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Robert Powell

April 22, 2021, 1:35 p.m. EDT

How do you feel about risk in your retirement investments?

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Robert Powell

If you’re like most investors, you may have completed a risk tolerance questionnaire to determine how to allocate the assets in your investment portfolio.

Typically, the risk tolerance questionnaire (RTQ) reveals your appetite for risk, whether you should have an aggressive, moderate or conservative portfolio.

But RTQs aren’t so good when it comes to determining an appropriate retirement income strategy.

Enter Wade Pfau, a professor at the American College of Financial Service and a principal with Retirement Researcher, and Alex Murguia, a principal with McLean Asset Management and CEO of Retirement Researcher.

Pfau and Murguia have created a different take on the RTQ.

They’ve developed, according to their research on the subject, “a richer, more comprehensive process for measuring risk tolerance that is better suited to the complexities of retirement income planning.”

In essence, it’s a financial personality assessment that ultimately identifies your preference for a retirement income strategy and implementation approach.

They call it the Retirement Income Style Awareness Profile or RISA for short.

The RISA questionnaire takes about 45 minutes to complete, and the result reveals your preference for one of four retirement income strategies:

  • Systematic withdrawals with total return investing. This strategy would place you in the probability-based (are you OK with risky assets being your source of retirement income?) and optionality (do you prefer to keep your options open?) quadrant of RISA’s matrix of retirement income strategies.

  • Risk wrap with deferred annuities. This strategy would place you in the probability-based and commitment (do you prefer to commit to a strategy?) quadrant. This preference calls for a strategy that provides a blend of investment growth potential with lifetime income guarantees through a deferred annuity offering living benefits, variable annuities or fixed index annuity.

  • Time segmentation or bucketing. This strategy would place you in the safety-first (do you prefer contractual protections?) and optionality quadrant. According to the paper, a time segmentation strategy usually sources short-term retirement income needs with a rolling bond ladder.

  • Protected income with immediate annuities. This strategy would place you in the safety-first and commitment quadrant.

You are then asked to select the statement that best reflects your thinking. So, for instance, if the statement you choose strongly aligns with your thinking, then you would choose the box closest to the statement (i.e., 1 or 6). Or you would use the middle numbers (2 – 5) to reflect with which statement you most closely agree.

I recently completed the RISA questionnaire and discovered (after answering the above question and many others, including those that tested my ability to work with numerical concepts and my self-awareness regarding my ability to work with numerical concepts) that I fell into the safety-first and optionality quadrant.

Put another way, I learned that I prefer a retirement income strategy that combines the benefits of contractual safety and the ability to revisit my payouts over set periods throughout retirement. These characteristics, according to my RISA results, are present within a time segmentation strategy for a significant portion of my retirement income needs.

And that usually involves, according to my RISA report, creating a rolling bond ladder and is frequently referred to as a bucketing strategy. I was also informed it may involve, given today’s low-interest-rate environment, setting aside cash for a period of time specifically for my retirement income.

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