Strategic Asset Allocation for Individual Investors: The Impact of the Present Value of Social Security Benefits
Posted: 10 Jul 2006
This paper demonstrates the dramatic effect of social security wealth on individuals' asset allocation. We first discuss why social security wealth should be included in portfolio asset-mix decisions. We then draw parallels between social security benefits and inflation-indexed treasury bonds to help quantify the present value of social security benefits. Finally, we show the portfolio impact of including social security wealth under several asset-mix decision rules. Excluding social security wealth from the asset mix decision results in sub-optimal portfolios. Including social security wealth provides an incentive for including more stock in the asset mix.
Keywords: social security, portfolio choice, mean-variance optimization, valuation
JEL Classification: G11, H55, J26, J17, K13
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