Your Profile Suggests: Embracing the Total Return Style (RISA®)

Scott Sullivan |
Categories
Retirement
Retirement Income
Retirement Planning

Following our previous discussions on Retirement Income Style Awareness (RISA®), let's delve deeper into one of the key profiles: the Total Return Style. Understanding this approach can clarify whether it aligns with your personal philosophy for generating retirement income.

The RISA® Matrix identifies the Total Return Style for individuals who exhibit both a Probability-Based and Optionality orientation. Here's what that means for your retirement income strategy:

  • Probability-Based Orientation: If you lean towards this, you are comfortable relying on the potential for market growth from a diversified investment portfolio to provide a continuous and sustainable income stream for both your essential and discretionary expenses. You are optimistic about the long-run potential of stocks to outperform bonds, and you're willing to accept market volatility in the hope of maximizing risk-adjusted returns. This approach is considered "probability-based" because it relies on the likelihood that investments will perform well enough over time.

  • Optionality Orientation: Individuals with this preference emphasize keeping their financial choices open and value the ability to adapt their strategies. You likely want to maintain the flexibility to adjust your withdrawals or asset allocation in response to evolving market conditions or personal circumstances, rather than committing to a fixed, less flexible strategy.

Strategies and Core Beliefs

For those aligning with the Total Return Style, the strategy typically involves:

  • Systematic Withdrawals from a Diversified Portfolio: Income is sourced from a diversified investment portfolio of stocks and bonds. This approach aims to maximize growth potential by combining different volatile asset classes that are not perfectly correlated to achieve lower overall portfolio volatility.

  • Maximizing Risk-Adjusted Returns: The focus is on maximizing the total return of the portfolio, with asset allocation decisions often mirroring those used during the accumulation phase, applying principles of modern portfolio theory.

  • Historical Context: This style has its roots in research, such as William Bengen's work in the 1990s, which explored historically safe withdrawal rates from financial portfolios over long retirement periods. The "4 percent rule" is an example of a withdrawal guideline that emerged from such research.

Individuals favoring this approach often believe that the upside potential from an investment portfolio is so significant that insurance products have a very limited role, if any, in their retirement income plan. They value liquidity and upside growth potential offered by investments. The "buy term and invest the difference" strategy is an example of the "investments only" logic popular with investment managers, aligning with this style's emphasis on maximizing investment in the market.

Prevalence and Considerations

Research indicates that approximately 33% of individuals generally align with the Total Return style. While a credible strategy, it's worth noting that a majority (roughly 67% of individuals) are looking for strategies that offer different degrees of contractual protections and commitments for their essential expenses in retirement. However, individuals with a higher net worth are more likely to prefer a Total Return strategy (48%). This preference for the Total Return style also appears to be more common among men (39%) than women (29%).

Your RISA profile reflects stable preferences that tend to remain consistent as you age or retire. Understanding your alignment with the Total Return 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 Total Return approach, or any other style, might fit into your comprehensive retirement income plan, please feel free to reach out.

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