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?



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MPT or MRT? Contrasting retirement income models

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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.

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

How much do you need to retire happy?

How much do you need to retire happy?

By Offain Gunasekara •
Originally posted: Posted: Sept. 5, 2012 at

M. Ray Grubbs

What is your number?

That question is often directed at people dreaming about how much savings they will need to achieve retirement bliss. But M. Ray Grubbs, professor of management at Millsaps College in Jackson, Miss., says the query misses the point. There is no magic amount of money than can guarantee a secure retirement for everyone. Individual wants, needs and circumstances dictate how much cash will be enough to see you through the golden years.

In the following interview, Grubbs discusses how to zero in on the precise amount you need to retire comfortably.

Is it financially smart to set a retirement date when retirement planning?

Absolutely. A specific retirement date is essential, as it provides an absolute target or goal for the retiree and advisers. If I set a date to retire on Jan. 1, 2018, I make important decisions each day and each month that lead to that goal. If I do not, then my decisions made today will likely be different.

For example, if a 25-year-old has a vision of retiring at the age of 50, this will drive a disciplined approach to investing and spending that can yield that goal over a 25-year work life. I may take a pass on that Porsche in favor of a Ford. However, if that same 25-year-old had a vision of retiring at the age of 75, then day-to-day, month-to-month and year-to-year financial decisions will be different.

What is the ideal amount needed to retire presently? What do you think the amount will be in 25 years?

Let me be very clear with this response: I have no idea! And neither does anyone else. There is an infinite number of variables for individuals and families, (so) there is no way to specify a single number that will suffice for retirement.

I have seen cases where a retiree had negative net worth, certainly not an ideal amount in anyone’s calculation. But that person retired comfortably with two pensions and Social Security in amounts well in excess of their expenses. In this case, zero dollars was an ideal amount. In another case, a retiree had a net worth in eight figures. That retiree is now bankrupt due to poor — really too soft a word here — spending habits. They spent themselves into bankruptcy, so in this case, eight figures was not an ideal amount.

When pre-retirement expense planning, what are a few ways to reduce your monthly costs and save more money for your retirement?

I … can offer no advice about how to cut an individual’s expenses. I have enough trouble doing that for myself to give others advice. But I can offer some experience that is serving me well.

The framework that follows is the Modern Retirement Theory pyramid — a priority-ordered series of funds established for specific expense purposes.

I keep a spreadsheet of all my expenses on a monthly basis. As I go through my monthly expenses, I take note of what I may reduce.

Then I look at all expenses and separate all those that I define as base expenses — those expenses that I must incur month to month to live with my chosen lifestyle. It is important to develop income that is stable, secure and sustainable to cover base expenses, and slightly more if that makes an individual comfortable.

As I come to a comfort level for my base expenses, I direct my attention to what Modern Retirement Theory calls contingencies. These are unknown expenses that can serve to derail retirement plans. Contingencies are such issues as disabilities, inflation, market returns, long-term care and death of a spouse that all retirees should think deeply about before initiating their retirement.

Next, my attention turns to discretionary expenses. Discretionary expenses are those lifestyle expenses that are wants and not needs, such as a new car, a cruise or a month in Tuscany, Italy. By definition, these expenses are not necessary to live and can be delayed if circumstances warrant, but not discarded.

Finally, if there is anything left, I contemplate legacy expenses. If I have resources available after providing for base, contingency and discretionary expenses, I can leave assets to a charity or to family members.

For people who want to travel during retirement, what tips can you offer so they can live out their dreams of being world travelers and still be financially stable?

I can only answer this in the context of the Modern Retirement Theory pyramid. If that person has covered their base and contingency expenses first and has resources to dedicate to discretionary expenses, I say book the trip now. But do not (book trips) and leave base and contingencies uncovered.

Is there an advantage to using a retirement planning coach?

I suggest there is benefit to using anyone who can help the retiree understand the context within which decisions can and must be made. But take the time to understand the perspective of the coach or adviser. To many insurance salespeople, there is an insurance solution to most all questions. If you seek advice from an investment broker, advice usually takes similar forms regardless of individual needs. Just be cautious about a coach or adviser, and know how they think.

We would like to thank M. Ray Grubbs, Ph.D., professor of management at Millsaps College in Jackson, Miss., for his insight.

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