Life After Full-time Work Blog

Learn about preparing for life after full-time work through posts from Don's upcoming book.

#193 Some Fundamental Attitudes Regarding Your Retirement Finances

Dr Wade Pfau calls them features of your “retirement style”


There are many approaches to generating lifetime income from your accumulated assets when you retire. None is perfect, by which I mean that it dominates all the other approaches for everyone in all circumstances. They all have pros and cons. So far, the best I’ve been able to do is to list the pros and cons of the approaches, and hope that readers can understand them and figure out which approach (or which combination of approaches) they feel most comfortable with.

It’s possible to go further.

For some months I’ve been following Dr Wade Pfau, Professor at the American College of Financial Services (whom I’ve known and admired for many years) and the work he and his colleagues (Bob French and Alex Murguia) are doing on what they call RISA, which stands for Retirement Income Style Awareness. I think this is a big advance on listing pros and cons. So I’d like to explain it to you, and show you how it works.

I have no connection of any kind with Wade and his colleagues – just admiration. And of course you should get in touch with them if you want to apply these ideas to yourself, because all I’m doing here is expressing my general understanding of the RISA principles. And for convenience I’ll keep referring to Wade, though the reference is really to him and his colleagues.


What I find particularly useful about RISA is that it helps you to narrow down the available approaches by asking you where you fit in a set of two choices. (For the techies, you’ll recognize that Wade has constructed a 2×2 matrix, with 4 cells.)

One choice is: how much do you want your solution to be locked in? This is a basic commitment question. Do you sleep better at night if you know you’ve made your choice, and thank goodness, you have a solution and it’s done? (Sort of: set it and forget it, particularly if you’re worried about future potential cognitive decline.) Or do you prefer to keep things flexible so that you can make changes with your assets as markets and your circumstances change? Wade calls this the commitment versus optionality factor.

The other choice is what he calls the probability versus safety first factor: would you rather have some sort of contractual protection, or are you comfortable with how markets play out?

For each of the four resulting combinations, some approaches fit better than others.

If you selected commitment and safety first, you will probably be most comfortable with building at least a floor for your lifetime income via insured lifetime income annuity contracts.

If you selected commitment and probability, what Wade calls a “risk wrap” strategy will appeal: use deferred income annuities for lifetime withdrawal, and generate income from market exposure up to the point when the deferred annuities commence, possibly with guardrails around your withdrawals.

If you selected optionality and safety first, a time segmentation strategy will appeal: create buckets that use less volatile assets to generate income over the short to medium term, and growth-seeking (but more volatile) assets to generate income over the medium to long term.

If you selected optionality and probability, you’ll like what Wade calls a “total return” strategy, focused mainly on generating growth over the long term, with the potential to change course whenever you consider it appropriate.

Makes good, clarifying sense to me.


How would you go about deciding which makes the most sense for you?

You probably need two inputs, I would guess. One is to know where you currently stand; this gives you some idea of how much risk there actually is in your future financial situation. The other is to know how you feel about that risk.

For the first input, start by estimating your Personal Funded Ratio (PFR), that is, the ratio of how much you’ve got relative to how much you need for your desired lifestyle to be supportable. I’ve written a lot about PFR over the years. It was an idea I borrowed from the way the finances of defined benefit pension plans are assessed, and transferred it to the realm of personal finance. It wasn’t an original idea of mine: it was only the transfer of the funded ratio concept to personal finance that was original. (It was almost an act of desperation, as I had to come up with some way of assessing my own financial situation when I retired, and being a World War Two baby and therefore even older than the Baby Boom generation, there really was nothing at all to help me. And all I knew was defined benefit plans.) I’m delighted to see how much its use is expanding, and I hope Wade and his colleagues make it an everyday concept.

In the blog post linked above to the PFR, I suggest two PFR calculations, a safety-oriented one (which tells you what proportion of your desired lifestyle you can lock in) and a best-estimate one (which tells how much more you can reasonably expect to satisfy if you get some return from taking investment risk). The calculator helps you estimate these, with an explanation from another blog post.

For example, suppose your best estimate is that your assets should reasonably cover 130% of your desired lifestyle, but if you tried to lock everything in without taking risk, that percentage would come down to 90%. Well then, you’re almost, but not totally, OK, and you don’t need to take a lot of risk. If your best estimate is not much more than 100%, then you really do have to take a lot of risk, and you might want to reassess what you desire. And if your safety-oriented PFR is well above 100%, you’re already home, and risk-taking is for fun or for the next generation.

The numbers will get you some way to deciding what strategies suit your comfort level, because now you will know how much comfort you already have.

Similarly, if you divide your lifestyle into two components, essentials/needs and wants/desires, you can calculate the PFR of the essentials/needs part separately, and see whether you’ve already got that covered or not; and that too will start to influence how much risk you want to take: for example, whether or not to lock in your essentials/needs.

I’m delighted that Wade’s concepts take these notions much further, and in addition the questions in your Retirement Income Style Analysis take your psychology even further in helping you to co-ordinate your goals with your financial situation and your attitude to risk.

That’s why I’m writing this blog post.


I have written before about what I’ve done for my wife and myself.

I know that longevity uncertainty is more financially risky than investment return uncertainty once you’re past age 75 (male) or 80 (female), and so to hedge that risk I’ve bought a deferred lifetime income annuity that kicks in at my age 85 (with no return of premium if my wife and I both pass away before my 85th birthday – this dramatically cut the cost of the protection). It’s a “joint and last survivor” deferred annuity that reduces the payments after the first death.

To generate income for both of us up to age my 85 I use a bucket strategy, with 5 years of income in safe investments and the balance in (the equivalent of) a global equity index fund.

(The bucket strategy is actually a bit complicated. Since the deferred annuity is expressed in nominal rather than real – that is, inflation-adjusted – terms, I hope that there will be something left in the growth bucket at age 85 to permit us to make inflation additions after age 85. And the annual transfer from the growth to the safety bucket depends on what sort of return the growth bucket has provided each year. See the link above for the way I implement it.)

What does that set of choices say about me and my wife? (Really me: my wife is comfortable letting me make the choices.)

It says that I see longevity and investment risks differently. For longevity risk I’m a commitment person. For investment risk I’m safety first with optionality.

That leads me to make two observations.

  • It’s not necessary for someone to fit entirely within one cell of Wade’s matrix.
  • I wish Wade had dealt with investment and longevity risks separately and explicitly. (But hey, I’m an actuary and longevity risk has always been in the forefront of my mind.)


I asked Wade if I had reflected his ideas reasonably accurately, and he said I had done so. He added that he and his colleagues actually have six sets of contrasting attitudes they have identified, rather than just the two I’ve mentioned here, but they focus on defining the style through just these two.

Sure enough, the other four are pretty insightful too … and so I’ll cover them in another post.



Would you like your financial solution to retirement to be locked in, or do you prefer to keep your options open? Would you like contractual protection, or are you happy with how markets play out? Your answers to these two questions lead logically to identifying which approach to retirement finance suits you best.

Leave a Comment

I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

Leave your question or comment