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Bonds More or Less

WHEN YOU SETTLE on your portfolio’s split between stocks and conservative investments, you should take a broad view of your finances—and factor in the many parts of your financial life that look suspiciously like bonds. If you think of a bond as something that kicks off a steady, predictable stream of income, that description doesn’t just fit the paycheck you might be collecting. It also describes a host of other assets, including certificates of deposit, savings accounts, Social Security benefits and any defined benefit pension.

What are pensions, Social Security benefits and paychecks worth as assets? You might investigate what you’d pay to buy income annuities that generate comparable streams of income. Some of the sites that offer annuity pricing are listed in the retirement chapter. Keep in mind that Social Security, and probably also your paycheck, will rise with inflation, while most pensions pay the same sum every year. When valuing these income streams, also keep in mind that your paycheck will be paid for a defined length of time, while your Social Security benefit and any pension will be paid for life—but if you won’t start those benefits for many years, they are effectively deferred income annuities.

These other income-generating “bonds” may make you feel wealthier—but you may feel less wealthy once you subtract any debts that you have. While bonds pay you interest, your debts will cost you interest and hence you can view them as “negative bonds.”

All this has major implications for how you structure your portfolio and manage your broader financial life. Early in your career, when you have decades of paychecks ahead of you, you might have diversified your human capital “bond” by investing heavily in stocks. But as you approach retirement and the last of your paychecks, you’ll want to add more bonds and bond funds to your portfolio, so you can safely generate income, with no risk of being compelled to sell stocks at fire-sale prices. One way to increase your effective position in bonds: Pay down debt—a topic we discuss in the chapter on borrowing.

What if much of your retirement income will come from Social Security, income annuities and a defined benefit pension? Because you have these bond lookalikes, you may have less need to buy actual bonds—and instead you can continue to keep a hefty portion of your portfolio in stocks.

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