10.4 Choosing a Strategy: Retirement Income Styles (RISA) & the Risk-Wrap Approach

10.4 Choosing a Strategy: Retirement Income Styles (RISA) & the Risk-Wrap Approach

Core Principle: No single retirement income strategy is best for every client. RICP 353 asks planners to determine how to choose the appropriate retirement income strategy. That means pairing an objective analysis of resources and risks with an understanding of how the client prefers to source income. The Retirement Income Style Awareness (RISA) framework gives planners a structured way to identify those preferences.

The RISA Framework

RISA was developed by Wade Pfau and Alex Murguía from research on how retirees want their income to work. A questionnaire scores clients on two independent dimensions:

Dimension 1: Probability-Based vs. Safety-First

• Probability-based: Comfortable relying on market returns (the stock market's expected risk premium) to fund spending, accepting some chance of having to cut spending in exchange for more upside.
• Safety-first: Prefers contractual guarantees (Social Security, pensions, annuities, bond ladders) for spending, especially for essential expenses.

Dimension 2: Optionality vs. Commitment

• Optionality: Values flexibility, liquidity, and the ability to change course, and dislikes locking in decisions.
• Commitment: Comfortable committing to a strategy or product that solves the income problem for life, and may value simplicity and protection from future decisions (including decisions made with declining cognitive ability).

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The Four Retirement Income Styles

1. Total Return (Probability-Based + Optionality)

• Approach: One diversified portfolio; spending is funded by selling assets as needed, often with guardrails.
• Strengths: Liquidity, upside, legacy potential, simplicity.
• Watch for: Sequence risk and the discipline needed to cut spending after losses (Chapters 2 and 3).

2. Time Segmentation (Safety-First + Optionality)

• Approach: Match near-term spending with cash and bonds, often a TIPS or bond ladder, and give growth assets time to recover.
• Strengths: Psychological comfort and visible safety for the next several years, with no irrevocable commitment.
• Watch for: Refill rules, and longevity risk if no lifetime guarantee is added.

3. Income Protection (Safety-First + Commitment)

• Approach: Build a floor of guaranteed lifetime income for essential expenses (delay Social Security, keep pension annuities, buy SPIAs or DIAs), then invest the rest for discretionary spending.
• Strengths: Longevity and sequence protection for essentials, and mortality credits.
• Watch for: Liquidity, inflation on fixed annuities, and insurer credit risk.

4. Risk Wrap (Probability-Based + Commitment)

• Approach: Stay invested in markets but add an insurance guarantee that income will continue for life even if the account is depleted. Examples include a variable annuity or fixed indexed annuity with a guaranteed lifetime withdrawal benefit (GLWB).
• Strengths: Upside participation plus a lifetime income guarantee, and more liquidity than annuitization (the account value remains accessible, though withdrawals above the guaranteed amount reduce the guarantee).
• Watch for: Rider and product fees, excess-withdrawal rules, surrender charges, and product complexity (Chapter 9).

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From Preferences to a Recommendation

RISA identifies what the client is likely to be comfortable with. The plan must still be sound. A practical process:

1. Measure resources and needs: essential versus discretionary budget, guaranteed income, assets, health, and legacy goals.
2. Assess risk capacity: Can the client absorb a 30% market decline in the fragility zone without cutting essential spending?
3. Identify the income style with a RISA-type profile and conversation.
4. Design within the style. Where the style conflicts with the numbers (for example, a total-return preference with little savings and no pension), explain the trade-offs and consider a hybrid.
5. Blend where needed. Many plans combine an income floor for essentials with a total-return or bucket portfolio for discretionary spending.
6. Revisit periodically. Preferences can shift with age, health, and cognitive changes, often toward more commitment and safety.

Matching Examples

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Advisor-Client Case Scenario: Reconciling Style With Resources

Paul and Denise (both 66) take the RISA profile. Paul scores probability-based and optionality; Denise scores safety-first and commitment. They have $900,000 saved, $52,000 of combined Social Security (Paul's benefit not yet claimed), and $70,000 of essential spending plus $25,000 of discretionary spending.

The advisor proposes a blended plan:

• Income protection for essentials: Paul delays Social Security to 70, which raises guaranteed household income and the survivor benefit. A portfolio bridge covers the gap until then. At 70, a modest SPIA closes the remaining essential gap.
• Total return for discretionary spending: The remaining portfolio is invested for growth with guardrail withdrawals, which gives Paul flexibility and upside.
• Shared rules in the investment policy statement, written down so both spouses know what happens after a bear market.

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Exam Tip

• RISA dimensions: probability-based vs. safety-first, and optionality vs. commitment.
• Quadrants: Probability + optionality = total return. Safety + optionality = time segmentation. Safety + commitment = income protection. Probability + commitment = risk wrap.
• Risk wrap means market investments with lifetime income guarantees (GLWB-type annuities).
• Style is not the whole answer. The strategy must also meet the numbers, and many plans blend styles.