Social Security Is My Bond Portfolio

My Dad is an Investor.  I say Investor with a capital I because I remember him studying investments in his home office (aka my brother’s former bedroom) for hours when I was a teenager.

He’s the first early retiree I knew.  So when he shared a bit of his investment philosophy with me, I listened.

In spite of being in his late 60’s at the time and retired with no significant pension, he continued to be invested very aggressively and held very little of his investments in bonds.

He said Social Security was his bond portfolio.

This approach worked well for him.  He’s now in his late 70’s and running out of money is not even possible (he was also the first frugal person I knew!).  Though he recognizes he would have been better off investing in index funds and saving the hours he pored over investment reports.

I’ve followed in his footsteps on many things and I’m following him on this one too.

I’m also invested very aggressively.  I’m 80% invested in the stock market.  More than half of my investments are in a single fund–Vanguard’s total stock market index fund (VTSAX) or an exchange traded fund that is very comparable to VTSAX.  I have about five years’ living expenses in banks and money funds and a tiny bit of bonds.  This cash helps me feel comfortable with my large exposure to the stock market–I shouldn’t have to sell stocks in a major downturn.

There are two primary reasons I’m not invested in bonds.  One is the stabilizing force my future social security payments have on my portfolio.  The other is the inherent risk long-term bonds have in the current, low interest rate environment.

The Social Security Administration tells me I should receive about $2,500 a month plus future cost of living adjustments when I reach my full retirement age of 67 (login to to check yours).  The actuarial tables tell me I should live to about 86 so I should receive 19 years of payments before I’m done.  The present value of those payments is over $400,000.  So I can say I have $400,000 invested in bond equivalents.  Only Social Security is even better than a bond because it escalates with inflation.

Some of you would say I shouldn’t count on receiving Social Security–the fund is running out, future contributions won’t support payments etc.  Our elected representatives will need to pull their heads out of the sand and make changes so the fund is sustainable.  Though I’m confident these changes won’t affect me significantly, I include only a reduced payment in my long-term plan.  Here’s one time when being older is a good thing–our elected rep’s aren’t likely to muck with a (voluntarily) low income baby boomer’s retirement.  We vote and being a baby boomer makes me sound even older than I am.  It won’t hurt that Mr. Ms. Liz is 8 years my senior–there’s no way they’ll be mucking with his Social Security.

Traditionally, bonds have been a low risk/low reward investment.  They act as a stabilizing force on a diversified portfolio.  Their value doesn’t tend to swing much and their value often goes up when stocks go down.

But, with interest rates currently at historic lows, I believe there are significant risks in the bond market.  A general rule of thumb is that for every 1% increase in interest rate, the value of the bond decreases 1% for every year of maturity.  If I paid $1,000 for a bond that matures in 10 years, my bond is worth only $900 if interest rates go up 1%.  With bonds paying about 2% today, the potential decrease in bond value seems to me like significant risk without adequate reward.

I prefer to invest almost fully in the stock market.  I expect sometimes scary volatility but I expect to be rewarded for the risk I am taking.

What do you think–is my Social Security as bond approach crazy?  How do you factor Social Security into your financial plan?


Investing is risky, this reflects my opinion and is for informational purposes only.  Proceed with caution, do your research and seek professional advice if necessary.

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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

6 thoughts on “Social Security Is My Bond Portfolio”

  1. That’s exactly the way I approach this.
    My wife and I retired early as well. I look at both SS benefits and calculate the present value for both. As you wrote, this acts like a bond, and in the big picture of asset allocation, should be treated that way.

    1. Thanks for stopping by Joe and sorry for the delay in responding–your comment ended up in my spam directory. I’m glad to hear you think I’m on the right track with this! For my younger readers, at what age do you think they shouldn’t be counting on SS as a portfolio stabilizer? 30? 40?

  2. A very good approach. Here in NZ a government provided pension is available to everybody at age 65 irrespective of wealth. I’m 45 and have been very hesitant to move from shares into bonds, and will now continue on my path with a view that the pension is essentially my bond investment!

    1. I’m glad this rang true for you Andrew–thanks so much for your comment! The present value of that pension is probably more than you would think.

      I’m curious is your NZ pension enough to support a typical lifestyle or does it provide subsistence level support like our Social Security does?

  3. Great insight from your Dad-I like the analogy. I would offer that your cash-stash also diversifies and protects your large stock exposure.

    I also “monetized on paper” our household’s combined SS payments and discovered we are actually millionaires-who knew?

    As for future cuts to SS. I was a young insurance salesman in the late 1970’s, licensed to sell annuities and mutual funds also. We were trained to focus on the “three legged stool” of retirement planning for our clients. SS-pensions-personal savings. We were taught the history of the SS retirement plan. Even back then, I heard the “experts” forecasting the reduction of future SS retirement benefits. Never happened (well, OK, the recent inflation adjustments have most likely been “cooked”, but still…). During the Reagan years, payroll contributions were tweaked upwards to “save” the system, but still no cuts. I agree with you about about the dire consequences should those in Washington cut the benefits.

    Great work. thanks.

    1. Congratulations on your millionaire status! I never thought to add the PV to my net worth–what a great idea.

      I’ve been thinking about my cash stash a lot lately. As the stock market climbs (for apparently no reason?) and it’s so tempting to pull back, I talk myself off the ledge with the reminder that I have about five year’s expenses sitting in cash. You could argue that my cash position isn’t wise but if it keeps me from selling off, it’s worth it.

      Thanks for the history on SS–I think I’m old enough they won’t reduce my benefits much. One benefit to being old!

      Thanks for stopping by and commenting!

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