A New Matrix for Personalizing Retirement Income Strategies

Ted Godbout

A new study identifies a set of scorable retirement income factors that can help define preferences for an overall retirement income style, which can point toward an appropriate retirement income strategy.

In “Selecting a Personalized Retirement Income Strategy,” published in the Retirement Management Journal, Alejandro Murguia, PhD, managing principal of McLean Asset Management and Retirement Researcher, and Wade Pfau, PhD, professor of retirement income at The American College for Financial Services and founder of Retirement Researcher, explain how they developed a multidimensional tool based on an analysis of existing research and a multipart survey of more than 1,400 participants. 

As background for initiating the study, the researchers note that for those who have been saving in anticipation of future retirement, questions remain about what to do with accumulated assets upon reaching retirement. Yet, at present, the guidance and strategies provided to retirees still largely depend on the viewpoints of a relatively small number of pundits and stakeholders, they contend. And while there are various options for retirement income, no one approach may work best for everyone. 

RISA Matrix

As such, in their analysis they identify six factors that pinpoint distinct retiree preferences through what they call the Retirement Income Style Awareness (RISA) matrix: 

• probability-based versus safety-first;
• optionality versus commitment;
• time-based versus perpetuity income floors;
• accumulation versus distribution;
• front-loading versus back-loading retirement income; and 
• true versus technical liquidity. 

Murguia and Pfau note that the idea is to create a workable model for retirement income planning by identifying retirement income styles and matching those styles to the quadrants of the RISA matrix and their related retirement income strategies. For those individuals working with advisors, the researchers suggest that their study can aid advisor understanding about an “agnostic approach” to retirement income and the applicability of various strategies. 

Matching Styles with Strategies

The researchers note that the correlations between the factors helped to create a taxonomy of strategy preferences based on individual RISA profiles. Accordingly, they created a model for retirement income planning by showing how the factors connect to four main retirement income strategies: 

• systematic withdrawals with total return investing;
• risk wrap with deferred annuities; 
• protected income with immediate annuities; and 
• time segmentation or bucketing. 

“Our results identify probability-based versus safety first and optionality versus commitment as the two main factors to structure a matrix with four quadrants that delineate four retirement income approaches,” they note. 

According to the study, the “probability-based versus safety-first” dimension details how individuals prefer to source their retirement income from assets, whereas probability-based income sources depend on the potential for market growth to provide a sustainable retirement income stream, while the safety-first income sources incorporate contractual obligations. 

In addition, the “optionality versus commitment” dimension details the degree of flexibility sought with income strategies. For instance, optionality reflects a preference for keeping options open for retirement income. Conversely, commitment reflects a preference for committing to a retirement income solution.

“Individuals with a strong preference for commitment prefer the lower risk of contractual retirement solutions over the greater expected returns and flexibility of investing in equity, fixed income and other market-based assets,” Murguia and Pfau observe. 

They use the other secondary factors to strengthen the case for matching retirement income strategies for individuals falling within each of these four quadrants. As such, they note that the main RISA factors presented a positive correlation with each other. For example, both safety-first and commitment factors were positively related to a preference for perpetual retirement income flooring. Both factors also were positively related to having a distribution mindset for predictable retirement income and back-loaded spending, the study explains. 

Murguia and Pfau note that although their research enhances their understanding of retirement income preferences and strategies, no research is without limitation and suggest that additional research may be necessary. Nonetheless, they suggest that the current results indicate validity of the RISA factor scales, presenting an effective framework for determining individual retirement income styles and retirement solutions. 

Once an individual’s RISA profile is identified, the individual can be presented with a range of strategies that should “feel right,” they note. “Matching retirement income strategies with one’s personal retirement income style may lead to more effective approaches to achieve buy-in and comfort from retirees,” Murguia and Pfau write. “Ultimately, this lays a foundation for achieving better retirement outcomes.”