Retirement Watch

Thinking like a retiree is quite different than thinking like an investor

Retirement income planning is now established as a vital component of financial planning

Sep 20, 2015 @ 12:01 am

By Wade Pfau

In mid-September, retirement income luminaries gathered in Indianapolis to celebrate the 10th anniversary of the Retirement Income Industry Association. RIIA's birth in Boston in 2005 represents the time that disparate thoughts began to coalesce about how retirement income planning differs from traditional accumulation-focused retirement planning. After having reached the mountain summit, how do clients make it back down?

The genesis of RIIA was founder Francois Gadenne's realization as an early retiree himself that thinking like a retiree is quite different than thinking like an investor. Dirk Cotton, host of the Retirement Café blog and winner of this year's thought leadership award, provides a great analogy to understand this. Consider a breakfast plate filled with eggs and bacon. For this breakfast, the chicken is involved, but the pig is committed. Simply put, retirement is the time that individuals transition from chickens to pigs and have to start thinking differently.

Early on, RIIA members realized that retirement income meant more than just financial accounts, as a household must deploy its entire balance sheet of assets (which add human and social capital to financial capital) to meet its liabilities (future household expenses and obligations). Solving the retirement income problem means focusing on the client's entire financial picture. This viewpoint did not fit into the existing silos and compartmentalization of the financial services profession, and so RIIA grew as an independent group advocating a more holistic client-centered focus fundamentally tethered to a “view across the silos.”

RIIA conferences always bring together an eclectic group of academics and practitioners for discussion and debate about what belongs in the retirement income toolkit. Perhaps most far-reaching in implications from this conference was Moshe Milevsky's keynote presentation about tontine thinking, which gets at the heart of the retirement income problem. Individuals do not know how long they will live. This is longevity risk. For those seeking to manage this risk on their own, it requires spending conservatively in an effort to make sure funds remain to cover the possibility of living to age 90, or 100, or beyond. It's not a particularly efficient way to go about things.

Tontine thinking proposes a solution to this risk by recognizing that those retirees who die young do not spend as much as those who live long. These differing uncertain spending needs can be pooled in what later discussions identified as the crowdsourcing of retirement, allowing everyone in the pool to spend more when alive, because the short-lived will subsidize the long-lived. It is a straightforward way to manage longevity risk while still maintaining an investment portfolio, without requiring any further contractual guarantees from an insurance company.

Simply, a pool of investors combine forces with a joint investment portfolio, and as time passes the remaining survivors share the proceeds from the investment income and returns. Sharing the investment results among survivors means those who do live are able to get higher returns than the investments alone can offer. Meanwhile, those who died still got to spend more than otherwise, because they could spend more aggressively knowing the subsidies would be there for them if needed.

Several years ago I served as a curriculum director for RIIA, and it really impacted my thinking. I became one of the “cross-silo people” that Elvin Turner identified as showing up in more and more places. Advisers are seeking education and training in this area. For instance, The American College's Retirement Income Certified Professional (RICP) designation has grown exponentially since its introduction in 2013. Now almost 10,000 individuals have completed or are working through the curriculum. RIIA's own Retirement Management Analyst (RMA) designation also continues to develop and evolve into multiple levels of content.

Next May, InvestmentNews will be celebrating its own 10th anniversary for the Retirement Income Summit, designed to help financial advisers work through what Bob Powell identifies as the field's “complexity, confusion, and conflict.” Retirement income planning is now established as a vital component of financial planning.

Wade D. Pfau is a professor of retirement income in the Ph.D. program in financial services and retirement planning at The American College. He is also a principal at McLean Asset Management and inStream Solutions. He maintains the RetirementResearcher.com website.

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