321: How The RISA® Profile Tool is a Gamechanger for Retirement Income Planning with Alex Murguia

Casey Weade: Alex, welcome to the podcast.

Alex Murguia: Hey, thank you, Casey. Thank you for having me.

Casey Weade: Well, Alex, I’m excited to have a fellow retirement income nerd with me here today. So, this is something that just gets me going. I don’t think there are two things that really get me excited when I come to a podcast, and that’s usually something around retirement income or taxes. And those are the things that I really love taking deep dives into. There are not too many people who get excited about retirement income strategies and taxes, but these are just fun conversations.

Alex Murguia: And you don’t even have to pay money for that.

Casey Weade: I know, right? Bringing on Dr. Pfau, just a huge opportunity and a big moment for me to have a conversation with someone that I’ve taken such a deep dive into research over the years and years that I have been following him. And now, we have you here as well. So, I’m really excited to jump in and figure out exactly what’s going on with RISA, what you’re working on latest and greatest right now. And we also have some great questions that came in from some of our fans that I want to turn over to you as well.

But first of all, you’re a retirement researcher, you’re the CEO, and you have Dr. Pfau, you have Bob French, there’s the three of you. And so, you just have these three musketeers over there. How did the three of you come together? And what gaps did each of you fill for each other because you each have kind of unique backgrounds?

Alex Murguia: Sure, sure. Well, just my background real quick to set the stage, my graduate degree, my doctorate is in clinical psychology. And so, that’s something unique within the industry, although obviously, I think the spotlight has been shown on that piece of it right now. And I wasn’t necessarily a therapist, more of a researcher, but you still need to do your hours from the standpoint of therapy so you do your thing.

But effectively, I got into the investment management industry simply because I was an NIH fellow. And as part of the fellowship, you’re given a stipend. And if you’re in grad school and you get a stipend, you think you’re rich no matter what, 10,000, I forgot what it was. And that being I needed to know what to do with that, and that led me down the road of investments and theory and stuff like that. And I just applied an academic approach. And by the time I graduated, I knew this was a field I wanted to go in. I just continued my course of study. So, that’s how I got into it.

I first met Bob before Wade, and Bob started working at DFA, Dimensional Fund Advisors. It’s a fairly established, and at that time, it was a boutique, well-to-do mutual fund company, institutional oriented, and the like. In fact, Bob’s father, Ken French, is one of the directors of research. They’re very one of the top economists in the world, I can say pretty easily.

And Bob was working there. And Bob is a hugely gray matter guy. He just flies under the radar a lot. And he came by over to our office for a visit, and we just started chatting and we hit it off great. And he was getting his MBA in Georgetown at the time. And we just said, hey, look, we have a spot here. And we started it actually.

At that time, we had started out of McLean Asset Management, a financial planning software company. And Bob really wanted to kind of check that part out of his professional trajectory so he joined us. He joined, it was called inStream Solutions, and it’s still out there right now. It’s just more of a white labeled solution for larger insurance companies and the like.

And Bob came over and we hit it off great. I mean, it was a great thing. Now, in addition to what we were doing that, I actually started reading some of Wade’s articles, and that was when he had just started. And I said, oh, this is somebody that’s on it. He gets the joke.

And we were introduced by Andrew Gluck, a financial journalist at the time. And he’s still around. And Andrew made the introduction, I told Wade the craziness of what we were doing with inStream and he joined that kind of thing. He joined our team.

And one of the things, I don’t know if people know this, but Wade obviously is this highly respected, erudite academic and the like, but he’s also one of the nicest guys, understated guys you’ll ever meet. And he’s very easy to work with. And he came on board and we haven’t looked back. That was, I want to say, 2010 kind of thing when we really started working together.

And then after inStream, which was the financial planning software company that we had, we sort of moved on simply because owners came in. It was that, are you a technologist or are you advisors? Yeah, that kind of thing. And we decided we were going to be advisors.

And so, inStream kept on, but Bob, myself, and Wade huddled up and we remained at McLean. And Wade had a blog, Retirement Researcher, that he started even in Japan. And when he came over to McLean, we were like, why don’t we use this blog to really provide financial education for a subset of folks that just want to learn?

And so, we really tried to fortify that quite a bit and we did that. And in that process, it became its own little endeavor, RetirementResearcher.com, which is where we publish and do a lot. When I say we, I really mean Wade and Bob. We put our stuff out in terms of retirement research and we really started fleshing that out quite a bit.

And that led to the creation of the RISA because what was happening is a lot of folks were asking these questions. How do we do this? How do we do it? Should I allocate my portfolio to 70% equity, 30% pay? Some very personal questions, and Wade and I and Bob were like, how are we going to answer this in an in-depth way? Because the reality is the answer is always it depends. And then it depends on these various factors. And then, ultimately, you may need to run a number. And the reality is we didn’t feel comfortable giving out very detailed explanations online just because it just didn’t feel right, and vice versa, I don’t think consumers like hearing us just say it depends.

So, they kind of left an empty taste in both people’s mouths, and that led us to create the RISA. But in terms of how we met, it’s just how we met. It was like that, and we all hit it off great. I mean, Wade serves as that sort of retirement income planning expertise. He hits that spot really well. Bob is the investment theory, practical application piece. And I just kind of like hide between both of them.

Casey Weade: Well, we all need a behavioral expert.

Alex Murguia: Well, I don’t know about that, but hey, hey, hey, hey, I’m the Reggie Jackson. I’m the straw that stirs the drink. They do their thing and I get out of the way. And it seems to work.

Casey Weade: You’re bringing some very unique things to the table. I really enjoy it. And one of the things that you said there, you said Wade gets the joke. And they kind of stood out to me because I’ve always thought that, I think there are some of us in the industry that have followed Wade for some time and go, Wade gets it. And I would like to know, what does that mean to you when you say Wade gets the joke? What did it mean to you when you first thought that? What’s that mean to you today?

Alex Murguia: Well, when I thought it back then, a lot of the research, it’s a new field. Financial planning is effectively a new field on a relative basis to a science, right? And there were a lot of research articles that were out in the Journal of Financial Planning, and again, I’d say 10 years ago or so, you start reading through them and you think they’re silly, they’re not real hard science, they’re just kind of opinion pieces.

And when Wade started it or glorified Excel sheets that are put in word form, and as the saying goes, if you really want to read fiction, read an Excel sheet kind of thing. And so, the reality is you start reading Wade stuff and you realize that there’s some heft behind this. Like he gets the joke in terms of how the scientific method should function. At that time, that’s how I was interpreting. He gets the joke. He’s not just some guy that’s having fun with Excel and saying, oh my, look at this. Look how this turned out. What a concept.

And I think from the financial planning field, I think Wade, I mean, maybe there’s others, etc., I just can’t think of them off top of my head, but Wade was really someone that stood out to me as someone that brings in scientific rigor to the financial planning world. And he does it in a way that’s agnostic, which is what a true scientist should be. And that’s what I mean that he gets the joke. He’s not coming in with some preconceived we need to do this, we need to do that. He’s saying, what do the numbers show?

I mean, look at what he’s written about reverse mortgages, right? I mean, who would have thought? After Tom Selleck commercials, and I forget his name, I think it is a David Heath’s commercial, the pitch in reverse mortgages in a really weird way, I mean Wade takes a look at that literature and runs the numbers and said, look, this is a viable strategy for certain individuals, and here’s why.

And you can argue on your preferences and things along those lines, but I don’t care. In God, we trust everyone else to bring data, right? And if you look at the numbers, you can’t argue certain things on merit when it’s a numbers-based situation, and Wade gets that. It’s this agnostic approach. What do the numbers show? And if the numbers show that, then it is what it is.

And I think that kind of humility is missing in a lot of folks. I think a lot of folks in our space have this sort of preconceived, this is the best strategy. This is the best this or that. And they go down that road as opposed to just taking that agnostic approach, the null hypothesis, and then trying to disprove things. And that’s what I mean by he gets the joke.

Casey Weade: And I want you to expand on that, too, because I think there’s an opportunity for an investor, specifically maybe in this role since we’re talking about retirement income, a retiree to apply that scientist-practitioner mindset. If someone wants to go down that road, how would someone apply the scientist-practitioner mindset or leverage that to make better investment or financial decisions?

Alex Murguia: Yeah, I would say you take a little bit of a Ray Bradbury approach. You could burn commercials. All those commercials that you see on TV, all those Power Lunch, Squawk Box, Fast Money, all of that kind of stuff, just burn it. Burn it, just ignore it. Yes, you got to like rid yourself of that in a funny sort of way because that’s not how advice works. I mean, it’s funny, right? The consumers see these things on TV and they assume this is how it’s done.

But I don’t know of any firm in the country, and even in the country, that kind of manages money the way these folks talk. I just don’t see it. I haven’t. And if they do, I mean, and funny, you see some firms there. I mean, there are some folks, there are some figureheads that are talking and saying, you should do this, you should do that, you should do that. And then you look at their firms and their indexing, so there’s a high level of duplicity that you see out there within the consumer media.

And look, it’s nothing new what I’m saying, right? They’re appealing to your perianth investing proclivities, that kind of thing. But the reality is just bring that to the ground because that’s the wrong way to think about the markets or to think about investing or to think about retirement success. So, once you can do that, then you can rebuild. And you simply put is what does the literature say without having any preconceived notions of what should work and what shouldn’t?

Now, the issue with that, though, Casey, is that there’s just a lot out there. There’s a lot out there. And so, okay, I’m going to do that. I’m going to burn everything that I know from the consumer media, and then I’m going to start building myself back up. And in doing that, that takes a long time. Five years later, now I’m ready. So, you can’t do that either, right?

And so, how you would think about a strategy is first, it really is a matter of preferences to me. To fast track, it is how do you want to source your retirement income? And once you figure that out, then you can really look at the literature. But let’s say you’ve figured that part out right now, and that’s something I’m kind of hinting at the RISA to some extent, but I don’t want to take the conversation there. I want to get to your question.

And so, but once you know how you want to source retirement income, then it’s really just doing the legwork, the research legwork of, okay, who are the top authors in this area? And by top authors, I don’t mean like Dave Ramsey or anything like that or Rich Dad, Poor Dad. That’s kind of a joke, to be honest. It really is more what’s in the academic literature with regards to how you want to...

Casey Weade: You’re going to offend some people with that one.

Alex Murguia: I don’t care. It is what it is. The views and opinions here are those of Alex Murguia and not those of Casey Weade. Please spare him any emails and send them my way.

Casey Weade: Well, I think you’re saying a joke, though, in a way that it’s not research fact. It’s there for marketing purposes.

Alex Murguia: Yeah. Effectively, as long as you stay with that research-backed approach and you go from there and I think that’ll lead you, all roads will lead to where you want to go if you really are true to that. And just remember to check yourself at the beginning, and by check yourself, I mean try to remove any preconceived methods of what you want to do, and that way, you avoid this confirmatory bias of saying, oh yeah, this is what I want, this is what I want, really take this agnostic approach and you’d be surprised where you may land. I mean, it’s easy for me to say, I can say that in 30 seconds, but I think it’s a mindset shift to be able to do that.

Casey Weade: It’s maintaining an open mind, right?

Alex Murguia: Yeah, and the main thing of it, well, I guess, yeah. The other piece that I think is really relevant and I think any Duke’s book is great in terms of pushing this out there. And it’s this concept of follow a process because also, if you look at behavior finance, they’ll tell you how we’re just not equipped. We’re really not adaptively equipped to make decisions with regard to our finances.

Over the last 300,000 years, we’ve been adapted to make decisions to stay alive. But when it comes to investing, we’re just not there. Investing is something that’s a relatively new phenomenon in our development. And so, from that perspective, we naturally have these biases which we need to survive, these mental shortcuts. Unfortunately, these shortcuts really submarine our ability to be effective investors. Now, just knowing them isn’t enough.

And so, it comes down to developing a process that you can try to take advantage of automating certain models. And really, it’s a great book for folks. And the takeaway ultimately, at least for me, is there’s a scientific method approach that you want to do, but the ultimate end game is you have a process in place. You have a qualified, credible process in place. That’s not going to guarantee investment success because there’s just in this world with regard to investments, it’s just too much left to chance. No matter what, there are just too many things, like what economic cycle you’re retiring and etc. There are too many things that are chance driven that can impact your retirement income success.

But if you follow a credible strategy in a systematic manner and you always use that as your anchor, that helps buffer you from these biases. It just does. But it also helps you keep your eye on what has worked from a credible standpoint. And even though it may not guarantee success, if you do that enough time that the odds are going to be heavily in your favor. That’s the best kind of way I can answer that.

Casey Weade: Your bio says you were very disillusioned by the lack of assessment tools used in the financial planning profession, and some might look at that go, what are you talking about? There are so many different tools. We have Riskalyze, we have MoneyGuide, we have Retirement Analyzer industry. We have all these different tools. What did you see was missing from these tools?

Alex Murguia: I’m specifically talking about psychological assessment tools, if you will, not necessarily like MoneyGuide or financial planning tools. That’s just Jenga. That’s just numbers go in, numbers go out, and it’s pretty clear. But if you take into consideration the risk tolerance tools, effectively, there’s nothing inherently wrong with them. They have a purpose. And their purpose is, look, we’re going to try to align your risk tolerance score with an investment portfolio. And that’s okay, fine.

There are issues there with regards to reliability, which is reliability would be like let’s say I get on a scale 10 times in a row right now, and that weight scale tells me that I’m X amount, 160 pounds. I get on and off, 160 pounds, I get on again 160 pounds, I get on again 160 pounds. It’s pretty consistent. If I get on and off 10 times in a row and I’m 160, then I’m 170, then I’m 150, then I’m 155, it’s an unreliable scale, right?

And so, there are some issues with that, with risk tolerance scales with regards to that, specifically around times of market volatility, that your risk tolerance all of a sudden swings. And so, you have to ask yourself, is this a trait that it’s measuring, or is it a state? Trait, I’m introverted. State, I’m angry, I’m nervous. And so, there are some issues there with risk tolerance questionnaires.

But let’s just say that’s not an issue. We can cross those hurdles. We’ll make some heroic assumptions and assume we’re good. They’re okay, fine, because they do have a place. But ultimately, what they’re doing is assigning you an investment portfolio. We can argue in the fringes, whether it’s valid or not, etc., but that’s not for here.

They’re assigning you an investment portfolio. And what that does is, is assuming that what you want ultimately, if you do that at the start, that’s assuming that you want a total return strategy. You want a strategy that is going to try to create a sustainable withdrawal rate from your portfolio.

Unfortunately, when you retire, investing is different. You have other risk factors. And a risk tolerance could be fine at the beginning when you’re accumulating because effectively, you don’t have to worry about spending shocks, you don’t have to worry about certain things that you may face in retirement because you’re still drawing on your job, you’re still drawing on human capital for your daily needs.

When you retire, you’re subject to a few more risks. And so, that removes this sort of reward contemplation that a risk tolerance scale is focused on. It just doesn’t work when you’re in retirement. At a certain point, there is a place for investments, and a risk tolerance questionnaire will come in. But what I’m getting at, there’s no place when you transition into retirement, tries to assess a simple question, how do you want to source retirement income? And that’s a very important question to ask.

And so, there’s no assessment tool that really just tries to get at, hey, how do you like to source retirement income? And an analogy to that that Wade talked about it now, I’ve talked about it very often is when you’re deciding what to do professionally, you’re ultimately asking yourself, how do I want to source my human capital? What do I want to do for a living? How do I want to source?

And there are many tools like StrengthsFinders, MMPI, Kolbe that kind of try to get a sense of where you’re at and what kind of job you would be good at, a front-of-the-house position, a back-of-the-house position, someone that’s pure analytical behind a computer running numbers, that kind of thing to try to set you up. And so, imagine if there was a high school guidance counselor and that high school guidance counselor was telling everyone, hey, look, when you retire, in your senior year, it’s telling you, hey, you want to work for the IRS? You should try to work for the IRS. They’re hiring 80,000 people. You should try to work for the IRS because if I were to put the IRS job in this sort of efficient frontier of human capital, it hits great. It provides you with a standard of living that you can have throughout your entire life. No problem. And you know what? When you retire, you get a pension. So, you know what? That’s the best risk-reward job in the world. You should do that. And I’m going to tell everyone to do that. That would be unfathomable. You wouldn’t do that at all.

In fact, they say, what do you want to do? Do you want to be in sales? Do you want to be in, etc., etc.? And so, when you’re retiring, you’re revisiting that question as opposed to with your human capital, you’re revisiting it with hopefully accumulated investment capital that you have now because you mined all your human capital. And so, then you have to decide how do you want to source retirement income. And there are many ways to source retirement income. And they all require different preferences. Do you want a total return approach? Do you want an income protection approach? Do you want a bucketing strategy? Do you want a risk wrap strategy?

And so, that’s what I’m getting at that really, there is nothing out there to try to quantify this or at least get it going. I think many advisors do this, by the way, implicitly. Right now, I think many advisors do this implicitly, at least the good ones. But I still think it’s done in a somewhat clumsy manner and not in a really standardized manner. And I don’t think, frankly, clients realize or prospects or individuals out there realize that, hey, I have a choice in how I want to source retirement income.

I think there’s a matching problem in terms of, hey, you have this potential individual out there in the wild that is looking for a retirement income strategy and happens to read an article because these approaches are very credible in and of itself. He reads an article, she reads an article, and says, this makes sense. This must be the way I should do it. Or they randomly walk into an office, and advisors are human beings and they have their own pensions for what they want to do and they explain their strategy. And before you know it, that’s what that person’s doing because that makes sense to me.

But you need to take a step back and first ask yourself, hey, how do you want to source retirement income and then match that up? And the only way to do that is not with numbers, but with your preference for how you want to source it. How do you feel comfortable? What do you gravitate towards?

Casey Weade: So, what you’re saying makes a lot of sense. Along the way to retirement, we have all of these assessments so we can do analyze our psychographics to help us better leverage our human capital. But once you get to retirement, there isn’t some type of assessment that helps us determine which strategies, retirement income strategies specifically are going to be best for us with our psychographics at that stage in the game. There are plenty of tools. You can say, yep, this is the optimal retirement income strategy for you. However, is it really for you? Now, it’s just technically this is the best retirement income strategy. It may not be the best strategy for you. Can you even live with it?

Alex Murguia: Yeah, it’s optimizing based on numbers as opposed to optimizing based on how you want to do it. And my argument would be, if it resonates with you, you’re most likely to follow through on it.

Casey Weade: Yeah, but this is a lot different than my dad was an advisor back in the 80s and 90s and pulling out the old yellow pad and just having a good conversation.

Alex Murguia: I think your dad implicitly was doing this very effectively. I’m sure your dad was doing this very effectively. It was implicit, right? But that’s the scarce resource. The scarce resource isn’t giving somebody five questions and optimizing them into an investment portfolio. The scarce resource is really teasing out of some individuals how they want to sort of optimize their retirement personally.

And I would venture to say, being that you’re sort of a continuation of your dad from a professional standpoint, he was very good at what he did. And so, I can probably imply that your dad is probably doing this just implicitly in a good way. And he was really connecting with individuals.

Casey Weade: Yeah, that’s about leveraging the tools and the technology that we have available to us today. And I’m really excited for RISA. I think one of those things that I do get excited about RISA is the scalability of it. If you have a practice, your onboarding advisors, this is a risk, your onboarding advisors with their own preferences, with their own biases, and then they’re bleeding those into the client with it. And those definitely happened with Dad. He was definitely going to bring his own bias to the table. I think it’s impossible for us not to do that.

But a tool like this can take some of that bias out, at least on the front end, to help us drive someone to a better strategy that’s better for them. Can you quick– we’ve said RISA many times. What is RISA? Why did you create it? Just give us a good high-level overview of what RISA is.

Alex Murguia: Sure. It’s effectively the Retirement Income Style Awareness. RISA, it means laughter in Spanish, by the way. We threw that in there just to sneak that in there. But effectively, what it is, it’s an assessment tool to determine how you best like to source retirement income. You had said Wade was on an episode and I’m sure he broke it down in detail. But it’s an assessment tool that tries to capture two main factors, optionality, commitment orientation and probability-based, safety-first orientation.

Casey Weade: He really focused on probability versus safety first. I feel like the optionality and commitment piece is a little newer, a little bit more unique to RISA.

Alex Murguia: Sure. Effective outcomes trait on that, but probability-based is more market-driven, safety first, more contractual-driven in terms of sourcing income. Optionality and commitment orientation is a factor that came out very strong in our study in terms of saying that this has significant explanatory power in terms of retirement income preferences and selection strategies.

And optionality implies that in the work, I like to keep my options open. There’s this sense of, yes, I get the theory behind SPIA, single premium immediate annuity, a personalized pension that I buy. I get it. I see that there’s this annuity puzzle and all of that, which is why don’t more people do it because it makes obvious sense. But the reality is, I don’t want to lock in, I don’t want to buy it and then unlock in.

There’s this uncomfortable nature that people have in terms of removing future potential alternatives. It’s just one of those things that you see and it goes both ways. I don’t want to lock in because potentially, the situation may improve and I’ve missed out. So, there’s this opportunity cost and there’s this just sort of finality to it that some people don’t want. They want to be able to reassess every few years, no matter what.

And so, that really affects the decision-making process on a retirement income strategy. And the inverse of that is a commitment orientation, which is the other side of the same coin, which is I want to lock in on this now because it resolves the solution for the rest of my life. And as much as things may improve, the economic situations may improve, and I could potentially have done better, they could get worse. And I don’t want to deal with it. And I know that if it solves this issue right now, that’s it. I’m done. I have resolved my retirement income needs, at least for essential expenses. And that has a great positive psychological valence for me.

In fact, it may allow me to even be more aggressive on my investments because I know that I’ve locked in my essential expenses. And there are some other remnants, like if I’ve locked something down, my potential for future cognitive decline is taken care of. I don’t need to worry about it as much. Yeah, there are other things that you get value from, from this commitment orientation. And what we found is that probability, safety-first and optionality, commitment orientation, those two variables really identify your retirement income preferences.

And the aha moment that Wade and I had when we were looking at the research is not only can we identify preferences, but we can map them to specific strategies. And it sounds weird for me saying something like this, but that’s really an innovative feature in industry that we just didn’t see coming until we started looking at the research. The ability to really blend psychology and financial planning together into like this Venn diagram, and the RISA sits somewhere between the intersection of those two circles because it’s the practical application of these psychological attributes into an actual strategy. And so, we just found it fascinating.

Casey Weade: Yeah, I love the tool. It’s going to revolutionize so many parts of the retirement income planning business. I truly do believe that. I am wondering what you’re seeing from an industry trend standpoint and when you look at safety-first probability. What kind of financial industry trends do you see? Are more trends going towards safety or probability? When you look at commitment or optionality, what kind of trends do you see there in the financial advice industry?

Alex Murguia: It’s a great question. I don’t know about forecasting, how effective I can be, that kind of thing. I don’t know how good I am about looking around corners. I just get a sense of it from my own business. And I’m sure you do it from your own business, Casey, in terms of how you want to position your firm.

But within McLean, a quick history, when I started McLean, my partner Dean, who is like a father figure to me, he was very appreciative in terms of, okay, look, this was in 2001, and he had some insurance business, but he was actually converting to a fee-only model. And from that vantage point, he hit it that on in terms of where the consumer appetite was. And also, at that time, a commission-oriented business model was kind of tricky.

But interestingly enough, here we are, 2022, and I think the folks that are struggling, at least on the consumer side from the perception are the folks that are providing annuity sales or things along those lines because I think that business is actually, to some extent, catching up with equitable sort of sales practices and the like. I mean, there’d be dragons here a long time ago. But I think it’s on the upswing.

And I think the bad guys in some “funny” sort of way are the advisors that charge 1% a year and call it a day. I think if you read a lot of the investment media, I think those are the folks that are being targeted by them. And why? I think part of it is because as much as advice is this verb– and to borrow Michelle Richter’s phrase, as much as advice is this verb, when you couch it around model portfolios, model portfolios tend to become nouns.

And so, I think what’s happening is this 1% AUM fee is really, you’re selling a product, you’re selling model portfolios. And that tends to be one of these things that because of the RISA and this realization that there are many ways to get your retirement income strategy right, if you’re just focused on a total return and slapping a 1% AUM fee and nothing else, I think you’re going to have trouble in the future with that because it’s coming full circle. I think folks are realizing retirement is different. I kind of need something more than just this. And if you ask me, I think firms that are able to provide a few investments in retirement income strategies beyond just a total return are going to be well positioned to satisfy the needs of consumers.

Casey Weade: Well, what I hear you saying is there’s been a huge focus on compensation over the last 10, 15 years. It’s been about fee only versus commission or fee-based versus fee only versus commission only. And the shift today is does compensation matter that much? Maybe not nearly as much as the value that’s being provided. Am I being provided value in actually analyzing what is right for me and creating something that’s truly custom?

Alex Murguia: Yeah, I mean, 100%, I think people get into these sort of arguments for, I’m more ethical than you. So, there, that kind of thing. And I don’t know, I don’t buy into that. I think, regardless of what, like contracts say or in terms of the heart, if you’re a true fiduciary, you need to act in the best interests of the clients, and you can’t act in the best interest of the clients if you’re not even asking them what their interests are. You just don’t.

And if you kind of ignore the three other retirement income strategies and you’re just focusing on one, assuming that that’s the right way, I think you’re making a mistake and you’re living in some sort of world that’s accommodating you more than anything. And just with regards to the RISA, we looked at a few national studies, a few, not just one. And only 35% of the population seems to resonate with a total return strategy for retirement income, 35% resonates...

Casey Weade: This hit me so hard.

Alex Murguia: I know. You can do a whole thing on that. Thirty-five percent resonate with income protection, which is kind of the SPIA’s ideas, that kind of thing. Fifteen percent with risk wrap, which is a variable annuity or RILA with guaranteed living benefits and 15% with time segmentation, bucketing strategies. I realize for the audience, I’m throwing out terms, so I apologize, but...

Casey Weade: Well, we’ll circle back to that here.

Alex Murguia: Yeah, but the main takeaway is only 35% of the people really resonate with this total return strategy. So, why are we jamming them with that? Why does the industry jam people with that, assuming that, oh, this is the best way? I have trouble reconciling that professionally.

Casey Weade: Yeah. And everybody beating, they’re going, hey, I’m AUM focused. We do stocks and bonds for fee only, but only, I mean 67% of individuals are actually wanting something that’s not just market-driven.

Alex Murguia: Exactly. You’re tethering somebody– yeah, no, it’s crazy. And look, it’s a...

Casey Weade: I’m going to put myself in that hole.

Alex Murguia: We say this a lot, the market doesn’t owe you a retirement. The market is not there to fund your retirement. The market is there as a financing tool for companies. You’re just piggybacking on it.

Casey Weade: Not so good.

Alex Murguia: No, but this is true. You’re just piggyback on it, but you think, oh, the market, that’s a magical place. Like, okay, here’s my money. You put it behind a curtain. You wait 10 years, and there’s more money. I think a lot of people think that’s what the market is. Oh, it’s someplace where I put money and more comes out later. No, that’s not really what it’s there for. The market is a financing mechanism for companies. Full stop. You just piggyback off of it.

Now, over time, this and that, I can show you Ibbotson charts, whatever, right? But that’s what it is. It’s not a social engineering exercise to help people retire. And so, when you are taking on a total return approach, you’re tethering yourself to the future of capitalism, which is fine. I’m not arguing against it. I’m just saying, know what you’re doing.

Casey Weade: Still a balanced strategy.

Alex Murguia: Yeah, yeah, yeah, exactly.

Casey Weade: I mean, that falls into one of those...

Alex Murguia: But I can see why only 35% of people really want to tether themselves to the market because you can have full faith. I believe in America. America has made my fortune. You can quote The Godfather in all that. You can have full faith in capitalism, but are you going to have full faith that these market returns are going to hit the moment you retire? I don’t know.

Casey Weade: And so, we talk about the two approaches, kind of the two constructs, and then that’s broken down into the matrix, which makes up four different quadrants. Can you walk us through the core retirement income strategies and which quadrant those fall into?

Alex Murguia: Sure. So, we had those probability based versus safety first optionality and commitment orientation. So, if you put it together, and quickly, everything’s on a spectrum, too. So, it’s not as clearly demarcated as I would– it’s not all in a nice little box, like we’re making it out to be. But you had to do something, right? You had to put something on the PowerPoint.

And so, you can’t put that cloud or whatever. And so, effectively, if you have a high degree of optionality and you have a high degree of probability orientation, that is going to coincide with a total return investment approach. And it makes intuitive sense, right? What you’re saying with a total return investment approach is I subscribe to the probability that over time the markets will go up.

So, if I have an investment portfolio that’s heavily invested in the stock market, I can take a withdraw from it because over time, it’ll be self-sustaining because the net value will consistently increase. Optionality on that quadrant also implies that I realize it’s going to be variable. I’m not just going to play chicken with the stock market and take out X percent every year no matter what. Like somebody that I alluded to earlier implies that you can take market returns at 11% every year so you have no problems taking out this. It’s kind of silly. That’s a specious kind of argument.

But effectively, optionality implies that you’re willing to be flexible around the amount of money you can take out. And you have many variables, sustainable withdraw strategies. And so, it fits very well.

Now, let’s go to the other end of the spectrum, which is total return. Total return is, listen, I get all the research. I can look at an Excel sheet, I can look at a chart, and I get it. Markets go up. Thank you. Can help, but I don’t know they’re going to go up when I need them to go up. And frankly, I don’t want the aggravation. You know what? I want to lock in on a paycheck. This goes back to your preference, right? I love sales, but I don’t want the aggravation of dealing with sales. I want a behind-the-desk job, you know that kind of thing.

And so, I don’t want the aggravation of having to look at the news every day or whatnot. I want a paycheck. And so, I want a contractual obligation. I’m willing to purchase a contractual obligation for my retirement income, largely for essential expenses. And I want to lock in on it. I want a floor throughout my entire retirement. I don’t want to have to revisit this contractual obligation every five years or every whatever. I just want to lock in and I’m done.

You can’t hand over your heart. Look at both of these strategies and say that one’s wrong. You just can’t. It’s just how that person wants to source retirement income. And so, that’s an income protection approach. There, you would do the single premium immediate annuity, the fixed indexed annuity. There are these products that can provide that. And frankly, some people may have been doing this during their careers.

Go back to the IRS agent. That person, let’s say he was very, very, very competent and could have had another job. That person didn’t because at some point, he said to himself, I’m willing to sacrifice the upside of my salary because what I’m effectively doing is kind of buying a pension. The opportunity cost of the higher salary is me buying a pension. You follow? It’s kind of the same thing, right

Casey Weade: Safety and commitment.

Alex Murguia: Yeah. And so, now, let’s go to the side strategies. The strategies on the other end, which is effectively optionality and safety first and commitment orientation and probability-based, they’re not really concordant. They’re kind of conflicting ideas. And so, it’s an interesting piece because you can see why your optionality probability based and you can see why your commitment orientation and safety first, they kind of go together.

But the others, they don’t as well, and that implies this sort of behavioral feature. And by behavioral feature, let’s take the optionality safety first. What you’re saying there is I want contractual guarantee, but I don’t want it for a long time because ultimately, I want to be able to just replenish this floor. The only way you can replenish this floor is by having this sort of market piece to it.

And so, I mean, it works fine. People do bucketing strategies all the time. But what you’re doing there is you have a bit of a conflicting thing. That optionality and safety first don’t necessarily go hand in hand, but people are people and you see this sort of how can we accommodate these conflicting thoughts? And you do that with a bucking strategy effectively. I’m going to have the safety first piece to it, and that’s a bond ladder, a bond ladder for three years, or MYGAs even.

Casey Weade: And the ironic part of that is quite often, what I find is you end up with a similar asset allocation as you would with the total return.

Alex Murguia: Actually, you end up with a more aggressive allocation. Yeah, I’ll say why, but you’re absolutely right. It’s a mental accounting. It’s a mental accounting piece, and at the end of the day, you look at the whole pot, it’s a portfolio allocation. And the reason I say it’s over time, it actually becomes more aggressive because as you use the bucket one, as you use the bucket two, as you use the bucket three, what’s happening? Your allocation to equity as a proportion to your overall asset base is actually increasing.

Casey Weade: It’s the rising equity glide path.

Alex Murguia: Yeah, yeah, yeah, yeah. Actually, that’s exactly what I told Wade. I said, Wade, this rising equity glide path in a funny sort of way is really kind of a bucketing strategy. It just clothes into this portfolio allocation. You got it. You hit it 100%. 100%, you got it.

But you see what I mean? Like, it’s this kind of like, okay, fine. If it works for you, knock yourself out. Smoking if you got them. That’s what you go, but it’s this behavioral strategy. And the same thing with the risk wrap strategy. The risk wrap strategy is, listen, I want this exposure to the market because I want to keep my finger in the pie, but just in case, I need this floor. If it goes underwater, I want this floor of income. And that’s the guaranteed living benefits that you buy. And you buy it through increased fees.

It’s not that the variable annuity has high fees because compared to a mutual fund, it’s higher. What you’re doing is you’re buying that floor of income. It’s embedded in the expense ratio, but that’s what you’re buying. And so, you’re kind of giving yourself that, yeah, I want market participation, but just in case, I want to give myself an out.

Casey Weade: To me, that seems like the most indecisive one.

Alex Murguia: Yeah, kind of. Well, I don’t know about indecisive. I mean, could you...

Casey Weade: I believe they’re more of it, but I don’t.

Alex Murguia: Yeah, you’re right. I just rather have wait here and explain that one because that’s where he falls in so...

Casey Weade: No, the wait is there.

Alex Murguia: I think what it is, ultimately is on that one. On the bottom half, you have the strong longevity aversion. You have this real, real aversion to running out of money and you kind of reconcile those two competing things, but I totally get what you’re saying. And there are many ways to skin the cat. I mean, I kind of think the bucketing strategy is the least attractive for me, frankly, not necessarily the risk wrap.

Casey Weade: That’s interesting. It’s the most attractive for me.

Alex Murguia: Really? No, no, and it’s fine. And it’s fine. And I’ll tell you this, Casey, when we looked at this, the advisors that are bucketing are the toughest to convince that, hey, look, there’s total return, there’s income protection, there’s risk wrap, and there is time segmentation. The time segmentation folks are all about time segmentation. But yeah, for me, I’m income protection myself, Bob is total return, Wade is risk wrap. I guess you finish our circle in time segmentation, but for me, personally, time segmentation is the least attractive.

I’m not judging and vice versa. I think you know where I’m coming from. But it shows you there are just different strokes. You’re well versed in the industry. You know it. I’m not going to tell you something. And you’re going to go, oh, wow, you know what? You’re right, yeah. Your digestion of the literature and I think your own personal style has led you to become time segmentation. Okay, great. The next step is maximize the strategy within that quadrant. There it is.

Casey Weade: I mean, I can tell you a story after story, and there’s always one that I go back to that I’ll never forget because presented three different strategies to this gentleman and one’s lifetime guaranteed income and pretty much a flooring approach, and the other one is a total return approach. And then we had a middle one, which is time segmentation. And I prefer time segmentation. In all three scenarios, he’d be fine. I mean, he had plenty of money. He could take the risk of all three strategies. And he goes, I don’t care about the upside and I just never want to think about this before ever again. And he goes, guaranteed lifetime income.

Alex Murguia: That’s commitment orientation. He was on that. No, I get it man. We have plenty of clients do that. We were total return. So, with the research that we came up, we realized we have to put this out to our clients kind of thing.

And so, we started doing this. And the messaging is, look, if you’re not a total return person, we weren’t embarrassed. Oh, my God, we got to interact strategy. No. Science moves forward, and there’s research right now indicating that this is a better angle so let’s do it. And clients were fine with that.

But we did find that some people are more income protection and risk wrap than when we viewed them. And they were everywhere. There were some that were time segmentation, there were some that were income protection, and there were some that were risk wrap. And we accommodated it.

And I got to say, they were actually– I am to say, oh, my God, thank you. This is unbelievable. We came out better for it. Let me say it like that. We came out better for making these recommendations because it just becomes you can create your retirement strategies that just become more bespoke. And you did the same thing with your example.

You have this proclivity for a time segmentation. You presented it to the clients. You even said if it was me, this is what I would do. But you obviously left him an opening that he felt confident enough to say, hey, I get it, Casey, but you know what? I’m going for this income protection. That’s great.

When you asked me earlier, where do I see the industry going? I don’t see the industries going in this direction, but this is where the industry should go in that conversation that you just had with that client because I think too many times, either the person doesn’t realize there’s a strategy or the person read some book on total return and doesn’t become a client because you didn’t recommend that strategy because he thought, oh, that’s the best one, not even knowing that he has a style himself.

Or the client talks to you and you just convince them point blank, time segmentation is the way to go. If you don’t do that, don’t work with me, kind of thing. But you didn’t do that. You kind of presented him A, B, C, that kind of thing. And you helped him on his journey, but ultimately, he was empowered to choose the one that resonated with him. And I think that’s the way that this industry should be going.

Casey Weade: One of the things you said in that article, in the Kitces article or that blog post you could call it was that you are only going to work with clients if they do a total return approach, then you should be upfront with that and not work with anyone else if they’re not willing to do that total return approach. And I thought to myself, God, who’s going to do that? They’re not going to say, oh, you don’t think the way I do, but...

Alex Murguia: Well, actually, to start, Michael asked us to hey, can you write a blurb, though, about what happens if they don’t match up and what should happen if it does? So, wait, we were like, what the heck are we going to write? So, we’re like, oh, let’s put that in there and see what happens.

Casey Weade: Yeah, I know. I like that. But something you said earlier about risk tolerance evolving over time, we’ve seen this a lot over the last couple of years as we’ve gotten into a much more volatile market. People’s risk tolerance is starting to come down on people that we saw a year or two years, even six months ago. Now, their risk score is changing, right? They’re becoming more conservative due to the current environment. When you look at the RISA, do you see that evolving over time? And how often are you reassessing?

Alex Murguia: Great question. For us, this is a relatively new tool. So, the only way I can answer this question effectively, like real, real effectively, is if I had a thousand people when at the age of 40 and gave them the RISA every year and waited till they were 80 and seeing if there were differences longitudinally. You can’t do that.

So, the next best thing which is still valid, the next best thing is to look at cohorts. And what I mean by that is look at how 40-year-olds did as opposed to 40 to 45, 45 to 50, 50 to 55, 55 to 60, look at groups of the population and see if there are differences within groups of the population because within every subset of a cohort, you have a normal distribution, an expectation of how people should blend.

And what I mean by that is, let’s say if the people that were 50 where 35% were total return and 35% of them were income protection and then 15 and 15 on the rest, okay, it’s split the way we expect it. By the time they’re 70, if we look at 70-year-olds and all of them, 80% are income protection and only 20% are total return, there’s a problem, right? That means that over time, groups tend to get more conservative.

We didn’t find anything like that. What we found is actually quite consistent. And this is now across two national studies where there were no differences in RISA location between age groups. So, that leads us to believe so far that this is more of a trait-like aspect that we’re measuring. And again, trait-like versus state-like.

Trait-like being introversion, extroversion. State-like being happy, sad. Those happy and sad, excited, angry, those things tend to vacillate based on environmental cues or personal whims, whereas traits are more underlying themes of your personality. And so, we’re starting to see this as a trait, which is actually great from a retirement income standpoint because it is what it is.

Now, how often should you do this? I don’t know. I think it’s worth just revisiting every few years simply from the standpoint of just reinforcing the strategy with the client. And at the end of the day, too, this is meant as a starting point. By no means is this a rubber stamp. Oh, you came out income protection. Let’s line you up with SPIAs. Absolutely not.

What all this is, is this is a starting point for the analysis. Remember I said at the beginning, you asked me how somebody’s going to analyze the scientific method, and the reality is you look at everything, and then, what are your way down? But not everyone has time to get a CFP in retirement.

And so, the reality is the RISA allows you to start from this very specific point. And now, you can work from bottom up. You can blow it up. And that’s really what the RISA is intended to be, to curate all the available strategies into a few that you can begin your research on.

Now, the advisor can curate that for the client or for the prospect in a very effective manner, or the client now has at least a manageable way of figuring out how to start. And then from there, you ultimately have to run numbers. You have to provide an economic overlay because you may tell a client and I’m sure you have, Casey.

You could have told that client, hey, look, income protection, okay, it makes a lot of sense for you. That’s how you want to start. But guess what? You don’t have enough money to buy a SPIA that will cover enough. So, you are going to have to do X, Y, Z to supplement it. So, you always have to run the numbers.

Casey Weade: I think this tool is going to be truly impactful for our business. I’m really excited to see where it goes, so I love hearing about it. Now, would you have a few minutes here to answer a few fun questions?

Alex Murguia: Sure. Fire away.

Casey Weade: Yeah. All right. So, we had a few questions. I know we’re running out of time, so we dial it down here to a couple of questions that we have that came in from our Weekend Reading subscribers. So, if you subscribe to Weekend Reading, then we will send you a preliminary notice that we’re having a guest like Alex come on the show, and then you have the opportunity to submit questions over to us. That’s what we did here with William.

So, William asked this, he said, for a conservative investor, I’m age 76. So, these are going to be pretty random questions here, Alex. So, be prepared. So, for a conservative investor, age 76, with priorities of capital preservation and income generation, please contrast the merits of brokered CDs and Treasury bills and/or notes in view of Fed Chairman’s commentary from Jackson Hole.

Alex Murguia: Well, I was traveling the last few days, so I haven’t been up to date with his commentary other than there will be pain, kind of argument. I mean, the quick and dirty answer would be if you’re going caveat emptor, this is not advice, etc., but the quick and dirty in terms of CDs and the like, keep the rates, keep the maturity low, that way, it can keep up with inflation. You don’t want to go long-term or intermediate-term if you’re looking at that from a retirement income standpoint. And frankly, I mean, I would amplify your purview beyond just that. I mean, depending on your net worth, iBonds seem to be kind of something you would want to consider, especially if they’re talking about increasing rates or maintaining them at a higher level. That would be the best quick and dirty answer I could give.

Casey Weade: Yeah. Keep your mind open to tools outside of CDs and T-bills or T-notes, look at iBonds, look at MYGAs, just look at all the different tools that are available, right?

Alex Murguia: And MYGAs, they’re very similar to CDs. They’re just issued by insurance companies.

Casey Weade: But you have a lot of tools out there today that are paying significantly higher interest than they were six months ago, right?

Alex Murguia: Yeah.

Casey Weade: And the concern is, well, what’s going to happen six months from now or a year from now or two years from now? So, stay short in that duration, and I think this ties in well to Ronald’s question that was really regarding pensions and lump sums. He said he’s got an option between taking a pension or lump sum. He said, I was planning to work two more years, but rising interest rates adversely affect the size of the lump sum. We have been told a 1% rise in interest rates reduces the lump sum by 8%. The calculation for 2022 was based on interest rates from August of ‘21. 2023 calculations will be based on August of 2022.

I don’t want to work for free for two more years because every year is working. If interest rates continue to go down, that lump sum goes down, he could effectively be working for free depending on how big that lump sum is. How should I evaluate taking the lump sum this year versus working two more years? Scientific approach here, buddy.

Alex Murguia: Yeah, I would say there’s one more variable you want to add. And Casey, please chime in. And the reality is, probably for the last five years, I haven’t been one on one with clients. So, my sort of muscles with regards to this, I have atrophied a bit. But that being the case, there’s one more variable you want to add that I know we’ve had with clients and maybe you’ve experienced this too, is if you take a lump sum, how much would it cost you to buy the equivalent “pension” from an insurance company that’s being offered?

We ran two analyses within McLean Asset Management for folks that we were doing financial plans with. And it made a lot more sense for that person to take the lump sum and by an annuity as opposed to sticking with the pension of that company and the source. So, that’s another variable that you can do. And I was assuming there, you would take the lump sum and put it in an investment portfolio. And so, ultimately, what do you want to do, a lump sum or pension? Normal questions, like look at the gun.

Casey Weade: I think questions even more along the lines of interest rates. I mean, how much risk is he going to be taking on by deferring another year and another year? How high are interest rates going to go? And what’s going to be the impact on his lump sum?

Alex Murguia: Yeah. Well, I would say look at the six-month bill, and that’s your best estimate. That’s your best prognostication where interest is going to be when you need to make that decision again. I mean, I try not to get into the forecasting game because it’s just a random draw. It really is. No matter what anyone tells you where they’re going, they’re guessing, they’re just guessing.

And so, it goes back to the thing I said at the beginning, what’s the best process you can undertake to answer that question? And the best process doesn’t involve, you want to disabuse yourself from this. It doesn’t involve where are interest rates going to go. I mean, you take– and I can say this over and over again and I know it sounds silly, but if you take all the top prognosticators of all the top investment banks and economists and say, hey, we’re into this, this is going to be six months from now, I guarantee you, half of them are going to be wrong, and they’re going to be in the wrong.

So, I don’t know, you can’t make a decision based on where you think things are going to be. And that’s why I was starting to answer that question, Casey, in terms of the process, right? What’s the best process to put you in the position to make the right decision? And that process is not where interest rates are going to go and that’s what you should do, but with the rates the way they are right now, what gives you the best breakeven?

Casey Weade: Well, it’s the same question people have around the markets. Which way is the market going to go over the next two years? Should I work two more years? Or should I retire today and put together that retirement strategy? The question should be, do you want to retire? And can you afford to do it?

Alex Murguia: Yeah. And if it gets you there, it gets you there. And that’s why, I mean, what’s the best? Run the process that gives you the best breakeven on this. With the caveat of add the component of what’s an open market pension worth right now and by over market pension, I mean, annuity, what would be the cost of that contract? Because it may be better than the company’s pension, and then there’s normal, is this a good company? Is this a school system or is this, whatever? A train company that used to offer a pension, and they’re kind of on their last legs, that kind of thing.

Casey Weade: Alex, are you good with one more question?

Alex Murguia: Yeah. Fire away.

Casey Weade: Good. All right. We’ve got a question from Mike. Mike said, this is probably a fairly basic question, perhaps, core to the topic, though, but as a soon-to-be early retiree, I’m planning income over three or four distinct periods. So, I think Mike might be an engineer. Mike says he’s planning on stage one retirement pension.

Alex Murguia: Mike is also time segmentation, by the way.

Casey Weade: Yeah. Right. He’s planning on retirement to pension, 55 to 60; pension to Social Security, 60 to 67; Social Security to RMD, 67 to 72; and post RMD, 72 plus. So, I love the way Mike’s breaking it out and really thinking intentionally about building a retirement strategy. The basic question here is how do you break down and think about income over different phases of retirement?

Alex Murguia: I think about it like that, actually, the way you did it. Honestly, it’s funny, right? And you see this, Casey, in your practice, and I’m sure you see it with your questions. This sort of bridging, I think from 65 to 75, there’s a sort of, okay, I got a bridge for this. I’m going to delay Social Security. So, what I do at the beginning, once I get Social Security, then the next best thing, then the next question is the RMDs. And I’m surprised you didn’t throw in a Roth conversion piece in that. No, that’s really it. But I think about it like that, I mean, we can quibble on a year here or there, but I think he’s spot on. At least, it matches up with my view of the world. What do you think, Casey?

Casey Weade: Oh, no, I can see it in two different ways. You can see spending patterns of retirees, more Blanchett research type, go, go, slow, go, no, go. But then you want to intertwine those spending patterns with what’s actually going on, the facts, the science behind it, which is your Social Security, your RMDs, your pension, or everything...

Alex Murguia: Yeah. I wasn’t even thinking about the spending patterns. I was just thinking the Jenga component. Yeah, this fits into that.

Casey Weade: Well, you’re taking that scientific approach.

Alex Murguia: Well, I don’t know about that, but yeah.

Casey Weade: Well, let me just go ahead and wrap up here today with one philosophical question and then so darn scientific here. Philosophically, what does retire with purpose mean to you, Alex?

Alex Murguia: Oh, it’s a good question. I would even say living with purpose because I kind of want to do that even right now in my non-retirement years. I mean retire with purpose would mean to me that you’ve set yourself up. Let me backtrack a little bit, right? First, what does retirement mean?

Casey Weade: I ask the big question.

Alex Murguia: What does retirement mean? Wait, and I kind of play with that term a lot. I don’t know offhand how you take it to me. And I don’t want the retirement cops to arrest me. But effectively, for me, retirement means that, whether voluntarily or not, I’ve chosen to stop drawing from my human capital. And now, I’m just drawing from my investment capital for the rest of my life, that kind of thing. It can mean whatever.

But to me, that’s what it means. I don’t need the human capital anymore. And I have the flexibility that sort of I think funded contentment is kind of a phrase that flows around. I don’t remember– Brian Portnoy, I think, came up with it, it’s a beautiful phrase, funded contentment where you can now underwrite the rest of your life with your accumulated assets.

And so, to me, that’s kind of I’m at the retirement stage. Now, what does, the second half, the purpose mean? Intentional. I have it, and now, I want to be intentional. I don’t just wake up. Unless your intention is to just wake up and do what you want that day and nothing about the next, that’s fine, but to me, purpose implies a sense of intentionality to it, which is a beautiful thing.

Casey Weade: We have the piece of retirement, which means, yes, I don’t need to work anymore. And the second part of that is, am I living with purpose, which would mean to you being intentional with your time every day.

Alex Murguia: Yeah.

Casey Weade: Thank you, Alex. It’s been a real pleasure.

Alex Murguia: Hey, man, likewise. I really appreciate the conversation.

Casey Weade: Thank you so much. Look forward to catching you again.

Alex Murguia: All right, man.