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.

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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.

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