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Personal Financial Planning Offers New Approach to Retirement

Award-winning research questions whether a one-size-fits-all strategy makes more sense for retirees.

Written by Melanie Hess

The research found that individuals with non-portfolio income, such as Social Security and annuity to supplement their portfolio income, will have higher optimal withdrawal rates.

The research found that individuals with non-portfolio income, such as Social Security and annuity to supplement their portfolio income, will have higher optimal withdrawal rates.

While retirement specialists typically recommend a 4-percent withdrawal rate, experts in the Texas Tech Department of Personal Financial Planning (PFP) recently published award-winning research that questions whether a one-size-fits-all strategy makes sense for retirees.

They suggest that an optimal rate of between 3 and 7-percent, based on a client’s willingness to accept risk and how much income they receive from non-investment sources, might be the smarter strategy.

Michael Finke, doctoral program coordinator, said he and doctoral candidate Duncan Williams believe retirement income is among the most important topics in financial planning today.

Their article, titled “Determining Optimal Withdrawal Rates: An Economic Approach,” uses an innovative method to estimate how financial advisors can create an optimal income plan for retirees that balances spending needs with the risk of running out of savings.

“The key insight of the paper is that optimal retirement withdrawal rates depend on the individual,” Finke said, “and we provide specific recommendations about what is optimal for different types of retirees.”

Williams and Finke recommend financial advisors consider both the client’s risk tolerance and risk capacity when recommending how much they can optimally spend each year.

Their study found that individuals with non-portfolio income, such as Social Security and annuity to supplement their portfolio income, will have higher optimal withdrawal rates. Still, the higher a client’s risk aversion, the lower their optimal withdrawal rates.

Finke and Duncan received the Retirement Income Industry Association’s first Thought and Leadership Award to recognize the excellence of their original thinking and industry leadership in their research.

“I’m most proud that we had an opportunity to showcase the high-quality applied research of graduate students at Texas Tech,” Finke said. “It is our goal that PFP at Texas Tech be seen as the home of financial planning education and research.”

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Department of Personal Financial Planning
Division of Personal Financial Planning

The Department of Personal Financial Planning in the College of Human Sciences educates students on the need to focus financial knowledge on families and the achievement of their goals.

Undergraduate and graduate degree programs in personal financial planning are registered by the CFP Board. Students graduating from a CFP Board-Registered Program are eligible to sit for the CFP® Certification Examination.

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