Including future pensions in allocations

[banders]

I was wondering if/how others include future pensions in their allocations.

Our investment position now:

Foreign stocks: 25%
J stocks: 10%
Foreign bonds: 8%
AAPL: 57%

If I convert these to monthly 4% drawdown numbers and include future pensions (assuming the UK pension increases by the minimum of triple lock 2.5%), using monthly figures (rounding errors included) it becomes:

Foreign stocks: 11%
J stocks: 4%
Foreign bonds: 4%
AAPL: 25%
UK pension: 38%
J pension: 19%

This assumes I retire in 8 years. The pensions are future expected amounts but the investments are today’s figures. Of course I have no way of knowing how they will perform over that time period.

I have no idea how to think about these numbers. Any opinions?

[RetireJapan]

I usually subtract the pension estimates from my living expenses estimate, which means I need less money from investments to live on.

I don't treat it as part of my investments.

For example:

estimated pensions (2x nenkin + 1x UK state pension)= about 3.5m yen

living expenses = about 5m

need to use 1.5m a year from investments to cover the gap

1.5m x 25 (4% withdrawal rate) = 37.5m in investments needed at minimum (probably 50m to feel safer)

[banders]

So you maintain your allocation outside pensions. The other POV is that the pensions are guaranteed and could counter the risk of a large stock market position so should be included. Difficult one.

[RetireJapan]

So you maintain your allocation outside pensions. The other POV is that the pensions are guaranteed and could counter the risk of a large stock market position so should be included. Difficult one.

Subtracting pensions from necessary income takes care of that.

You can use bonds/cash to smooth out volatility from your investment portfolio, but I don't think there is much advantage to including pensions when thinking about investments.

[northSaver]

What I do is calculate when and how much we'll get from our pensions, assuming we continue to pay into them until we can stop. The actual amounts are unknown so I use this year's pension payments as a safety net. In truth we'll probably get more by the time we retire, unless something breaks horribly in the pension systems.

Then I guess how much we'll need to live on each year at today's prices. Actually I guess three numbers: minimum, comfortable and luxury lifestyles.

Then I calculate how much money we've got now (actually end of previous quarter) across all investments. And for simplicity, I assume four ludicrous ideas:
1. The investments won't increase at all from now.
2. There is no inflation going forward.
3. We won't earn any more income from now.
4. GBP.JPY stays at 150 forever.

The first two should hopefully cancel each other out if our portfolio is constructed well enough. The third one is highly unlikely but I suppose could theoretically happen if we suffer horrendous injuries that would prevent us from working. The fourth one might work on average, who knows.

Then the fun starts. Based on the above, I work out how much we'll need right now to live until at least 100. At some point the pensions should cover everything, so it's a matter of drawing down our savings until that point, and taking into account the fact that the various pensions will kick in at different times. This will produce three figures: minimum, comfortable and luxury.

I compare these results with how much we actually have, and either jump with joy or sigh with despair depending on the outcome (it changes each year). I'm pleased to report that currently we have enough to live a comfortable life, but not a luxury one (with no extra income). But I'm less than a decade from my first pension payment so it's not such a great achievement. If you're still in your 20s it will probably feel like an impossible chasm to bridge... unless you're someone like Mr Money Mustache.

As well as that, I use online retirement simulators to get a different (and more realistic) picture. I find cFIREsim to be particularly powerful, even though the data is for US markets and doesn't take into account exchange rates.

[goodandbadjapan]

What I do is calculate when and how much we'll get from our pensions, assuming we continue to pay into them until we can stop. The actual amounts are unknown so I use this year's pension payments as a safety net. In truth we'll probably get more by the time we retire, unless something breaks horribly in the pension systems.

Then I guess how much we'll need to live on each year at today's prices. Actually I guess three numbers: minimum, comfortable and luxury lifestyles.

Then I calculate how much money we've got now (actually end of previous quarter) across all investments. And for simplicity, I assume four ludicrous ideas:
1. The investments won't increase at all from now.
2. There is no inflation going forward.
3. We won't earn any more income from now.
4. GBP.JPY stays at 150 forever.

The first two should hopefully cancel each other out if our portfolio is constructed well enough. The third one is highly unlikely but I suppose could theoretically happen if we suffer horrendous injuries that would prevent us from working. The fourth one might work on average, who knows.

Then the fun starts. Based on the above, I work out how much we'll need right now to live until at least 100. At some point the pensions should cover everything, so it's a matter of drawing down our savings until that point, and taking into account the fact that the various pensions will kick in at different times. This will produce three figures: minimum, comfortable and luxury.

I compare these results with how much we actually have, and either jump with joy or sigh with despair depending on the outcome (it changes each year). I'm pleased to report that currently we have enough to live a comfortable life, but not a luxury one (with no extra income). But I'm less than a decade from my first pension payment so it's not such a great achievement. If you're still in your 20s it will probably feel like an impossible chasm to bridge... unless you're someone like Mr Money Mustache.

As well as that, I use online retirement simulators to get a different (and more realistic) picture. I find cFIREsim to be particularly powerful, even though the data is for US markets and doesn't take into account exchange rates.

Ha - I pretty much do this. Assume no growth and no income or inflation from now but also assume no pension or inflation! Then I see how much I could spend monthly for 30 years (I figure if I haven't calculated pension and live this far then the accumulated pension I do actually get would get me easily through the rest of my days if I live longer. - I'll be 84 in 30 years!) I figure this is probably quite a pessimistic scenario but I think it gives me a rough idea of whether I am FI or not.

[northSaver]

Ha - I pretty much do this. Assume no growth and no income or inflation from now but also assume no pension or inflation! Then I see how much I could spend monthly for 30 years (I figure if I haven't calculated pension and live this far then the accumulated pension I do actually get would get me easily through the rest of my days if I live longer. - I'll be 84 in 30 years!) I figure this is probably quite a pessimistic scenario but I think it gives me a rough idea of whether I am FI or not.

Wow, I'd be crying every time if I didn't include pensions. You must have a sizeable stash to make it last 30 years with no future income! Our lives would be pretty basic until age 84 without pension income, and nothing left after that. So I hope we get it

[goodandbadjapan]

Ha - I pretty much do this. Assume no growth and no income or inflation from now but also assume no pension or inflation! Then I see how much I could spend monthly for 30 years (I figure if I haven't calculated pension and live this far then the accumulated pension I do actually get would get me easily through the rest of my days if I live longer. - I'll be 84 in 30 years!) I figure this is probably quite a pessimistic scenario but I think it gives me a rough idea of whether I am FI or not.

Wow, I'd be crying every time if I didn't include pensions. You must have a sizeable stash to make it last 30 years with no future income! Our lives would be pretty basic until age 84 without pension income, and nothing left after that. So I hope we get it

I didn't say that it doesn't make me cry! But this is just a worst case scenario kind of take (I hope)!

[Beaglehound]

Ha - I pretty much do this. Assume no growth and no income or inflation from now but also assume no pension or inflation! Then I see how much I could spend monthly for 30 years (I figure if I haven't calculated pension and live this far then the accumulated pension I do actually get would get me easily through the rest of my days if I live longer. - I'll be 84 in 30 years!) I figure this is probably quite a pessimistic scenario but I think it gives me a rough idea of whether I am FI or not.

Wow, I'd be crying every time if I didn't include pensions. You must have a sizeable stash to make it last 30 years with no future income! Our lives would be pretty basic until age 84 without pension income, and nothing left after that. So I hope we get it

I didn't say that it doesn't make me cry! But this is just a worst case scenario kind of take (I hope)!

Your Scottish pessimism is of course something I can relate to, but even I factor in pensions to future income projections, though I assume a bit later than current age rules.

[goran]

Would any of you be willing to share your calculation/estimation sheets?

Looking for an efficient format for Japan style investment and not reference numbers.
I am (relatively) newbie in my investment journey. 2 years since I started to seriously invest every month.
I have a rudimentary sheet for each year but nothing yet consisting of estimation for future.