NEW YORK (CNN/Money) - I'm 56 and plan to retire within three years. When I analyze my investment portfolio to make sure it is balanced and diversified, how should I account for my company pension? The pension pays a monthly benefit, so for asset allocation purposes should I think of it as the same as owning a bond or bond fund?

-- Bill McTiernan, Charlestown, Mass.

From a purely theoretical standpoint, you're absolutely correct. But from a practical standpoint, I don't think the theory is much help for setting an actual asset allocation for your retirement portfolio. Let me explain.

As you said, having a pension that pays you a regular monthly benefit is pretty much like owning a bond or bond fund that makes regular payments.

I don't know whether your pension benefit has cost of living adjustments or is in some way pegged to inflation. But if it were, then your pension would be a bit like a TIP, or Treasury Inflation Protected security, or a Treasury bond whose payments and principal value increase along with the consumer price index.

And it's also true that, again theoretically, you could consider your pension part of your fixed-income or bond portion of your portfolio, since it throws off regular income like a bond and, like a bond, has far less volatility than stocks.

The problem with this approach is carrying it out. To figure out what percentage of your overall portfolio is invested in bonds (i.e., your pension), you must put a price tag, or a market value, on it.

If you can determine that your pension is worth, say, $250,000, and you also own $250,000 in stocks, then you would have a 50-50 stocks to bonds allocation.

RELATED ARTICLES The best retirement benefits Investing in retirement An unused pension plan

But attaching a value to your pension is tricky. Since you can't sell your pension, it doesn't really have a market value in the traditional sense. You could put a price on it by using the present value calculator in a program like Excel and figuring out your pension's value based on the income stream and your estimated life expectancy. But even if you did that I think you would still run into practical difficulties in managing your portfolio.

Let's say, for example, that stock prices take a big hit and bond prices rise, much as stock and bond prices did over the past two years. If you were following a traditional asset allocation rebalancing strategy with a portfolio of stocks and bonds, you would probably want to take some profits in bonds and reinvest the proceeds into stocks in order to bring your mix of stocks and bonds back into balance.

But could you do that with your pension? Could you sell off a piece of it? No. Fact is, a pension doesn't give you the same flexibility as a bond or bond fund.

That doesn't mean you shouldn't factor your pension into your investing strategy. You should. But I recommend a different approach -- namely, include your pension as a separate income source rather than as income thrown off by your investment portfolio. Here's how to do that:

Start by figuring out how much annual income you need to live in retirement. Let's say, just for argument's sake, that figure is $60,000. From that figure subtract the amount you'll get from Social Security and then the amount of your pension. Let's assume your combined income from SS and your pension is $30,000. That means you must get the remaining $30,000 a year from your retirement investments.

That is the point at which you set your asset allocation. Basically, you want to figure out what mix of assets will allow you to draw down $30,000 a year and will last as long as you're alive. Actually, you'll also want to adjust that thirty grand for inflation, otherwise you will lose substantial purchasing power as you age.

There's no one "correct" portfolio. The one that's right for you will depend on such factors as the size of your retirement investment stash, your tolerance for short-term risk, how long you think you'll live and how much of a chance you're willing to take that you might run out of money before you run out of time.

But the important thing is to create a portfolio that provides the level of income you need -- or as close as you can get to it -- and that has a reasonable chance of lasting the rest of your life. For help in doing that, I suggest you check out the Retirement Income Calculator at T. Rowe Price's Web site. You can run several different scenarios and then decide what type of portfolio works best for you.

If you follow my approach, you'll still be taking your pension income into account (albeit indirectly) in setting your investing strategy. Plus you won't have to waste your time doing present value calculations to determine a theoretical value for your pension that has little application in the real world.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 am on CNNfn.