Patrick and his spouse have $2.5 million in TSP and IRA accounts, along with military pensions and VA benefits. Financial advisor Wes Moss suggests treating the $2.5 million as an equity portfolio, using pension income as a fixed-income layer. Moss employs a capitalization rate approach to evaluate guaranteed income streams, translating annual pension amounts into equivalent asset values. For example, a $50,000 pension equates to $1 million in bond-equivalent wealth. This method provides a clearer picture of total wealth and helps in retirement planning.
"I like to take an annual amount and translate that to what it would be in money sitting in an account. So just divide it by 5%. So if you have a pension that's $50,000 a year, as an example, $50,000 divided by 5% is a million dollars."
"This is a capitalization rate approach: the same math used in real estate to convert annual income into an implied asset value. Applied to pensions, it reframes guaranteed income as an equivalent bond portfolio."
"The 5% cap rate Moss uses sits above the current 10-year Treasury yield of 4.30% and above the current Fed Funds Rate of 3.75%. That spread is intentional."
Read at 24/7 Wall St.
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