If you expect to receive a pension, you can consider it the equivalent of a substantial bond portfolio. Suppose, for example, you anticipate receiving a pension of $30,000 a year. That’s like having $750,000 in bonds that yield 4 percent.
With that guarantee of future cash flow, you can focus on assets other than bonds–assets such as stocks, real estate, and commodities. If you’ll receive a pension as well as Social Security, you might decide to hold few bonds or bond funds in your asset allocation.
In fact, a pension might be even better than bonds now. General bond funds yield only 3.3 percent, on average, according to Morningstar. Interest rates are likely to rise from such low levels, and rising rates will devalue bonds.
If your expected pension leads you to hold fewer bonds, more can go into stocks. You could up the ante by putting more money into aggressive categories such as emerging markets funds and sector funds focusing on areas such as technology or health care.
Even if you are risk-averse after recent bear markets, relying on a pension may make you more willing to own growth-oriented assets than they would otherwise. Say you are wary of equities so your idea of a suitable portfolio includes 40 percent stocks and 60 percent bonds. If you are assured of a pension after you retire, that cash flow cushion might lead you to increase your stock fund allocation from 40 to 50 percent.
