New tool helps define retirement income styles

The great challenge facing the wealth management industry, which has long focused on accumulation based on market growth, is what to do with that accumulated wealth when clients retire.

Should a retiree remain fully invested and rely on systemic withdrawals with the assumption that wealth will last a lifetime, however long that might be? Or is a time-segmented solution, keeping some cash protected for short-term income needs while still relying on market appreciation for future growth, the right answer? Or perhaps retirees should use a portion of their assets to buy annuities that offer either guaranteed income or continued market participation with downside protection?

Yes. No. Maybe. All of the above. It depends.

The fact is that most financial advisers have a preference or bias toward one type of retirement income approach, but that preference may not align with their client’s comfort level in retirement. Advisers have long relied on risk tolerance questionnaires and Monte Carlo simulations to build investment portfolios during a client’s accumulation phase. But until recently, there has been no widely accepted assessment for the distribution phase.

Enter the groundbreaking Retirement Income Style Awareness profile developed by retirement income experts Wade Pfau and Alex Murguia. Pfau and Murguia are founders of the Retirement Researcher Academy, an educational arm of the McLean Asset Management investment firm.

The RISA profile blends psychology and financial planning in a survey that considers a variety of factors related to an individual’s feelings about security, flexibility, reliance on market returns and preference for contractual guarantees to define their income risk tolerance during decumulation. RISA equips financial advisers with the insights they need to implement the retirement income strategies that make the most sense for each individual client.

“Without a standardized tool to help match retirement income strategies to a client’s tolerance for income risk, advisers have traditionally defaulted to investments-only strategies, which often are misaligned with client psychologies in retirement,” said David Lau, founder and CEO of DPL Financial Partners. “Through Wade and Alex’s research-backed framework, advisers can deliver strategies that meet clients’ best interest through RISA-facilitated conversations about what that best interest is.”

DPL Financial Partners, a commission-free insurance marketplace for registered investment advisers, recently partnered with Pfau and Murguia to pair the Retirement Income Style Awareness tool with DPL’s no-load insurance solutions. DPL is making the RISA available to a small group of its member firms in an initial rollout this month and plans to expand access to the full DPL membership later this year.

“RISA fills a critical gap in the adviser’s retirement income planning toolkit,” Murguia said. “We look forward to hearing feedback from DPL members as they bring this tool to their clients and prospects.”

It took me about 25 minutes to complete the RISA questionnaire and another 20 minutes to review the results, which accurately reflected my personal views on retirement income planning. You can try it yourself for free here.

The first question asks which of two statements most closely reflects your views on retirement income planning, with answers ranging from 1 to 6. One says: “I see my investment portfolio as funding the majority of my retirement expenses.” The other says: “I see my essential retirement expenses funded, to the extent possible, from protected income sources, with the rest of my expenses funded by my investment portfolio.”

I am decidedly in the second camp, comfortable with the fact that my husband’s pension, both of our Social Security benefits and a few annuities will cover most, if not all, of our fixed costs in retirement, leaving our investments to pay for discretionary expenses.

Other questions focus on the desire for emergency reserves, legacy planning, and the longevity balancing acting of funding a bucket list early in retirement or taking a more conservative approach to avoid outliving assets. I hope to work my way through an extensive bucket list, sharing our children’s inheritance with them while we’re still around to enjoy it together, and hopefully leaving them whatever is left. I’m confident that we are well-prepared for health care expenses and long-term care costs if the need arises.

The RISA profile also helps identify an individual’s preference for working with a financial adviser to implement a suggested retirement income plan. In my case, the RISA matrix defined me as a collaborator, rather than a delegator, validator or self-directed investor.

“In addition to helping you craft an effective retirement income plan, an adviser can also help you avoid the many behavioral aspects that can derail a plan,” my RISA profile results stated.

And isn’t that the true measure of a good adviser? One who listens to clients to figure out what they need and want, creates a plan, implements that plan and helps them stay on track.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s 2022 ebook at MaximizingSocialSecurityBenefits.com.)

Related Topics: DPL Financial Partners