 years ago

Some sloppy arguments here around the reasonable premise of viewing SS as an annuitized annuity rather than a bond. If clients are deriving all their needed income from SS it is highly likely they will support a much higher percentage of stocks than otherwise. Maybe not 100% (a straw man argument) but 60% vs. 30%. In fact, I see that all the time in my client base. The key is for them to understand that, like the rich, if they can afford not to care about market up and downs because they're not touching the money it is highly likely they will give to their heirs a much bigger pot if they stick with the market.