QUANTIFYING RETIREMENT INCOME BELIEFS AND PREFERENCES TO DETERMINE A RETIREMENT INCOME STYLE
By Alejandro Murguía and Wade D. Pfau
Research Overview
RETIREMENT INCOME SERIES — PART 1 OF 3
The nature of risk changes after retiring, and this realization has spurred the development of retirement income planning as a distinct field within financial services. Wealth management has traditionally focused on the accumulation of assets. This accumulation mindset has dominated financial services and public policies with a focus on getting people to save and invest. Household investing has been guided by Modern Portfolio Theory, a framework developed by Harry Markowitz that uses portfolio diversification to seek the highest risk-adjusted returns for investment assets by considering their characteristics related to expected return, volatilities, and correlations. This framework focuses on assets only; it does not provide a link to funding household liabilities.
Whether this same accumulation mindset should continue post retirement is a source of ongoing debate and disagreement. Maintaining a diversified investment portfolio to spend from in retirement is an option, but other options also exist that may better resonate for different individuals- at least when considering funding for core retirement expenses. We believe it is important to view retirement within a larger context- that is, how to fund household spending and manage new retirement risks. It is important to create a framework which focuses on the unique characteristics of retirement to align individual preferences for retirement income with the strategies used to provide that income.
Read the Full Paper
About the Authors
Alejandro Murguía, Ph.D. is Managing Principal of McLean Asset Management, Retirement Researcher, and co-founder of RISA, LLC.
Wade D. Pfau, Ph.D., CFA, RICP, is a Professor of Retirement Income at The American College of Financial Services. He is also a Principal at McLean Asset Management, Retirement Researcher, and co-founder of RISA, LLC.