Last month's article in the Journal by Joe Tomlinson, coupled with this month's article by Finke, Pfau and Williams, together introduce the idea of risk tolerance into the retirement income sufficiency realm. When we help clients understand how much money they can take out of their portfolios safely, shouldn't we be taking into account how worried they are about diminishing their lifestyle later in retirement if the markets are not kind?
In this article the authors introduce something called a "risk-version coefficient," which ranks clients on a scale of one to ten, "one" being the sort of person who might look hard at a 9% annual distribution from the portfolio. The authors then look for optimal solutions for each type of client--but, as you'll see, this is a VERY sensitive measure, which yields very different outputs for clients with subtly shaded differences in risk tolerance.
Nevertheless, this is an important field of research, and you will be seeing a lot more of it before long. Early adopters will be using some kind of risk tolerance measure for retiring clients in the very near future, and the rest of the profession will be dragged along as the tools, and the discussion, become less exploratory.
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