There is a key difference between the two – liquidity.
Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.
Question: I recently retired and am fortunate enough to have a pension. It, along with Social Security, is enough to meet all my needs. The pension is not guaranteed, but it comes from one of the largest health care corporations in America, so I believe it’s safe. We own our house and have virtually no debt. What role should the pension play in determining the allocation of stocks and bonds I choose for my portfolio?
Ric: None. What you’re really asking is whether the pension will allow you to accept more risk in your investments because you have a safe pension to rely on.
We’ve never felt that was a good idea. To suggest that pension income is the equivalent of bond income doesn’t make sense. First of all, a bond is liquid. You can sell it whenever you want for its current market value if you need the cash. You can’t cash in a pension; all you can get is this month’s check — then you must wait a month for your next check.
If you pretend that your pension check is the equivalent of getting bond interest and therefore the equivalent of owning bonds, you’ll conclude that you don’t need to actually own any bonds — and the result will be that you’ll allocate too much money to stocks. That can drastically increase your investment risks.
Do not adjust your asset allocation based on the presence of Social Security or pension income.