RISK TOLERANCE QUESTIONNAIRES AND RETIREMENT INCOME CONCERNS
By Alejandro Murguía and Wade D. Pfau
RETIREMENT INCOME SERIES — PART 3 OF 3
Pre-retirement and post-retirement financial planning require different approaches, as retirees face the frightening reality that – unless they plan wisely – they may outlive their money. Especially when it comes to determining risk tolerance. This paper asks: how effective common risk tolerance questionnaires (that emphasize short-term market volatility) are when it comes to addressing the concerns that individuals have in retirement and is there a better way? We explore how the Retirement Income Style Awareness® (RISA®) Profile framework moves beyond investment focused risk tolerance questionnaires and does a better job of capturing individual attitudes and concerns regarding risks related to retirement planning, such as longevity, health care spending risk, general liquidity needs, and lifestyle spending. Finally, we examine the ways in which this understanding creates a common language for clients and their advisors, making sense of the many competing views about retirement. This shared understanding of individual preferences can inform which of the four broad investment strategies: Total Return, Income Protection, Risk Wrap and Time Segmentation are most aligned with individual preferences and will best support their financial and psychological needs for retirement.
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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.