Include the House and Social Security

Including the lump-sum present value (PV) of all future Social Security benefits plus home equity as part of a client’s portfolio can greatly alter portfolio design. Including these two assets can mean the stock portion of the portfolio should increase by 20 percentage points or more.

For example, Betty is age 65; she can estimate the PV of her remaining Social Security benefits by multiplying her current annual payments, call it $25,000, by 20. This means she can add $500,000 to the fixed-income portion of her portfolio. Suppose her investment portfolio is worth $1,000,000; a 60/40 mix would then be adjusted. Instead of $600,000 in stocks, $900,000 could be the more appropriate figure if the portfolio’s value went from $1 to $1.5 million (1.5 x 60% = 0.9). The next table provides a simple estimate of the current value of all future Social Security benefits, adjusted for mortality and future inflation (the PV factor).

 

Current Value of All Future Social Security Benefits

[factor should be multiplied by this year’s annual benefit]

Age	Male	Female		Age	Male	Female
45	13.6	15.7		75	12.4	13.6
50	14.4	16.6		80	9.9	10.7
55	15.4	17.6		85	7.7	8.1
60	16.7	18.7		90	5.8	5.9
65	18.3	20.1		95	4.3	4.2
70	15.3	16.8

      Source: Morningstar, 2014

Further suppose Betty had a home with no mortgage, valued at $700,000. Sources such as Morningstar would argue the additional $700,000 should be added to the fixed-income portion—with an expected appreciation rate of 2-4% a year; in highly volatile real estate markets such as Las Vegas, Miami, or Phoenix, the home should be considered the equivalent of a balanced fund (50/50 mix). Adding $700,000 to the portfolio, whether counted as a debt instrument or hybrid, will alter the percentage amounts going to stocks and bonds.