Question: I retired from the US Army in 2004 after twenty years of active service with approximately $36,000 per year retirement benefit. The military retirement is adjusted annually with COLA. I started normal and IRA mutual fund accounts in 1985 and continue to make contributions. I continue to work for the Government as an engineer. My question concerns asset allocation. Am I correct in considering my military retirement as an income-producing asset class (bond) and thereby allocating the remainder of my assets in mutual funds consisting of equities? If I divide the $36,000 by an estimated 5% return, that would result in a theoretical principle value of $720,000. After the recent 40% market fall, my portfolio does not approach this value. My current asset allocation is 84% domestic equities, 8% international equities, and 8% cash. Gregory, Pinehurst, NC
Answer: You’re right to consider your military pension as the equivalent of a very safe asset, like a government-backed debt security. The same insight holds with your (future) Social Security payments. Theoretically, you can then take more risk with the rest of your portfolio in the hope of earning a higher return over time. But there’s no guarantee you will earn that higher return. But that’s in theory. You should adjust the risk in the portfolio to reflect your own desires.
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