Wade Pfau: Finding the Best Retirement Income Strategy for Your Client

Annuities may not be appropriate income generators for every client. But how can folks make an informed decision unless they’ve separated annuity fact from annuity fiction?

“Annuities deserve an equal seat at the table with any other retirement income strategy,” argues Wade Pfau, professor of retirement income and director of the Retirement Income Certified Professional program at The American College of Financial Services, in an interview with ThinkAdvisor. “The whole idea that annuities mean giving up something is not true.” 

Whether or not to buy an annuity depends largely on one’s retirement income style, the concept of which Pfau explores in his new “Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success” (Retirement Researcher-Sept. 7).

It’s an all-inclusive, 450-page-plus conversational reference book that answers all the critical questions and addresses many issues that most people have never even thought of.

In the interview, Pfau maintains that there are multiple retirement income styles and that clients’ awareness of their preferred style will lead to a more satisfying retirement. 

The total-return approach is not necessarily the right strategy for every client, he insists.

Pfau, in fact, is co-founder of a new firm, RISA — an acronym for Retirement Income Style Awareness — to help financial advisors create clients’ and prospects’ RISA profiles.

The co-founder of the company, launching in late October, is Alex Murguia, managing principal of McLean Asset Management and the popular blog Retirement Researcher. Pfau is founder of the latter. McLean is Retirement Researcher’s sister firm.

RISA identifies four retirement strategies: total return, risk wrap, time segmentation and protected income.

Next month, Pfau is conducting a webinar series to explain how RISA can help advisors and their clients.

In the interview, he maintains that FAs who represent themselves as serving clients beyond managing their investments should help them plan for retirement in ways that include explaining Social Security claiming strategies and Medicare pitfalls.

ThinkAdvisor recently interviewed the professor, who was on the phone from Dallas. He summed up the variations in preferred retirement income styles: “Different strokes for different folks.”

Here are highlights of our interview:

THINKADVISOR: In your new book, you write about the importance of determining the client’s retirement income style because “no one approach works best for everyone.” How are you defining “style”?

WADE PFAU: Many advisors have one retirement income style in mind: total return. That is, they’re comfortable relying on the stock market as a funding source for retirement; and they want to keep as much optionality as possible and make changes in the future. 

But that style doesn’t apply to everyone.

It’s fine to have the total-return investment-only approach if the client is comfortable with it. But that’s not going to appeal to everyone — different strokes for different folks.

What’s another style, then?

A lot of people would feel more comfortable not having to rely on the stock market. They want to have some contractual protection to support their retirement spending and therefore would [feel better] committing to a protective strategy so they don’t have to keep second-guessing themselves or making changes or monitoring the situation.

So that would suggest an annuity as one solution. But many advisors, for a variety of reasons, don’t recommend annuities. Also, annuities have a reputation for high costs and requiring a lump sum to be paid up front, which are turnoffs to many people. Your thoughts?

Annuities deserve an equal seat at the table with any other strategy that meets the style of the client. Annuities are quite competitive with the risk premium for the stock market as a way to fund retirement expenses.

A lump-sum payment is usually [required] with a low-cost type of annuity. If it’s a high-cost type, [often] a deferred annuity, it won’t require [that].

The whole idea that annuities mean giving up something is not true.  

Why is the total-return style the most popular?

It’s possible that a lot of couples’ financial planning discussions may be driven by the husband, which might lead to total-return strategies. 

The wife might prefer more of an income-protection style, but she’s not being listened to. We have empirical evidence of that.

Since women, on average, live longer than men, would they be inclined to want to buy an annuity if their style is focused on income protection?

That’s a question we’re now researching in our national study about retirement income style. I hope to have an answer by the end of this year.

Would this be a good area for female advisors or male advisors working with women in particular to discuss with their female clients?

Yes, indeed. If it’s true that women have a [greater] preference for contractual income and committing to a [protective] strategy, absolutely. 

Advisors should be aware of that and not pitch them a total-return investment strategy.

Research has shown that widows’ top concern is having enough money to live on for the rest of their lives. Does that apply here?

We find that the retirement income style of people who have that longevity concern tends to be toward having some sort of protective income as a strategy and not relying just on the stock market.

In your book, you discuss Social Security as an investment, which could be “problematic,” you say. You also state that Social Security can be “beneficial” as an investment. Please explain.

Thinking about Social Security as an investment leads people to want to claim early because they don’t see the insurance value of Social Security’s providing benefits if they live a very long time.