Social Security as Your Bond Portfolio?

October 29, 2010

As someone who has a moderately aggressive investment approach, I had a conversation with a friend who has a very aggressive investment approach (in my opinion) and he has made me rethink a piece of my own investment philosophy.  I thought I’d share the conversation and see if anyone wants to add their opinion into the debate.  My friend is just about 50 years old and has always been an aggressive investor.

He and his wife have put 4 kids through college (they graduated with ZERO student loans), will pay off their mortgage entirely by age 55, and have amassed $500,000 in the combination of their 401(k) plans and IRA’s.  They have no savings outside of retirement plans, but given the amount of spending they have done on the kids’ education that is hardly a thing to worry about today.  They are hard workers and excellent savers.  Their lifestyle entails very little in the way of risky behavior; they eat nutritiously, exercise regularly, do good deeds in the community, and live a fairly basic, conservative lifestyle. We had never talked about money before, and I was surprised at what I learned.

He is invested 100% in the stock market and has no plans to “get more boring and conservative” and he feels that he needs no cash or bond exposure in his portfolio because in his opinion that is Social Security’s job as well as his pension’s role in his overall investment life.   According to his math, he plans to work another 12 years (to get to age 62) and between contributions and growth he is hoping to have $1,000,000 in retirement assets.  He and his wife, at that time, will receive roughly $2,800 per month in Social Security income ($1,500 for him, $1,300 for her).

Here’s the twist:  He considers Social Security income his “bond and cash” portion of his investment portfolio.  He assumes that if you buy long term US Treasury Bonds, you should average a 4% – 5% rate of return.  How much would you need in Treasuries to earn $2,800/month?  Using his return estimate, he would need to have $672,000 to $840,000 invested.  So, when looking at his $500,000 retirement accounts, he thinks he has way less than 100% invested in stocks.  He said he is 37% stock, 63% bond because of the $840,000 (he used the biggest number available to exaggerate his point!).  I thought he was an aggressive investor because of the way his accounts are invested and he thinks his portfolio is far too conservative.  While I think he has a point, I don’t think it’s an appropriate way for most of America to start viewing their investment accounts for a whole host of reasons that I’ll be addressing in a later post.

What do you think?