The Time to Solve Retirement Income Has Arrived: Wade Pfau

Sitting down for a new interview with ThinkAdvisor to mark his departure from full-time academic work, Wade Pfau, the long-time professor at the American College of Financial Services and widely respected retirement income guru, took a moment to reflect on this personal and professional milestone — and to share some expectations for what comes next.

At the end of last week, Pfau announced his decision to focus on the development and deployment of the Retirement Income Style Awareness program, which he launched in 2021 alongside fellow retirement income researcher Alex Murguia. The RISA program is built on the academic work of Pfau and Murguia, and it operates under the hypothesis that there are multiple retirement income “styles” to be found among large groups of investors.

Even more important than the identification of these styles is the well-supported hypothesis that an individual’s awareness of their preferred style will lead to a more satisfying retirement and better financial outcomes. As Pfau explained, getting people to understand and embrace their personal retirement income style helps them stay the course and avoid making wealth mistakes based on fear or other emotions.

During the interview, summarized in Q&A format below, Pfau said he was both gratified and excited to be at a point in his career where the topic of retirement income is now solvable at scale. As Pfau explained, the complexity of retirement income planning from a research and practical perspective stems from multiple sources of interrelated uncertainty, and it is only by carefully identifying and tackling the problem in a holistic way that effective solutions are created.

While he was quick to emphasize that the RISA framework represents a “good starting point” for income planning discussions, Pfau said he hopes the approach could soon become a go-to tool for financial planners helping their clients enact the transition from accumulation to sustainable spending.

THINKADVISOR: Can you please start by telling us a little bit about how much the topic of “retirement income” has evolved in your time as a researcher?

WADE PFAU: Yes, and the short answer is that it has changed tremendously. When I first started looking at the topics of retirement and financial planning more than a decade ago, there was just a huge amount of basic disagreement that existed.

You could ask simple questions about the best way to help a given individual navigate their retirement, and you would get completely different answers about what to do, all from people who were professionally qualified to give financial advice. As a researcher, that was just an intriguing thing, and it underscored how complex and challenging the income planning topic could be.

There is a lot of work left to do, but we have made progress over the past decade when it comes to defining key terms and concepts that are involved in income planning. People have also come to understand that the inherent complexity of retirement income planning stems from multiple sources of interrelated uncertainty. We don’t know what is going to happen in the markets, and we don’t know what our own futures will bring, and so there is just so much uncertainty to deal with.

Thinking about this is what really inspired the RISA framework to begin with. We don’t have one single answer or superior approach to income planning. What we need is a workable, flexible framework that really helps people think about and navigate a very complex situation.

How does awareness of one’s retirement income style lead to better outcomes?

To begin with, the essential thing is to realize that there is no single correct answer with respect to the approach to retirement income. For a lot of people, getting to that realization is the most challenging and important part of income planning — to recognize that there are actually a variety of different approaches to income and that different approaches can all be valid.

The biggest risk that a lot of people face in the retirement transition is getting themselves into a situation where they abandon their plan or strategy because they just aren’t comfortable with it. Maybe they can’t handle the volatility of a total-returns approach, for example, and they end up making poorly timed trades during volatile markets. That is a bad outcome.

The primary factors that best capture an individual’s retirement income style are whether the person prefers probability-based thinking and planning versus a safety-first approach, and whether they prefer optionality versus commitment.

The probability-based versus safety-first factor explains whether individuals are more comfortable with market growth or with contractual protections as an income source for their essential retirement spending. The optionality versus commitment factor, on the other hand, describes whether individuals place an emphasis on keeping options open to be able to make changes or whether they prefer to commit to a strategy known to solve for a lifetime retirement goal.

The RISA framework shows how these factors can be combined to create four distinct retirement styles, which can then be mapped into the core retirement income strategies offered in the broader marketplace.

Can you tell us about the way the financial planning community is embracing the RISA framework?

At this point, the RISA framework is all set out and it is ready to be utilized by financial planning professionals. Of course, there are always updates and improvements to be working on, but the real project now is about getting it out there and putting it into use.