A reader writes in, asking:
“At our local Bogleheads chapter meeting, there was a heated discussion about Social Security, specifically, whether it should be counted as a bond in your asset allocation. My view is that it’s not really an asset because you can’t sell it. But one of the more experienced people in our group was emphatic that it’s a mistake to leave Social Security out of an asset allocation analysis and that it should be counted as a bond because it provides predictable payments.”
This question comes up over and over, year after year — both in my email inbox as well as on the Bogleheads forum.
Social Security is an asset. It’s true that it is not a liquid asset (i.e., you cannot sell it). But even illiquid assets show up on balance sheets. Same goes for lifetime annuities. They are assets, even if they are not liquid.
And yes, Social Security is a fixed-income asset. So it’s more bond-like than stock-like.
But it’s definitely not a bond.
There are a lot of differences between a) having a $2,000 monthly Social Security benefit at full retirement age (i.e., a stream of income with a present value of about $350,000) and b) having $350,000 of bonds in your brokerage account.
Social Security is what it is — and it isn’t what it isn’t.
The desire to classify everything as either a stock or a bond is completely bananas.
For example, do you classify your house as a stock, because its value goes up and down considerably over time? Or do you classify it as a bond, because it pays you “interest” in the sense that you do not have to pay rent each month? (I hope the answer is obvious: it’s neither a stock nor a bond, because it is a house.)
The distinctions between different types of assets are real and useful.
Social Security:
- Is inflation-adjusted,
- Will last your entire lifetime,
- Will not extend beyond your lifetime (or beyond you and your spouse’s lifetimes if married, child benefits notwithstanding),
- Is absolutely illiquid (i.e., it’s not just hard to sell; it cannot be sold at all), and
- Is subject to political risk.
By shoehorning that into the “bond” category, you are ignoring some or all of those unique characteristics. You are ignoring useful information.
Relatedly, if you have decided, for example, that you want 40% of your portfolio in bonds, but you haven’t yet decided what will count as a bond, how did you decide that 40% was the right number? Perhaps the line of reasoning that went into that decision had some flaws.
Rather than counting Social Security income as part of your bond allocation, I’d suggest using this method for fitting it into your overall retirement plan:
- Determine how much money you plan to spend each year during retirement.
- From that, subtract any part-time job or business income you expect to earn.
- From the remaining amount, subtract your Social Security/pension income to determine how much you will need to spend from your portfolio each year.
- Then make any portfolio-related decisions (including asset allocation) with that net required-spending-from-portfolio figure in mind.
"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
FAQs
A bondholder is an investor who acquires bonds issued by an entity such as a corporation or government body. Bondholders essentially become creditors to the issuer, and so bondholders enjoy certain protections and priority over stock (equity) holders.
Is social security income considered an asset? ›
Social Security and Medicare are indeed forced retirement, disability insurance, and health insurance plans that you are paying into, which will be a great complement to your IRA and other retirement vehicles down the line. For that reason alone, you should view these programs as Assets.
Is an investor in bonds the owner of the asset? ›
By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year. Unlike stocks, bonds issued by companies give you no ownership rights.
Are bonds assets for investors? ›
Fixed income is an asset class that is a commonly held investment because it helps preserve capital. Fixed-income investments, or bonds as they are commonly known, typically provide a premium above inflation and experience less return volatility compared with shares.
Is your retirement an asset? ›
Retirement account: Retirement accounts include 401(k) plans, 403(b) plans, IRAs and pension plans, to name a few. These are important asset accounts to grow, and they're held in a financial institution. There may be penalties for removing funds from these accounts before a certain time.
Does a retirement account count as an asset for SSI? ›
Many people retain 401(k) retirement accounts with former employers even after they have stopped working. For individuals seeking Supplemental Security Income (SSI) benefits, it is important to know that these accounts are treated as an asset, which can result in ineligibility for SSI.
What income is considered as assets? ›
Income is generally not considered an asset, but can become one if invested in assets that generate additional income. Income can be considered patrimony if used to pay off debts, reduce liabilities, or finance a business venture. Assets are resources that hold monetary value and can be easily converted into cash.
What are investors in bonds? ›
Bonds – also known as fixed income instruments – are used by governments or companies to raise money by borrowing from investors. Bonds are typically issued to raise funds for specific projects. In return, the bond issuer promises to pay back the investment, with interest, over a certain period of time.
Why would an investor put a bond? ›
Similar to callable bonds, the rationale behind putable bonds is related to the inverse relationship between interest rates and the price of bonds. Since the value of the bonds declines as interest rates rise, they provide investors with protection from potential interest rate increases.
How does a bond investor make money? ›
A bond is simply a loan taken out by a company. Instead of going to a bank, the company gets the money from investors who buy its bonds. In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value.
Owners of bonds are debtholders, or creditors, of the issuer. Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower.
