As an investor, you may have done a risk tolerance assessment when determining how to allocate the assets in your portfolio. Typically, you have to fill a risk tolerance questionnaire (RTQ) to help decide whether you are an aggressive, conservative, or moderate investor.
But RTQs aren’t very effective in determining the appropriate strategy for retirement investment. Enter Alex Murguia, CEO of Retirement Researcher, and Wade Pfau, a professor at the American College of Financial Service. Murguia and Pfau, according to their research, created a richer and more comprehensive way to measure risk tolerance.
The Retirement Income Style Awareness (RISA) profile strategy is more suited for complex retirement income planning than RTQ. It involves a personal assessment to identify an individual’s preferred ultimate retirement saving strategy. You’ll have to fill a questionnaire that will reveal your preference for the following four retirement strategies.
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Systematic withdrawals with total return investing: with this strategy, you’ll be placed in a risk-receptive RISA quadrant while also keeping your options open.
Risk wrap with deferred annuities strategy: this would place you in a probability-based and commitment quadrant.
Time segmentation or bucketing: this would place you in a safety-first and optionality quadrant.
Protected income with immediate annuities: this would place you in the safety-first and commitment quadrant.
The assessment asks you to choose the statement that best reflects your thinking. So, for instance, if the said statement greatly aligns with your thinking, then you’ll choose the box closest to it. Otherwise, you can click on any of the boxes representing how close the statement reflects your thinking. I completed the RISA questionnaire myself. It took them about the specified 45 minutes, and upon answering all the questions, I fell into the time segmentation or bucketing strategy group (safety-first and optionality quadrant).
So, in essence, I learned that my preferred retirement income strategy is a combination of contractual safety with the ability to modify my payout set periods throughout retirement. According to my RISA result, these characteristics usually involve creating a rolling bond ladder, also referred to as bucketing the strategy. I also learned that it would involve setting aside cash for my retirement income, given the current low-interest-rate environment.
For one thing, the RISA question demonstrates that there are various strategies to creating a retirement income. And most importantly, just as Pfau said in an interview, “There’s no superior strategy.” There are numerous viable approaches that all help the consumer decide where to start.
Pfau and Murguia’s study showed probability-based and optionality and safety-first and commitment as the two most popular approaches.
The RISA tool will go a long way in helping individuals choose a retirement strategy that accounts for their financial goals, lifestyle, concerns for longevity, unexpected expenses shocks, healthcare, and more. This was also the thought of Michael Zwecher, author of Retirement Portfolios.
According to Michael, there’s a big need to move from MPT paper questions about portfolio tolerance level to questions about retirees’ lifestyles. These lay a more simple and refined way forward.
Ideal For Financial Advisors and Their Clients As Well
Pfau says the tool will go a long way in helping advisors and their clients. Currently, advisors tend to offer an approach they are comfortable with or licensed or incentivized to provide, with little or no consideration to whether it matches their client’s preferred style. This creates a mismatch between advisors and their clients since no one approach or retirement product works for everyone.
The best way forward is a defining style and matching strategy that ensures that an individual’s personality aligns with their retirement strategy, which leads to improved outcomes.
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Flavio “Joe” Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
