May 2025, In the Spotlight
Unlike the accumulation phase of retirement investing, during which most individuals share a common goal of saving as much as they can afford and growing those savings through investments such as target date funds or other diversified multi‑asset investment products, investors’ goals typically are more diverse during the decumulation phase. As more defined contribution (DC) plan sponsors evolve beyond exploring the landscape of available retirement income solutions to adopting an implementation‑oriented stance, we believe that the system could benefit from:
To address this challenge, T. Rowe Price’s global multi‑asset research team, in partnership with our global retirement strategy team, has developed a patent‑pending five‑dimensional (5D) framework for exploring retirement income needs and potential solutions. Our 5D framework establishes the foundational attributes of the “in‑retirement experience” for individual investors and quantifies the economic trade‑offs between these attributes.
Our unique approach starts with a simple assumption that every aspect of the in‑retirement experience is captured by at least one retirement income product currently available in the marketplace. By comprehensively reviewing the existing universe of retirement income solutions and analyzing the trade‑offs inherent in various product designs, we were able to identify five key attributes that are specific, mutually exclusive, and exhaustive, and that we believe fully characterize the in‑retirement experience (Figure 1).
Source: T. Rowe Price.
See Appendix and Additional Disclosure for more information
Using these five attributes, we then analyzed various retirement income solutions to identify and articulate the trade‑offs inherent in each solution—such as understanding how a specific solution balanced the goal of hedging against longevity risk with the objective of achieving a desired level of income payments.
Our research revealed a parallel between our 5D framework and the traditional risk/return investment trade‑off. The 5D framework enabled us to conduct quantitative studies of retirement income solutions based on various well‑defined metrics, similar to how the risk/return trade‑off has been studied for decades.
While traditional metrics such as risk‑adjusted returns and the familiar mean‑variance frontier may suffice for traditional investments during the accumulation phase, plan sponsors and their consultants and advisors need a more sophisticated approach to evaluate retirement income solutions. Leveraging the five key attributes in Figure 1, we use our 5D approach to analyze how various retirement income solutions prioritize these five aspects of the in‑retirement experience.
“We believe our 5D approach better captures the diverse needs and preferences of retiree populations, and, importantly, quantifies the relationships between these preferences.”
We believe our 5D approach better captures the diverse needs and preferences of retiree populations and, importantly, quantifies the relationships between these preferences. For example, in the accumulation phase, investors primarily seek to achieve the highest return possible for a given risk budget, which typically grows more conservative as they near retirement age. During decumulation, risk and return are still important metrics but fall short of fully representing investors’ objectives at the point of retirement, which tend to be more varied and unique to each individual.
Because the in‑retirement experience includes these five attributes, potential solutions must be optimized against five dimensions instead of the traditional two—risk and return—that dominate the accumulation phase (Figure 2).
Source: T. Rowe Price. For illustrative purposes only. Not representative of an actual investment.
See Appendix and Additional Disclosure for more information.
Furthermore, we must account for how the five attributes influence one another, as opposed to simply understanding how risk and return are related. For example, to hedge against longevity risk, an investor may need to deprioritize balance liquidity. Similarly, to achieve a higher payment level, greater risk may need to be introduced, which, in turn, increases the likelihood of unexpected balance depletion. To gain any additional performance on one factor, an investor may need to sacrifice benefits elsewhere.
In addition to establishing the five key attributes by which a retirement income solution can be evaluated, our 5D framework captures and quantifies the trade‑offs that a retiree must make in prioritizing certain of these attributes. Much of the retirement income research conducted to date has focused on identifying retired participant preferences, e.g., “I want a guaranteed stream of income,” but has failed to consider the other side of the ledger, e.g., “I am willing to give up X% in monthly income to achieve that goal.”
“Quantifying participant needs for each of the five attributes allows us to identify how participants would spend their savings to create desired in-retirement experiences.”
Under the financial market efficient frontier, our 5D framework quantifies retirement income needs by precisely calibrating trade‑offs between the five attributes and assigning quantitative values to each of those attributes based on well‑defined metrics. Quantifying participant needs for each of the five attributes allows us to identify how participants would spend their savings to create desired in‑retirement experiences.
Using a radar chart (a way of displaying multivariate data on an axis with the same central point), we can quantify and visualize these trade‑offs.
Source: T. Rowe Price. For illustrative purposes only. Not representative of an actual investment.
See Appendix and Additional Disclosure for more information.
For example, consider the radar charts in Figure 3. The left chart represents one possible hypothetical preference profile for the in‑retirement experience. A retiree with this preference shape is primarily concerned about hedging against longevity risk—perhaps because of a family history of great health—and wants guaranteed income for life. This hypothetical retiree also prefers a stable income stream to allow for better travel planning in retirement, but wants a higher income level (measured as a percentage of balance) to compensate for past undersaving.
Given these priorities, the retiree is willing to accept a moderate level of balance depletion risk while giving up some liquidities under the efficient frontier constraint. As one can imagine, preference profiles for different retirees can and do vary widely because of differing in‑retirement needs. Because preferences can change across all five dimensions, the range of desired in‑retirement experiences can be immensely diverse.
Figure 3 also highlights the difference between our 5D framework and those retirement income studies that fail to consider the trade‑offs inherent in retirement income products. There will be only one preference profile in such studies—a perfect pentagon in which maximum values for all five attributes are selected (as shown in the radar chart on the right in Figure 3) without acknowledging that it is impossible to attain all five under the efficient frontier.
T. Rowe Price’s proprietary 2024 study of approximately 2,500 individual investors shed light on how investors, as a group, actually prioritized each of the five in‑retirement attributes.1 As illustrated in Figure 4, the data indicated that individuals who were approaching or in retirement were most concerned about how many years their savings would last (longevity risk), followed by the risk that they might run out of money earlier than expected (unexpected balance depletion). Payment level and balance liquidity were assigned equal importance, while payment volatility was viewed as the least important attribute by the investors surveyed.
Data do not add to 100% because of rounding.
Source: T. Rowe Price, 2024 Exploring Individuals’ Retirement Income Needs and Preferences.
See Appendix and Additional Disclosure for more information.
Once a plan sponsor understands the distribution of preferences within their participant population—whether that’s based on a participant survey or a qualitative review that prioritizes the five attributes—we think they will be better positioned to identify potential solutions that prioritize the needs of that population.
Similarly, retirement income products can be plotted using our 5D framework to visualize which products appear to align best with the plan’s retirement income priorities (Figure 5). Notably, the 5D framework provides an opportunity to compare different retirement income products using a uniform and unbiased process, much like mean‑variance optimization can be used to compare products suited for traditional investments. The 5D framework shows how a retirement income product scores across each of the five attributes, and this output can then be compared with the same output for another product.
Source: T. Rowe Price. For illustrative purposes only. Not representative of an actual investment. This analysis contains information derived from a Monte Carlo simulation. This is not intended to be investment advice or a recommendation to take any particular investment action. See Appendix and Additional Disclosure for important information.
Plan sponsors, in partnership with their consultants or advisors, can compare the findings of a 5D analysis and the specific retirement income needs of their participant populations to identify “best fit” solutions. Any retirement income solution can be analyzed using our 5D framework under a commonly accepted set of capital market assumptions to understand and quantify how well the product meets each of the key attributes.
We believe our 5D framework is a novel approach that offers plan sponsors the ability to better understand the unique preferences of their plan participants, enabling them to narrow the retirement income product universe to the solutions that are most likely to meet the needs of their unique populations.
Let’s continue the discussion.
Contact your T. Rowe Price representative to learn more about applying our 5D approach to your evaluation of retirement income solutions.
The methodologies used in this study included theoretical economic trade-off analysis, Monte Carlo simulation‑based quantitative investment analysis, and classic quantitative marketing research methods.
Key Evaluation Metrics
For participant acceptance:
For efficiency:
1 T. Rowe Price, 2024 Exploring Individuals’ Retirement Income Needs and Preferences. Data reflect responses from 2,582 individual investors age 40 to 85 who were currently enrolled in a DC plan and had at least USD 100,000 saved in their plan accounts. The survey was fielded December 2023 through February 2024.
Additional Disclosure
Monte Carlo simulations model future uncertainty. In contrast to tools generating average outcomes, Monte Carlo analyses produce outcome ranges based on probability—thus incorporating future uncertainty.
Material assumptions include:
Material limitations include:
Modeling assumptions:
Additional Information
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