Overview

Two fundamentally different philosophies for retirement income planning, which I call probability-based and safety-first, diverge on the critical issue of where a retirement plan is best served: in the risk/reward trade-offs of a diversified and aggressive investment portfolio that relies primarily on the stock market, or in the contractual protections of insurance products that integrate the power of risk pooling and actuarial science alongside investments. The probability-based approach is generally better understood by the public. It advocates using an aggressive investment portfolio with a large allocation to stocks to meet retirement goals. My earlier book How Much Can I Spend in Retirement? A Guide to Investment-Based Retirement Strategies provides an extensive investigation of probability-based approaches. But this investments-only attitude is not the optimal way to build a retirement income plan. There are pitfalls in retirement that we are less familiar with during the accumulation years. The nature of risk changes. Longevity risk is the possibility of living longer than planned, which could mean not having resources to maintain the retiree's standard of living. And once retirement distributions begin, market downturns in the early years can disproportionately harm retirement sustainability. This is sequence-of-returns risk, and it acts to amplify the impacts of market volatility in retirement. Traditional wealth management is not equipped to handle these new risks in a fulfilling way. More assets are required to cover spending goals over a possibly costly retirement triggered by a long life and poor market returns. And yet, there is no assurance that assets will be sufficient. For retirees who are worried about outliving their wealth, probability-based strategies can become excessively conservative and stressful. This book focuses on the other option: safety-first retirement planning. Safety-first advocates support a more bifurcated approach to building retirement income plans that integrates insurance with investments, providing lifetime income protections to cover spending. With risk pooling through insurance, retirees effectively pay an insurance premium that will provide a benefit to support spending in otherwise costly retirements that could deplete an unprotected investment portfolio. Insurance companies can pool sequence and longevity risks across a large base of retirees, much like a traditional defined-benefit company pension plan or Social Security, allowing for retirement spending that is more closely aligned with averages. When bonds are replaced with insurance-based risk pooling assets, retirees can improve the odds of meeting their spending goals while also supporting more legacy at the end of life, especially in the event of a longer-than-average retirement. We walk through this thought process and logic in steps, investigating three basic ways to fund a retirement spending goal: with bonds, with a diversified investment portfolio, and with risk pooling through annuities and life insurance. We consider the potential role for different types of annuities including simple income annuities, variable annuities, and fixed index annuities. I explain how different annuities work and how readers can evaluate them. We also examine the potential for whole life insurance to contribute to a retirement income plan. When we properly consider the range of risks introduced after retirement, I conclude that the integrated strategies preferred by safety-first advocates support more efficient retirement outcomes. Safety-first retirement planning helps to meet financial goals with less worry. This book explains how to evaluate different insurance options and implement these solutions into an integrated retirement plan.

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9781945640063

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Reviews

Wade Pfau, an authority in the field of retirement income planning, provides a whirlwind tour of capital markets, annuity & insurance products and illustrates how risk pooling can optimize the decumulation phase of the lifecycle. This book should be required reading for all misguided financial advisors who believe that a diversified portfolio of stocks & bonds is all that's needed to maximize the probability of financial success during the golden years of life. MOSHE A. MILEVSKY, PHD, Professor of Finance, York University, Toronto Wade Pfau is among the most trusted names in personal finance. He's clear, fair, and bases his advice on solid research. You never have to get trapped by a financial huckster again. Wade's books and blogs are your reality check. Mine, too! JANE BRYANT QUINN, personal finance columnist, and author of How to Make Your Money Last: The Indispensable Retirement Guide A must-read for anybody who wants to truly grasp the concepts of retirement income solutions and the role of annuities in building a retirement income portfolio. Pfau goes into detail about explaining the various types of annuities, their pros and cons, and how they compare to other retirement income solutions. Once again, Pfau comes through with a very helpful and insightful book that will help many people develop effective retirement income solutions. STEVE VERNON, research scholar, Stanford Center on Longevity, and author of Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life Dr. Wade Pfau brings a level of honesty, intellectual rigor and impartiality seldom witnessed in financial product analysis. Coinciding with the publication of Safety-First Retirement Planning --almost to the day--Americans will for the first time have a larger percent of our population over 65, than under 5 years old. Collectively, we are not prepared for the societal burdens that comes with this longevity success. Dr. Pfau, more than any other contemporary academic, has articulated a vision for individual savers to take control of their retirement longevity risks. Dr. Pfau simultaneously proves that the risk is today and with careful planning, the risk can be managed. WADE A. DOKKEN, President, WealthVest Dr. Pfau's book takes a needed look at a key issue in retirement: what products will support a retiree's income strategy. Without prejudice and with impartiality, we are provided readable research that supports solid retirement planning ideas. STEVE PARRISH, JD, RICP(R), ChFC(R), CLU(R), RHU(R), AEP(R), Co-Director, The American College New York Life Center for Retirement Income It is becoming imperative to include annuities in retirement portfolios as life expectancies expand and sources of secure income disappear. Wade's thought leadership on the topic is bringing critical insights to advisors and investors, enabling them to leverage annuities in the financial plan to realize better retirement outcomes. DAVID LAU, Founder & CEO of DPL Financial Partners

Author Information

Wade D. Pfau, Ph.D., CFA, RICP, is the director of the Retirement Income Certified Professional designation and a Professor of Retirement Income at The American College of Financial Services in King of Prussia, PA. As well, he is a Principal and Director for McLean Asset Management. He holds a doctorate in economics from Princeton University and publishes frequently in a wide variety of academic and practitioner research journals on topics related to retirement income. He hosts the Retirement Researcher website, and is a contributor to Forbes, Advisor Perspectives, Journal of Financial Planning, and an Expert Panelist for the Wall Street Journal. He is the author of the books, Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement, How Much Can I Spend in Retirement? A Guide to Investment-Based Retirement Income Strategies, and Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.

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