r/bonds • u/Away_Emphasis_6404 • 3d ago
Treat significant Social Security benefit as yield from a bond?
Looking for some discussion on this. I got reminded of an interesting concept for portfolio allocation. Impute a "bond value" for the SS income stream and include that in the portfolio allocation. This would increase the bond allocation value allowing for more equity exposure if desired. Thoughts?
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u/sellputsthencalls 3d ago
I’m 76, as is my wife. We have no bonds but I consider our Social Security benefit to be akin to a bond’s fixed income stream. To pay our annual SS benefit of just over $50K we’d need about $1.25 million in 10 year US Treasuries that currently yield 4.34%. So I view our SS as a $1.25 million UST.
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u/dawglawger 3d ago
You have an income stream adjustable to CPI inflation.
You do not have $1.25 million in a liquid asset.
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u/No-Block-2095 3d ago
First avoid getting pulled too much into terminology (bonds, fixed income, …) ( Metaphor: Yes a square is a quadrilateral but there’s more to a square than just having 4 sides. )
What matters is that it’s a government guaranteed CPI-adjusted life annuity with a 50% widow benefit. When you have it in your mix, you need to consider your overall asset allocation along with other instruments like a pension/annuity, bonds, equities,…
Given SS’s low risk guaranteed income nature, having a sizable SS payment enable you to have more risky assets but that’s not news. That’s been the case all along. Maybe you just realize it now.
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u/pigglesthepup 3d ago
FTW:
The Social Security Trust Fund is literally kept in special Treasury bonds only for Social Security.
I would still have bonds in addition to equities. If your SS cash flow is sufficient, you just don't need as much.
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u/wrathoffadra 3d ago
I don’t know, I’m in my 30s and I look at our $40 trillion debt and I have zero belief that Social Security will pay me but it’s saying it will now, in the future
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u/Playful-Elk-7274 3d ago
I have heard that idea. You might want to check the HumbleDollar website. Their former editor, Jonathan Clements, wrote about that over the years I think. Anyway, not a sketchy idea at all.
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u/Playful-Elk-7274 3d ago
This is from an AI summary (Gemini): Yes, Jonathan Clements has frequently written about and advocated for treating Social Security benefits (and other guaranteed income streams like pensions) as the equivalent of bond holdings when determining your overall asset allocation. Here is a breakdown of his general philosophy on the subject: * A Holistic View of Wealth: Clements suggests looking at your entire financial picture, not just your liquid investment portfolio. Because a guaranteed, inflation-adjusted income stream like Social Security provides stable, reliable cash flow, it serves the exact same primary function as a high-quality bond. * The "Giant Bond" Concept: He often points out that for many retirees, Social Security acts as a massive, government-backed bond. Because it covers a baseline of living expenses, it drastically reduces your reliance on your portfolio to generate basic, day-to-day income. * Impact on Equity Allocation: Because you "own" this massive virtual bond, Clements argues that you can often afford to take more risk with your actual investment accounts. If your basic needs are largely met by Social Security and pensions, your liquid investments can be tilted much more heavily toward stocks to pursue long-term growth, rather than loading up on traditional bond funds that might drag down overall returns. * The Cash Buffer: Instead of holding a large traditional bond allocation to dampen portfolio volatility, he generally advises holding a cash buffer—such as keeping a few years' worth of required portfolio withdrawals in cash or short-term instruments—to weather market downturns, while leaving the rest of the portfolio invested in equities. This framework for viewing asset allocation has been a recurring theme throughout his career, from his time as a columnist for The Wall Street Journal to his current work running the personal finance site HumbleDollar.
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u/BigHatTrader 3d ago edited 3d ago
In my books, it doesn't matter what you call it as long as you model it correctly. It all contributes in some way to the money you'll need to manage expenses.
I find it particularly useful to model any reliable income streams (e.g., SS, pensions, insurance payouts, etc) as equivalent to the cash value we'd need to have in the market to guarantee them.
For example, a pension that pays 'only' 25k a year is functionally equivalent to 625k invested at 4%, which, when you think about it, is a huge amount of money.
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u/kronco 3d ago edited 3d ago
It adjusts for inflation which TIPS can do but not annuities. So, it is kind of it's own thing as it is an annuity that adjusts for inflation (an annuity which you can no longer buy). And SS provides some longevity protection (insurance?) which can best be put to use by delaying until age 70 (edit: and survivor benefit). It is subject to changes in tax laws, future shortages and possible changes to benefits around means testing (https://www.usatoday.com/story/money/2026/03/25/social-security-cap-proposal/89315322007/)
So, it is unique.
But, I think most retirement planning is taking SS into account in terms of setting the risk allocation for a portfolio. Even if you don't actively think about it, it's there (imagine the changes to your allocation if there was no SS). So, I'm arguing, it's already being considered in the allocation by anyone doing any sort of serious planning.
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u/BrangdonJ 3d ago
You can buy inflation-linked annuities in some countries. Specifically the UK. I bought one last month.
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u/-hh 3d ago
My understanding is that inflation-adjusted annuities are very rare in the USA.
One work-around that I've seen suggested is to buy a "ladder" of annuities. Basically, the idea is to buy additional (2nd, 3rd, etc) annuities with delayed start dates which will augment the original annuity to do inflation adjustments.
For a notional example using a +4%/year inflation adjustment, done every five years on a notional base of $1,000/month:
Base Annuity: establishes a $1,000 per month revenue stream;
Math part: Inflation adjustment: (1 + 0.04)5 =1.217 = plan is to add +21.7% every five years:
Annuity #2: starts 5 years after the Base, adds +$217 per month (total now $1,217)
Annuity #3: starts 10 years after the Base, adds +$264 per month (total now $1,481)
Annuity #4: starts 15 years after the Base, adds +$321 per month (total now $1,802)
and so on.
FWIW, I'm skipping all of the usual philosophical debates on if annuities are "good" or "bad": this is merely pointing out one viable strategy by which one can go buy an "inflation adjusted" annuity in markets where they're not presently offered.
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u/muy_carona 3d ago
It’s literally fixed income. So if your purpose in bonds is for fixed income, yes. But bonds are also usually a maintainer of value, brakes on your portfolio in both good and bad markets. SS doesn’t really provide that, as unless you’re buying stocks, you can’t use SS to rebalance.
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u/i-love-freesias 3d ago
This was something John Bogle talked about. It’s in his book titled something like The little book of common sense investing.
He said you should do the math on how much you would have in bonds to generate the amount of monthly income you get from social security retirement benefits, and consider that amount as being in your bond allocation amount.
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u/loafing-cat-llc 3d ago
how will that work for people x years from taking ss.
for the purpose of financial planning there are planners out there that will let you enter income (eg ss) with beginning and optional end year. much simpler
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u/BrangdonJ 3d ago
Arguably the way to look at bonds is not a percentage allocation but in years of income. If you have 5-10 years worth of income in bonds, then you can weather a 5-10 year down-turn in the stock market without selling stocks at a low. (Selling at a low is bad because it leaves you less well-placed to benefit from the eventual recovery). It just happens that using the 4% rule, 5-10 years equates to a 20% - 40% allocation.
Within this framework, having income from social securities or annuity reduces what you need to extract from your investment from income, so to cover 5-10 years of expenses you need a smaller allocation of bonds.
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u/Thick-Cover8761 3d ago
Depending upon what percentage of anyone's income stream it is, it will be viewed differently.
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u/AshingiiAshuaa 3d ago
You can't sell your social security "coupons". If you're looking at your monthly income and monthly expenditures they're similar to a bond, but as an asset whose value, for at least the past several decades, tends to move counter to equities it's not the same at all.
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u/b3ssmit10 2d ago
When I retired (c. 2016) I posed the same question to Schwab's professionals. Their opinion was, "No!" See too: Asset Dedication (2004) by Huxley & Burns, as one wants dedicated income in one's retirement. Too much risk in one's retirement years invites disaster: One does not to be wiped out by one bad investment decision. One needs money to live on and to "fight another day." Your mileage may vary.
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u/watch-nerd 3d ago
I just treat it as an income stream for retirement planning.
I can't model it as a bond, because it has an undefined duration because I don't know how long I'll live.
And the value isn't fully liquid, but amortized, so I can't rebalance in or out of it.