Boston Gal's Open Wallet

No matter how much of your portfolio is in stocks, they amount to less of your net worth than you think. Let's assume you have $600,000 in stocks and $400,000 in bonds, even after the market meltdown. You are not 60% stocks, 40% bonds.

Here's why. Say you are a 65-year-old man; your life expectancy is 17 more years. You earned good money, and now you can expect a monthly Social Security payment of $2,000. At least for now, the U.S. government pledges that you will receive those payments, adjusted for inflation, for as long as you live. Having Social Security is equivalent to holding a bond that should produce $24,000 in today's purchasing power every year.

This kind of bond has a name: an inflation-adjusted immediate annuity. How big an annuity would match that $2,000 in Social Security each month? With the help of Allan Roth, a financial planner at Wealth Logic LLC in Colorado Springs, Colo., I was able to answer this question. It takes a $327,000 lifetime annuity -- assuming you bought it from Vanguard, an economical provider, at this week's rates -- to throw off $2,000 a month, after inflation, for the rest of your life.

Strictly speaking, this $327,000 implicit bond is on Uncle Sam's balance sheet, not yours -- but its income belongs to you. Effectively, that gives you a total bond position not of $400,000, but $727,000.

As a result, your $600,000 in stocks is not 60% of your assets; it's really 45% (since the annuity brings your total portfolio to $1,327,000).

The implicit bond of Social Security makes up about 40% of the total assets of the average household on the verge of retirement, according to Olivia Mitchell, director of the Pension Research Council in Philadelphia. "Having Social Security comprise such a big piece of the typical household's portfolio," says Prof. Mitchell, "makes recent equity-market losses, and home-value losses, relatively less critical."

Labels: Retirement