Is There An Extra $1 Million In Your Portfolio That You're Forgetting About?

Allison Schrager wrote an article for Bloomberg last week that Wall Just Doesn't Get It On Retirement. I shared on Facebook noting that Schrager suggested better and cheaper annuity products and that given how undersaved we collectively are, it may come to more annuity products. Saying that people may be forced to try their luck on longevity pools does not mean I am now an annuity guy. I also quipped that people forced to work in "retirement" should not be penalized having to pay more income tax on their Social Security payout. 

I've mentioned the LifeX fund suite from Stone Ridge a couple of times. Alan Roth wrote about them and he is favorably disposed for the most part. Basically an investor can buy the fund that corresponds with their birth year. Once they hit 80, they cannot sell it. Hopefully the funds will pay out more along the lines of how much annuities payout when the time comes. It is a longevity pool so people who live longer get a larger accumulated benefit than people who die young. When the age cohort hits 100, the assets are divided among the holders still alive. 

Where regular annuities are very expensive, these are merely not cheap. Roth makes the case that despite appearing to be not cheap, the fee is not unreasonable. There is of course the unpleasant reality that some number of people buying in will die right after the cutoff to sell getting nothing or almost nothing out of it and surrendering their investment. I haven't looked close enough to know if their is any sort of grace period on this. If the cutoff is exactly 80 and someone dies two months later, would they let the family get the investment back? That's a good question to ask if you're interested in these. 

These are an evolutionary step and I think they are an improvement over what most annuities do and cost. The space will continue to evolve and I think it would short sighted to not keep tabs in case it evolves into a product that improves your retirement income.

Let me be crystal clear, I am not saying buy annuities. What I am saying is let the space for annuity-like products evolve and keep tabs on that evolution. 

The Best Interest Blog (via Abnormal Returns) made a couple of interesting points about Social Security. These are points we've made in various posts but there is value as a refresher or if this is new to you. With regard to the possible cut in payouts coming in the middle of the next decade, I am convinced that no one who is at least 55 now will face a reduction unless they impose means testing which is a different thing than a simple, across the board cut. The odds of means testing reductions are pretty high. I seriously doubt anyone who is now 50 will face an across the board cut ex-means testing. Best Interest didn't say he doubted cuts would impact everyone, that's me saying that, he said it would only be 20% which is not that bad. 

Would 20% be bad? I think they're talking about 23%, would 23% be that bad? Regardless of whether you think that is bad it might be happening and if it does, how will you work around it? I said today's 50 year olds probably won't be impacted but that could be wrong. Regardless of your age, what is your work around?

He also talked about how to value Social Security working backwards with the 4% rule. If you have a combined $40,000 benefit, that's like having another $1 million in your portfolio. Best Interest didn't say this but I think this also applies to other income streams like some sort of side hustle or real estate income.

The relevance ties into asset allocation. In this context, a $1 million Social Security "portfolio" is considered fixed income. Real estate income and side hustle income are as well even if they are less permanent than Social Security. Keeping it simple, if someone has a $1 million Social Security "portfolio" and a $500,000 IRA allocated at 60/40, what they really have is a 20/80 allocation. The $300k in their IRA is 20% of the whole pie, the rest is "fixed income." Even if all $500,000 is allocated to equities, that's only 1/3 in equities. In that example, an investor almost has to have the entire IRA in equities. Is that realistic? Probably not but it is useful information and justification to uptick the equity exposure some even if not to 100% of the IRA. 

Last one, Barry Ritholtz listed out his investment philosophy in ten bullet points, the original post is from 2022. It's not that I strongly disagree with items on his list but there are things that wouldn't make my top ten if I wrote something like this out. I also think the way a couple of them are framed isn't quite right.

Number 2 on Barry's list is that market timing is hard. The description seems to have a very short term focus. Yes, guessing what the market will do over the next short period of time is difficult, it is a guess. There is a different context here that is far more useful that I've done a few times but of course any time I have done this I realized I should have done so with more conviction. Occasionally, the stock market goes down a lot. After a large decline, buy more. If you buy, down 20% or 25%, you are buying low. It may go lower, no question. 20 or 25% is just an example and I have not done it every time but a few times yes. In my case, this has included selling an inverse fund into panic to increase net long exposure but it is the same effect. Accept you won't nail the timing and buy a little more after a large decline. That is hard to do emotionally, it means buying when everyone, including you maybe, is scared. Latch onto having bought cheap, not bottom-ticking, you won't do that very often. 

He says we are oblivious to our own cognitive shortcomings. I think this can be worked on and improved. Improved may not mean solved, it probably doesn't but improvement is possible. I just identified one of my shortcomings in the previous paragraph. Identifying any of our shortcomings is the first step. 

The list is good but not too many of them would get top priority as my investing philosophy. I will try to work on a similar list for a future post. 

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