Experts stress retirement strategy preferences go beyond maximizing return

Many financial advisers recommend relying on equities — and accepting the risk that goes along with investing in stocks — to accumulate retirement savings. Some stick with that strategy even for post-retirement. But their clients may want to take a different approach, and having that conversation is essential, experts say.

Wade Pfau, professor of retirement income at The American College of Financial Services, has found two characteristics that influence how people save for retirement. One has to do with whether a person is “probability-based,” which means seeking to maximize total return and take on risk, or “safety first,” a tendency to want to protect a nest egg from downside risk.

Two other tendencies contribute to how a person wants to approach retirement saving. People either seek “optionality” — maintaining maximum flexibility in a strategy — or they are oriented to “commitment,” which is sticking to a particular strategy.

The factors can be combined to create a retirement savings matrix. For instance, if someone is probability-based and wants optionality, they lean toward heavy use of equities. The combination of safety first and commitment results in using annuities to fortify income. The factors can be combined in other ways that influence strategy.

Advisers should talk with clients to assess their retirement savings preferences.

“Not everyone will necessarily end up using the particular strategy associated with their style, but I think it’s a great starting point for the conversation,” Pfau said Monday at the InvestmentNews Retirement income Summit in Chicago.

Pfau and his colleagues have developed a questionnaire, Retirement Income Style Awareness, to catalyze that discussion.

Although clients may be gung-ho about accumulating assets leading up to retirement, they may want to ensure a steady income stream in their post-career lives. Advisers, on the other hand, often promote staying the course because the probability is that the market will go up again.

“The problem is once you get to retirement, maybe you don’t want to rely on probabilities anymore,” said David Lau, founder and chief executive of DPL Financial Partners, who participated in the session with Pfau. “Maybe you want that commitment. Maybe you want that safety first. This is now a device to help advisers or individuals to assess that and assess their own feelings about retirement income when going into retirement.”

A representative sample of the U.S. population shows that among those who are between 50 and 80, about one-third favors the total return approach but the other two-thirds are looking for a strategy that includes some sort of income protection, Pfau said.

Advisers should be familiar with the different available options, he said.

“There are more and more advisers who are implementing the ability to draw from the different strategies to find who might want to do income protection, who might want to do total returns, and they will offer that strategy to the client on a more bespoke basis,” Pfau said. “It’s ultimately going to be [those] advisers who have the most success.”