For Effective Planning, Learn Your Retirement Income Style
Paul Fain, CFP®
It is a critical question affecting one-third of your lifespan: What is your retirement income style?
There is not a “right” way to generate a retirement income. The key is knowing your preferences. For example, do you prefer the stability of a guaranteed income or the flexibility to change your income strategy in the future?
Recently, Wade Pfau, Ph.D., founder of Retirementresearcher.com, presented his work on “Retirement Income Style Awareness” to the East Tennessee chapter of the Financial Planning Association (the membership organization for CERTIFIED FINANCIAL PLANNER®️ professionals).
There are many viable retirement income strategies, but how does a retiree choose? Pfau described retirement income preferences in four dimensions: probability, safety, optionality and commitment.
A probability-based income approach allocates your retirement assets to investments that can grow. Then you periodically tap those funds for retirement income. A safety-first style prefers a contract-based income for safety relative to unknown market outcomes.
Do you prefer flexibility to keep options open and take advantage of new opportunities? Or do you prefer the commitment to an income solution that is lifelong and irrevocable?
Adopting an approach that fails to align with your preferences can lead to a plan that is unsatisfactory and poorly implemented throughout retirement, according to Pfau.
In retirement planning, we face potential risks that include inflation, market volatility, health crises, overspending and longevity. Building a successful retirement income strategy involves determining how to combine retirement income tools to optimize the balance between meeting your retirement goals and protecting your goals from these risks.
“It is still the Wild West in terms of retirement income strategies,” says Pfau. There are multiple viable approaches for retirement income, and some strategies claim the higher ground. In reality, a combination of strategies may be optimal for success.
Considering my retirement income style, I want a reliable income to cover my essential retirement expenses. This includes Social Security and a laddered fixed income (cash and bonds) allocation covering years of anticipated spending needs. I expect my diversified investment portfolio to cover my discretionary expenses and to provide a long-term inflation hedge. I value this strategy’s flexibility for retirement spending, handling contingencies and legacy planning.
Another person’s preferences might be influenced differently by risk aversion, a need for certainty, longevity concerns, family challenges, etc.
Are you curious about your retirement income style? Check out Pfau’s free RISA questionnaire at Retirementresearcher.com.
This article originally appeared in the Knoxville News Sentinel online on September 27, 2024.
