Robert Powell


A financial personality test can help

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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.
A Model Approach to Selecting a Personalized Retirement Income Strategy by Alejandro Murguia and Wade D. Pfau

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.

Now one benefit of the RISA questionnaire is that it demonstrates that there are many strategies to use to create retirement income. There is “no superior retirement income strategy,” Pfau said in an interview. “There are lots of viable approaches.”

“And so, for the consumer, it’s helping them to figure out, ‘what should I use as a starting point?’” said Pfau. “What type of strategy might be the right one for me to be looking at?”

For what it’s worth, the two most popular approaches in Pfau and Murguia’s study – though it wasn’t a random sample of Americans participating in the research – are safety-first and commitment and probability-based and optionality.

No doubt this sort of tool will go a long way toward helping people get a better sense of their preferred retirement income solutions, their concerns about longevity, lifestyle, unexpected spending shocks and healthcare expenses and bequests.

And others seem to agree. “My gut reaction is that this is a great step,” said Michael Zwecher, author of Retirement Portfolios. “There is a big need to go from the ‘paper’ questions of MPT, i.e., ‘how much volatility in your portfolio is tolerable’ to the ‘food-on-the table’ questions, i.e., ‘how much temporary/permanent risk to your lifestyle are you willing to tolerate.’ They lay it out cleanly and in ways that can be refined and ultimately operationalized.”

Good for advisers and their clients, too

This sort of tool could also go a long way toward helping advisers and their clients, according to Pfau.

At present, “advisers tend to offer the approach they feel most comfortable with or are otherwise licensed or incentivized to provide, with little consideration for whether it matches a client’s style,” Pfau and Murguia wrote in their paper.

They craft retirement-income plans based on their preferences.

But that approach can create mismatches between adviser and client. That’s especially the case given that “constructing an appropriate strategy is a process, and there is no single right answer,” wrote Pfau and Murguia wrote. “No one approach or retirement income product works best for everyone.”

The better approach is defining a style and matching strategies to it. “That,” the authors wrote, “provides an important step forward in making sure individuals and their retirement income strategies are aligned. And that may lead to improved outcomes that achieve greater ‘buy-in” and comfort.”