The place of social security in your retirement portfolio

Is Social Security part of your retirement investment portfolio? What about a pension? Most of us will have Social Security and, according to the Federal Reserve, 44 percent of retirees have

pensions. I’m often asked how to think about how these fit in with a portfolio of stocks and bonds. Are they bonds, or something else? The answers have huge implications for how you manage

the rest of the portfolio, as well as how much you can spend in retirement. Although Social Security and pensions provide monthly payments, like bonds, I don’t consider Social Security as a

bond in a portfolio, which often surprises people. I do, however, count a pension as one. Let me explain why and what this means to you. First, Social Security is far better than a bond. Not

only is it backed by the U.S. government, but it keeps up with inflation and pays for life, often with a survivor benefit. The average annualized benefit as of February 2023 was $21,384

($1,782 a month) according to the  Center on Budget and Policy Priorities. How much this is worth to the retiree depends on his or her life expectancy as well as whether a surviving spouse

would receive a higher benefit. Let’s assume Sue is single and 66 years old. The lifetime value of her Social Security is about $350,000, according to OpenSocialSecurity.com. Let’s assume

she has a pension with a monthly payment of $445 that will pay for life. That’s about 25 percent as much as her Social Security. Unlike Social Security, most pensions do not increase the

monthly payment over time and, even if they do, it’s not the full amount of inflation. So, in this example, the pension is worth about $65,000. If you have not taken your pension yet or just

recently started, most pensions have a lump-sum option as well as monthly payment option. The amount of the lump-sum option is likely a good approximation of today’s value of the pension

payments. Note that the pension payment is a quarter of the Social Security payment, yet its value is $65,000, far less than a quarter of the $350,000 that Social Security is worth. That’s

because Social Security payments increase with inflation while the pension doesn’t. With even 3 percent annual inflation, in 20 years the pension only buys about 55 percent of what it would

buy today, while Social Security keeps up with inflation. Between Social Security and the pension, she has assets worth an estimated $415,000.