Retirement Planning Guidebook: A Book Review
A Text Book for Retirement Income Planning?
Accumulation is easy. Have a hefty savings rate and invest consistently and reasonably.
Retirement planning is much more difficult than accumulation. Turning accumulated assets back into income is tricky. There are many moving parts, novel risks to consider, products galore (some of which are appropriate), and no good textbook on the topic.
True retirement income planning needs careful study and attention.
Finally, there is a textbook on retirement income planning: Wade Pfau’s Retirement Planning Guidebook.
Retirement Planning Guidebook
Wade’s writing is dry and thick. I do not recommend this book to a non-interested party. I have recommended Wade’s books multiple times over the years, though many DIY investors don’t finish them.
His new book is what we were waiting for—finally—a textbook for retirement income planning.
This book is appropriate for both the professional planner and the advanced DIY investor who wants to DIY retirement.
He calls it a guidebook, as it goes step-by-step through his decision-making process depending on your retirement “style.” Yes, it isn’t just about safe withdrawals from risk assets; it is a comprehensive guide to product allocation that depends on your personality. Product allocation is important as you take many different resources into retirement, not just your portfolio.
It is a guidebook that reads like a textbook. Enjoy!
Let’s start with the content, chapter by chapter.
Ten New Chapters and Three Previous Books
Wade has written three prior books, and three chapters in this book review previous books.
As you can see, three chapters summarize prior books.
Chapter four is “How Much Can I Spend In Retirement?” It answers that question from the perspective of the traditional AUM financial planner.
Chapter five reflects on his important book Safety First. Among his books, this is the most important to read if you don’t want to live (and die) by the 4% Safe Withdrawal Rate. What other options increase your odds of survival and don’t depend just upon the stock market?
Chapter Nine is from the best book on Reverse Mortgages. Believe it or not, these “bad” products help most people have more income in retirement and leave behind their Home—the slowest-appreciating, least-appreciated, yet most-often-left-to-heir asset.
What are Retirement Income Styles?
Perhaps the most novel idea in this book comes from discussing retirement income styles.
He thinks each person (couple) has an individual retirement income style, and one does better in retirement if one pays attention to one’s personality… and the Retirement Income Factors.
What are the Retirement Income Factors?
Retirement Income Factors
Above, you can see Wade’s retirement income factors. He considers the primary factors to be the spectrum of investment risk you desire to take (probability vs safety first) and then the new dimension of optionality vs commitment. I’m going to comment on this new dimension below, but first, here is a summary of his secondary factors:
- Time-Based vs Perpetuity Income Floors (which is bucketing vs guaranteed income for your basic needs)
- Accumulation vs. Distribution (time segmented vs perpetual)
- Front-Loading vs. Back-Loading your retirement income (in regards to when you have the most optionality, early or late in retirement) and
- True vs. Technical Liquidity
Interestingly, if all of your liabilities are met, you have true liquidity. If no liabilities are met, your assets are tied up in future liabilities and not truly liquid. Think about this: if you have a guaranteed fixed income, everything else is liquid and can be spent on anything. Whereas if you have to meet all possible future liabilities with your current assets, they are all spoken for already, and you have no actual liquidity from your assets).
Wade advances the discussion on each individual’s retirement style. Once you know your style, you can see what strategies are useful.
The main continuum is probability or safety-first:
- Probability-based means earning a risk-premium from stocks and using a systematic withdrawal strategy. This is popular among AUM advisors who want to manage your assets.
- Safety first is the opposite along that continuum, indicating that you desire guaranteed income via risk pooling (insurance). Insurance salesfolk favor this idea.
The second primary factor is new work: Optionality vs. Commitment.
Optionality Vs. Commitment
Wade adds a second primary dimension to this work. This addition is less useful and will not be incorporated into the retirement planning culture. But here it is:
- Optionality – Favor flexibility, not locked in
- Commitment – Have a plan locked in, at least with part of your assets
Let’s see how these two primary factors look in a 4×4 retirement income style box.
Putting it all Together: Your Income Style
Above, you can see the primary and secondary factors in a summary box that determines your income style.
East to West, you have the probability vs. safety-first continuum, and north to south, you have optionality vs. commitment-oriented.
Then, the secondary factors are placed into this matrix. I won’t review each secondary factor, as you can read all about them in the book, but you see some redundancy.
Regarding the primary factors, there are two assenting and two dissenting factors to review.
Assenting:
- Probability with Optionality: classic total return and systematic withdrawals
- Safety-First with Commitment: classic risk pooling through insurance products
Dissenting:
- Probability with Commitment: Wade suggests Fixed Index Annuities with Income Riders here
- Safety-First with Optionality: Here, he suggests time segmentation with the bucket approach
This feels a little forced. Especially the dissenting factors that point out specific products.
Check out the secondary factors. Do they add much to the matrix, or are they redundant?
Risks in the Retirement Planning Guidebook
In his Risks of Retirement segment, Wade draws heavily from his time at the American College and the RICP’s 18 Risks in Retirement.
All retirement risks are multiplied by longevity risks. If you live longer, you need more of everything!
Below are macro and personal spending risks and the second big daddy: inflation.
This section is pretty basic, but the important concept to consider is that there are novel risks in retirement that must be considered.
Summary: A Text Book for Retirement Income Planning
This book is important for professionals and those considering DIY retirement planning.
There is finally a textbook for retirement income planning.
You will not get a better education on retirement (from zero to thirty-five MPH) than you get from Wade Pfau’s Retirement Planning Guidebook.
Wade says: know yourself and create income from your assets safely and effectively. Of course, you must always consider your fundedness and desire to take risks when considering retirement, as the options vary greatly depending on these two factors.
If you have under-saved for retirement, focus on social security planning, as everything else flows from that decision. If you have oversaved for retirement, the initial chapters are important for understanding where you sit on the Safety-First vs. Probability-Based spectrum. However, if you are constrained and need more money, this book is for you.