Making retirement planning personal: A new 'personality assessment' strategy for advisors

A new retirement income research series argues for the importance of focusing on each consumer – and their individual preferences – in retirement planning rather than simply emphasizing the accumulation of assets.

The three-part Retirement Income Series was commissioned by the Retirement Income Institute, the research and thought-leadership arm of the Alliance for Lifetime Income. The alliance is a nonprofit consumer education association that promotes the value of having protected income in retirement. The series ultimately points to a “consumer-first” retirement income approach that considers a range of options for each individual to determine what approach resonates with them – rather than defaulting to a “save and invest” approach. The series advocates for the use of RISA (Retirement Income Style Awareness), a psychology-backed, research-driven personality assessment co-founded by Alex Murguia and Wade Pfau, the authors of the series.

“This research gives us valuable and important insight into consumer behaviors and preferences that can help financial advisors develop practical retirement income strategies, customized to each individual,” said Jason Fichtner, a senior fellow and head of the Retirement Income Institute, in a press release. “Pensions have virtually disappeared and the traditional model for retirement income security may not provide sufficient, reliable and protected retirement income for Americans planning for retirement. A new framework is needed that focuses on how protected income from annuities can provide the retirement security consumers need and are looking for.”

According to the report, two primary factors help explain retirement preferences for Americans between the ages of 50 and 80 – no matter their demographic:

1. Does the investor prefer a probability-based approach or a safety-first one? That question addresses if someone is more interested in market growth (probability-based) or a contractually protected income source for essential retirement spending (safety-first).
2. Do they prefer optionality or commitment? Optionality means they place importance on keeping their options open to make changes and adjustments to their retirement approach while commitment means that they would prefer to commit to a strategy that is “known to solve their lifetime retirement income problem,” according to the research series.

According to the researchers, individuals demonstrate “distinct preferences” about how they want to source retirement income and those preferences can be measured.

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“Throughout the research process, we were able to surface undeniable connections between retirement preferences and retirement styles, and illustrate how these styles indicate the distinct retirement income strategies that resonate most closely with how each individual wants to generate retirement income,” said Pfau, a professor of retirement income at the American College of Financial Services and a principal at McLean Asset Management. “For example, we discovered that at least two-thirds of consumers are seeking protected income solutions as a significant source of their retirement income.”

According to the researchers, individuals who are approaching retirement or who have begun it face different risks than those who are in the “accumulation phase of their financial journey.” The RISA tool works to “account for these risks and ensure those preferences are considered within their retirement income plan,” according to the press release.

“As a starting point for retirement income, it is important to meet individuals where they are and offer a strategy that will resonate with them,” the researchers said.

According to Murguia and Pfau, a retiree and their financial services professional need to understand the style the retiree prefers to ensure that advisors and retirees are aligned. The researchers argue that their RISA Profile offers “a systemized way” to ensure advisors understand retirees’ preferences and can help create a strategy to match them.

“The RISA is changing the retirement income conversation for advisors and their clients,” Murguia said. “For the first time, advisors can accurately identify an individual’s retirement income preferences and easily point them to a solution that accommodates those preferences, empowering the consumer with the knowledge, confidence and peace of mind that this is the right strategy for their retirement goals.”

The researchers argue that risk tolerance questionnaires used with investors are helpful for accumulation-based portfolios but fall short for tackling “the broader question of retirement strategies.” The researchers argue that RISA better captures investors’ attitudes and concerns and can help identify appropriate solutions.

“Investing for retirement is inherently different and creates a new set of variables that need to be assessed,” the researchers wrote. “Instead of framing the decision with portfolio risk tolerance, we need to assess the tradeoffs that people are willing to make to address the new risks they face in retirement. Risk tolerance questionnaires may still play a role in deciding on asset allocation, but the broader question of choosing a retirement income strategy must happen before deciding asset allocation.”