Wade Pfau Quotes

Financial advisors and other pundits tend to support the approach they feel most comfortable with or are otherwise licensed or incentivized to provide, with little consideration for what may be best for any given individual.

Monte Carlo simulations create randomized series of market returns to test the sustainability of financial plans through various market environments.

Wade Pfau, Ph. D., CFA, is a Professor of Retirement Income in the Ph.D. program at the American College. He holds a doctorate in Economics from Princeton University and is very well respected in the discipline of retirement income. He is the co-editor of the Journal of Personal Finance and has published many articles in

The objective for retirement is first to build a safe and secure income floor for the entire retirement planning horizon, and only after that does one include more volatile assets that provide greater upside potential and accompanying risk.

Wealth Building Cornerstones.

We now understand that there are serious issues with using MPT to determine investment portfolios for household investors, especially after retirement begins. Harry Markowitz recognized this. After winning the Nobel Prize in 1990, he was asked to write an article in 1991 for the first issue of Financial Services Review about how MPT applies to household investors. This article was named, “Individual versus Institutional Investing.” In the article, he writes about how he had never thought about the household’s investing problem before, and after reflecting on it for an evening, he realized that households face a very different investing problem from the large institutional investors, such as mutual funds, he had in mind when developing MPT. MPT does not teach how individual households should build investment strategies to meet their lifetime financial planning goals.

A key difference between probability-based and safety-first approaches is that the probability-based approach is more comfortable with accepting greater volatility for higher return potential and an improved chance for success, while the safety-first approach looks for alternatives that do not expose core retirement spending goals to market volatility. The question is ultimately about which is the best way to be able to spend more than a bond ladder can support: to rely on the excess returns expected to be provided by the stock market, or to rely on the power of risk pooling to bring additional spending power to those facing a higher cost retirement.