Experts stress retirement strategy preferences go beyond maximizing return

Experts stress retirement strategy preferences go beyond maximizing return
Advisers should talk to their clients about their comfort level with risk and whether they prefer a safety-first approach.
MAY 03, 2022

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.”

Latest News

HSBC's global private wealth head to depart amid latest shakeup
HSBC's global private wealth head to depart amid latest shakeup

The challenges continue for the financial services giant as its new CEO orchestrates a "measured, thoughtful and fair" restructuring in its management.

Orion taps Envestnet vet Chris Shutler as head of strategy
Orion taps Envestnet vet Chris Shutler as head of strategy

Meanwhile, Orion's former COO and wealth division president has emerged to become CEO of wealth technology consultancy firm F2 strategy.

Raymond James firms up CEO succession plans for 2025
Raymond James firms up CEO succession plans for 2025

The firm said in May that current leader Paul Reilly would be stepping down.

Choreo empowers advisors, CPAs with new tax planning solution
Choreo empowers advisors, CPAs with new tax planning solution

Firm says automated tool aims to solve a gap in the marketplace.

Advisor sells $300M firm after 22 years to return to where she started her career
Advisor sells $300M firm after 22 years to return to where she started her career

Beverly Hills firm serves clients including those in entertainment industry.

SPONSORED How MRP’s Synthetic Equity is balancing growth and protection for advisors

"Synth Equity has been such a tailwind for these advisors who really understand the story," Measured Risk Portfolios’ head of distribution said.

SPONSORED The future of prospecting: Say goodbye to cold calls and hello to smart connections

Streamline your outreach with Aidentified's AI-driven solutions