Individual Retirement Planning Liability-driven Investing Pensions Retirement Decision Making Retirement Income

Forbes: 8 Essential Principles Of Planning For Retirement (Part 3)

Forbes: 8 Essential Principles Of Planning For Retirement (Part 3)

by Wade Pfau, Ph.D.

A retirement plan involves more than just finances. Rather than beginning at your savings, the starting point for building a retirement income strategy should be the household balance sheet. This fundamental lesson has been proven several in various retirement frameworks, including Modern Retirement Theory, the Funded Ratio approach, and the Household Balance Sheet view.

At the core of these different methodologies is a desire to treat the household retirement problem the same way pension funds treat their obligations.

Assets should be matched to liabilities with comparable levels of risk. This matching can either be done on a balance sheet level, using the present values of asset and liability streams, or it can be accomplished on a period-by-period basis to match assets to ongoing spending needs.

Structuring the retirement income problem this way makes it easier to keep track of and to make sure each liability has a funding source. This also allows you to more easily determine whether you have sufficient assets to meet your retirement needs, or if you may be underfunded.

This organizational framework also serves as a foundation for choosing an appropriate asset allocation and seeing clearly how different retirement income tools fit into an overall plan.

The following table provides a basic overview of potential assets and liabilities a household balance sheet should consider.


Individual Retirement Planning Liability-driven Investing Longevity Retirement Decision Making Retirement Income

MRT appears in Forbes article: “What Is A Safety-First Retirement Plan?”

Read Now: What Is A Safety-First Retirement Plan?



Conditions within Longevity Individual Retirement Planning Longevity Portfolio Theory Retirement Decision Making

MPT or MRT? Contrasting retirement income models

Originally post:


The “safety-first” approach continues to draw attention as a retirement-income planning model and as an alternative to modern portfolio theory (MPT). Modern retirement theory (MRT) is an example of safety-first strategy. The concept was first described in a December 2010 Journal of Financial Planning article by Jason K. Branning, CFP and M. Ray Grubbs, Ph.D. It’s based on six premises as described on

    • An absolute goal: Retirement is an absolute goal, not a relative one.
    • Individualized and client-centric: Planning and executing retirement funding should focus on individuals rather than historical data or group statistics.
    • Outlook ambiguity — the future is unknowable to the individual: MRT acknowledges that future events are always unknown to individuals.
    • Secure, stable and sustainable: MRT provides retirement funding that is simultaneously secure, stable and sustainable.
    • Retirement sheet: Retirement sheet represents assets or cash flow items that will affect the retiree. Retirement funding should consider how best to utilize an individual’s entire balance sheet, not just his or her portfolio, as well as off-balance sheet items like Social Security and pensions.
    • Funding priority: A hierarchical priority of retirement funding can be established to offset retirement risk.

I recently asked Branning for additional details on MRT. He responded to my questions by email:

When, how and why did you start to develop this approach?

Branning: MRT came about through a confluence of events beginning in 2008 out of a desire to serve clients. There was one client question in particular about long-term care and then finally market recession and significant declines in asset values that were major factors. Dr. Ray Grubbs, a business professor in the Else School of Management at Millsaps College, and I had known one another for a number of years and began talking through these issues. We developed the actual theory through mid- to late-2009 that culminated in an article for theJournal of Financial Planning’s Retirement Income supplement in December titled “Modern Retirement Theory.”

What are they major distinctions between MRT and MPT?

Branning: At the core, MPT is about how to optimize investments for risk-adjusted returns. It was originally designed for institutional investors. MRT is a planning paradigm that places individual retirees at the center of the retirement planning question. As well, MRT encompasses all clients assets (human capital, social capital, and financial capital) not just their investment portfolio and establishes a prioritized framework for solving against an individual client’s two unknowable questions:

1) How long will I live (longevity)?

2) What will happen during my retirement (conditions within longevity)?

There are two fundamental truths that must form the foundation of financial planning, particularly retirement planning.

First, the individual will never know with precision how long they will live and correspondingly how long their money will need to last. It just simply cannot be done in the individual case. It can be approximated for large groups of people but never for an individual.

It must be accepted and acknowledged that longevity will never be known for the individual; therefore, any financial planning framework must accommodate planning in the face of the unknowable.

Second, no individual can ever know with precision what life will be like during his or her span of retirement. Regardless of the attempts to do so, no individual is capable of knowing these two fundamental and unanswerable questions.

MRT offers a planning process that thinks through the individual retiree’s whole situation by helping thoughtfully to assess, weigh pros/cons, and navigate implications of possible decisions.

So often, the modeling that is shown in research is like a sterile, sanitized lab. Instead, retirement is more like an organic garden environment where weeds and storms exist. MRT simply recognizes that the future for individuals is always unknown. Planners and individuals cannot always know when a storm is coming, but can take steps to minimize the effects of unpredictable natural occurrences through careful planning using the MRT framework and planning process.

How can financial advisors implement MRT in their work with clients?

Branning: MRT is a process oriented decision tool for advisors. If an advisor agrees with the logic that there are two unknowable questions for each individual retiree and that the six premises are true, they could use the matrix on the last page of our 2010 JFP article as a guide for implementation. We are product-agnostic.