Embracing the Income Protection Style (RISA®)

Scott Sullivan |
Categories
Retirement Income
Retirement

In our last email, we explored the Total Return Style as one approach to retirement income, and in the first email, we introduced the broader Retirement Income Style Awareness (RISA®) Matrix. Today, let's focus on another significant RISA® profile: the Income Protection Style.

The Income Protection Style is characterized by a Safety-First and Commitment orientation. Here’s what these preferences signify for your retirement income strategy:

  • Safety-First Orientation: If your profile aligns here, you primarily seek contractual protections and guarantees to secure your essential retirement spending. This means you are comfortable relying on solutions that provide a predictable income floor, minimizing your exposure to market fluctuations for critical expenses. The safety-first approach focuses on eliminating risks to essential expenses by transferring risks like longevity and market volatility to insurance companies.

  • Commitment Orientation: Individuals with this preference are comfortable committing to a strategy known to solve for a lifetime retirement goal. This typically means choosing solutions that provide structured and reliable income streams, even if it means less day-to-day control over the underlying assets.

Strategies and Core Beliefs for the Income Protection Style

For those who resonate with the Income Protection Style, the strategy typically involves:

  • Essential vs. Discretionary Spending: The core of this approach is to prioritize covering essential retirement expenses with contractually-protected lifetime income sources. Once these basic needs are secured, any remaining assets can be allocated to a more diversified, market-based portfolio for discretionary expenses and potential growth.

  • Role of Actuarial Products: There is a strong willingness to utilize insurance products such as Social Security, pensions, and annuities (particularly income annuities) as primary income sources. These solutions are valued for their ability to pool market and longevity risks across a large base of retirees, similar to traditional defined-benefit pensions. This risk pooling allows for sustainable spending that is more closely aligned with average long-term returns and average longevity, potentially supporting a better lifestyle than if an individual were to self-manage these risks.

  • Reduced Reliance on Market Growth: For essential income, relying on market growth is not necessary because the market risk is offset and managed by the insurance company. This means that the concept of a "safe withdrawal rate," which is central to Total Returns discussions, becomes less relevant for covering core expenses.

Prevalence and Key Characteristics

Research indicates that approximately 35% of individuals generally align with the Income Protection style. In fact, a majority (roughly 67%) of individuals are looking for strategies that extend beyond a purely Total Return investing approach, often seeking greater contractual protections and commitments for their essential expenses. Demographically, the Income Protection preference is more common among:

  • Individuals with a lower net worth (45%).

  • Women (39%) compared to men (29%).

  • Single individuals (37%) compared to married individuals (34%).

Your RISA® profile tends to reflect stable preferences that remain consistent as you age or retire. Individuals with an Income Protection style show a strong link to:

  • A "Back-Loading" preference, indicating a greater concern about longevity risk (the fear of outliving assets) and a desire to preserve spending capacity for later stages of a potentially long retirement.

  • A "True Liquidity" mindset, meaning they prefer to have assets specifically earmarked as reserves for future unknown events, such as buffer assets or insurance, rather than relying on converting assets already designated for other goals.

Understanding your alignment with the Income Protection Style is key to developing a personalized retirement income plan that genuinely resonates with your comfort levels and goals. This personalization can lead to increased confidence and reduced anxiety in retirement, as you are more likely to adhere to a plan you are truly comfortable with.

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

Click here to schedule your 15-minute Retirement Fit Call.
 
Let's make sure your retirement journey is as secure and fulfilling as you envision.