Retirement Pulse

Incorporating Behavioral Risk Preferences in Retirement Income Strategy Design

Anna Dreyer, Ph.D., CFA, Associate Director of Research
Luiza Pogorelova, Ph.D., Multi-Asset Quantitative Investment Analyst
Som Priestley, CFA, Global Multi-Asset Solutions Strategist
Executive Summary
  • Design of retirement income strategies should consider multiple factors, including investment-, investor-, and product-specific characteristics.
  • To demonstrate why investors’ behavioral risk preferences should play a significant role in retirement income strategy design, we studied the impact of demographics (the interaction between salary and expected mortality) and risk preference on potential optimized withdrawal strategies in retirement.
  • We show that the effect of using a salary-dependent mortality schedule depends more on an investor’s risk aversion than it does on demographic characteristics or the specific withdrawal strategy under consideration. This suggests that behavioral preferences are more likely to drive the choice of a retirement income strategy.
  • Our findings highlight the need for a comprehensive framework that captures both demographic factors and risk preferences—as well as the interaction between the two—when designing retirement income strategies. 

In designing robust retirement income strategies, the financial industry has been challenged by the heterogeneity of individual characteristics. There are a variety of investment-specific (e.g., asset allocation or expected yield), investorspecific (e.g., demographics) and product-specific (e.g., guaranteed versus non-guaranteed) parameters that need to be calibrated when determining the appropriate retirement income strategy for an investor or a group of investors. Investor-specific characteristics are perhaps the most nuanced of these design dimensions. Investor characteristics can be broadly bucketed as:

  • Demographics: salary and expected salary growth, contribution rates, retirement dates, and mortality schedules.
  • Preferences: attitudes toward consumption risk, liquidity, longevity risk, and legacy. 

While demographic factors are generally easy to measure (e.g., “my client will retire in five years” or “the average salary of my plan population is $X”), investor preferences are innate, diverse, dynamic, and nuanced. We believe, however, that preferences—not demographics—should be the primary drivers of retirement income strategy design.

To demonstrate the primacy of investor preferences, we studied the effect of income-dependent mortality assumptions on an investor’s optimal withdrawal strategy. We found that while lifetime earnings are linked to longevity, an investor’s risk tolerance ultimately determines how adaptive she will be in her retirement spending strategy and how much of a difference adjusting for a longevity gap will make. We believe that the importance of investor preferences also extends to other dimensions of the retirement income challenge, highlighting the need for a robust analytical framework when assessing investors’ retirement income options. 

White Paper

Read the Full Article

Behavioral Risk Preferences

To demonstrate why investors’ behavioral risk preferences should play a significant role in retirement income strategy design, we studied the impact of demographics and risk preference on potential optimized withdrawal strategies in retirement.

You can also find a more in depth analysis of our research in our paper, The Effect of Income-Dependent Mortality on Withdrawal Strategies, published in the Journal of Retirement.

Important Information

The principal value of the Retirement Funds and Target Funds (collectively the “Target Date Funds”) is not guaranteed at any time, including at or after the target date, which is the approximate year an investor plans to retire (assumed to be age 65) and likely stop making new investments in the fund. If an investor plans to retire significantly earlier or later than age 65, the funds may not be an appropriate investment even if the investor is retiring on or near the target date. The Target Date Funds’ allocations among a broad range of underlying T. Rowe Price stock and bond funds will change over time. The Retirement Funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus on supporting an income stream over a long-term retirement withdrawal horizon. The Target Funds emphasize asset accumulation prior to retirement, balance the need for reduced market risk and income as retirement approaches, and focus on supporting an income stream over a moderate postretirement withdrawal horizon. The Target Date Funds are not designed for a lump-sum redemption at the target date and do not guarantee a particular level of income. The key difference between the Retirement Funds and the Target Funds is the overall allocation to equity; although they each maintain significant allocations to equities both prior to and after the target date, the Retirement Funds maintain a higher equity allocation, which can result in greater volatility over shorter time horizons. Diversification cannot assure a profit or protect against loss in a declining market.

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

© 2018 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

T. Rowe Price Investment Services, Inc.

Tap to dismiss

Manage Subscriptions

Unsubscribe All

Manage your watched Funds and Insights subscriptions here.


Change Details

Congratulations! You are now registered.

Begin watching and receiving email updates for:


Sign in to manage your subscriptions and watch list.



Latest Date Range
Download Cancel

This content is restricted for Institutional Investors use only. We were not able to validate your status as an Institutional Investor with the information you provided at registration.

Please contact the T. Rowe Price Team with questions or to revise your status.


You will need to accept the Terms & Conditions again.


You have updated your email address.

An activation email has been sent to your new email address from T. Rowe Price.

Please click on the activation link in order to receive email updates.


You have an existing account

Click OK to view your subscriptions and watch list.


Confirm Cancel