Exploring the Risk Wrap Style (RISA®)

Scott Sullivan |
Categories
Retirement
Retirement Income

We've previously discussed the Total Return and Income Protection Styles within the Retirement Income Style Awareness (RISA®) Matrix. Today, let's explore another important quadrant: the Risk Wrap Style.

The Risk Wrap Style occupies the lower-right quadrant of the RISA® Matrix, indicating a combination of a Probability-Based and Commitment orientation. This means individuals aligned with this style have unique preferences for managing their retirement income:

  • Probability-Based Orientation: You desire market participation and are comfortable with the potential for investment growth from a diversified portfolio. You want to maintain exposure to the market for potential upside.

  • Commitment Orientation: Despite your desire for market growth, you also seek to commit to a structured income stream or solution that provides a degree of certainty and predictability for your retirement income. You are looking for a strategy known to solve for a lifetime retirement goal.

Strategies and Core Beliefs for the Risk Wrap Style

For those who resonate with the Risk Wrap Style, the strategy typically involves:

  • Blending Investment Growth with Guaranteed Income: This approach aims to provide a blend of investment growth potential with guaranteed lifetime income benefits. It seeks to balance the desire for market upside with a need for a protected income floor.

  • Use of Hybrid Annuity Products: Risk Wrap strategies often utilize deferred annuities with living benefits, such as variable annuities, registered index-linked annuities, or fixed index annuities with guaranteed withdrawal benefit (GLWB) or annuitization riders. These products are designed to offer exposure to market growth while providing a secured lifetime spending amount, even if markets perform poorly.

  • Providing Guardrails and Structured Income: These tools offer "guardrails" and a commitment to a lifetime strategy. For example, a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider ensures the ability to withdraw a specific level of income each year, regardless of market performance, as long as withdrawals don't exceed the income rate.

  • Annuities as a "Workhorse": In this integrated approach, the annuity component can act as a "workhorse," taking on a significant portion of the initial income burden. This alleviates pressure from the managed investment account and reduces sequence of returns risk on that account, potentially improving its growth opportunity for legacy purposes.

  • Improving Efficiency: Research suggests that incorporating structured annuities with living benefits can improve outcomes for meeting retirement income goals, preserving portfolio value, and leaving a legacy. When considering the "efficient frontier" for retirement income (trade-offs between satisfying spending goals and preserving assets), replacing traditional bonds with certain structured annuities can lead to more efficient outcomes, such as less spending shortfall and greater average legacy.

Prevalence and Key Characteristics

Research indicates that the Risk Wrap Style is less common than Total Return or Income Protection, generally aligning with approximately 15% of individuals. It's considered a "hybrid" approach due to its less natural mix of preferences. Demographically:

  • It's slightly more common among higher net worth individuals (17%) compared to lower net worth (14%).

  • It shows a modest preference among married individuals (16%) over single individuals (13%).

  • There is no significant difference in preference between men and women for this style.

Individuals with a Risk Wrap style tend to exhibit a stronger link to a "Back-Loading" preference, indicating a greater concern about longevity risk (fear of outliving assets) and a desire to preserve spending capacity for later stages of a potentially long retirement. They also show a link to a "True Liquidity" mindset, preferring to have assets specifically earmarked as reserves for future unknown events, such as buffer assets or insurance.

Your RISA® profile reflects stable preferences that tend to remain consistent as you age or retire. Understanding your alignment with the Risk Wrap Style, or any other RISA® style, is a crucial step in developing a personalized retirement income plan that truly resonates with your comfort levels and goals, leading to greater confidence and reduced anxiety about your financial future.

To discuss your unique RISA® Profile and explore how the Risk Wrap approach, or any other style, might fit into your comprehensive retirement income plan, please feel free to reach out.

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