Have you ever filled out a questionnaire at your financial advisor’s office? If you have, it was probably a risk tolerance questionnaire. I have my own opinions about them, but you’ll have to wait until the end of this episode to hear what it is. 

On this episode of Retirement Starts Today, we’ll explore an article from AdvisorPerspectives.com written by Dr. Wade Pfau and Alex Murguia which argues that risk tolerance questionnaires (RTQs) don’t work. You’ll hear new retirement slang and acronyms as well as a discussion of retirement income sourcing. 

Dr. Pfau has also developed his own tool to use that can help you select the best deaccumulation approach. Don’t forget to stick around until the end to hear my thoughts. 

Outline of This Episode

• [2:22] How risk tolerance questionnaires are used
• [5:45] The different approaches
• [10:35] Two different styles
• [12:58] My personal criticisms of risk tolerance questionnaires

What are risk tolerance questionnaires used for?

RTQs are a tool that help financial advisors identify the amount of volatility that clients can handle in their investment portfolios. These tools generally consist of 9 questions and they are designed to establish a baseline so that the advisor can rank the investor on a scale of 1-5 from conservative to aggressive. These documents are especially helpful for advisors to stay compliant as they choose portfolio recommendations.

Why retirement investing is different

RTQs work best in the accumulation stage of people’s lives, but when it comes to retirement they fall flat. In retirement, a person must shift their way of thinking from accumulation to decumulation and this can be a challenging adjustment in mindset. Viewpoints on funding daily expenses inevitably change when one is completely dependent on living off one’s investment capital without the luxury of human capital to cushion the blows of a bear market. 

Retirement brings added risks

In addition to a change in mindset, there are unavoidable spending shocks that arise in retirement. This means that retirees need to consider how much of their assets they need to keep on hand for these unexpected events and market downturns. 

Not only are there the everyday expenses that come along, but retirement brings on further risks. There is constantly the risk of outliving your money and becoming a burden to others since no one knows their own longevity. Another retirement risk is lifestyle risk. To maintain a comfortable lifestyle in retirement it is important to ensure enough discretionary income to fully enjoy retirement. 

Why RTQs don’t work 

RTQs work better for people in the accumulation stage of life because they weren’t designed to handle the broader questions that retirement brings. They can play a small role in helping to decide asset allocation, however, they cannot be used in place of a retirement plan. 

It is important to come up with a retirement income strategy based on goals first. By beginning a retirement plan with a questionnaire you end up boxing yourself into a strategy that may not be in alignment with your ultimate retirement goals. Listen in to hear why I think RTQs are a poor excuse for proper retirement planning. 

Resources & People Mentioned

• Boomer Benefits
• Why Risk Tolerance Questionnaires Don’t Work for Retirees
• The Mullet Episode
• BOOK - Paychecks and Playchecks by Tom Hegna
• Wade Pfau’s Retirement Researcher blog
• The American College

Connect with Benjamin Brandt

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