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SCOTT BURNS: Social Security is an income right, but not an asset

Q: I have a good handle on an asset allocation for my situation, but I’m not sure what to include in determining the value of my nest egg. Should I include the value of my Social Security as part of my nest egg by using the interest rate on a 30-year Treasury bond? Social Security is really better than the 30-year bond. I do not have a pension.

My home is paid for. Should I consider some value like the rent I don’t have to pay? – J.B., Lakeway, Texas

A: You can calculate the imputed value of your Social Security income, but for what purpose? It won’t be part of your estate. It is only an income right, not an asset. Most people, when they do such calculations, find that their imputed assets – the assets they would need to have to replace the income they receive from Social Security or other retirement pension – are a lot larger than the actual financial assets they have.

The only use for this information is as a rough guide to asset allocation for the financial assets you do have. For instance, if Social Security and/or a pension provide 80 percent of income, you can take more risk with financial assets than if Social Security and/or a pension provide only 20 percent of income.

You can do a rough valuation of your Social Security benefits by visiting the website and entering your gender, age and benefit. The website will calculate how much you would have

to invest, in the current market, to get that benefit as a fixed payment. You’ll need to add about 50 percent to the sum to compensate for the fact that Social Security benefits are inflation-adjusted and the vast majority of private life annuities are not.

The average Social Security benefit in 2012 will be a bit over $1,200 a month. For a 66-year-old male without a spouse who might receive future benefits, that’s worth about $196,000 for a fixed annuity benefit and about $300,000 as an inflation-adjusted life income equivalent to Social Security.

Your house provides you with an imputed income in the form of shelter services. It is a nice income to have for two reasons: It is not in cash, and it is not taxable. If you imagine two people with equal cash incomes living in identical houses, one owned and one rented, the owner would be able to maintain a much higher standard of living because he would not be paying rent. Nor would he be paying taxes on the cash income he needs to pay the rent.

Q: I inherited $140,000. I have left it in a money market account for months, not knowing what to do with it. I am 54, single, and chronically ill, but still trying to work. What are your suggestions for what to do with the money? – J.G., by email

A: Join the crowd! Most people are frozen at the switch, unable to make a decision about buying or selling. If they already have a diversified portfolio, indecision may not be a bad thing. In your case, with $140,000 in cash, you are safe but slowly bleeding to death from loss of purchasing power to inflation.

You can overcome indecision by making a conscious decision about how much risk you can tolerate. Suppose, for instance, that you didn’t want to face a portfolio loss of more than 2 percent. Well, you could invest 10 percent of the money in a broad-market index fund. Then, the index fund could decline by as much as 20 percent, and the total loss to your entire portfolio would be only 2 percent. Even if we had another meltdown like 2008-2009, the impact on your portfolio would be no more than 5 percent.

The market would have to decline about 35 percent for your total portfolio loss to equal the 3.5 percent loss in purchasing power you would suffer by being in cash for a year, since the trailing inflation rate is about 3.5 percent.

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