Personal Financial Planning
PERSONAL FINANCIAL PLANNING RESEARCH @ TEXAS TECH improves knowledge related to the profession of financial planning, including targeted projects, such as curriculum development for specific groups, and broader studies of financial services firms and financial decision making. The Personal Financial Planning (PFP) research faculty at Texas Tech are experienced in designing research studies and analyzing a variety of data. Please take a moment to read the highlights from just some of the current PFP research projects. For a more detailed description of faculty research, please read below.
MultimediaPodcast: Understanding Aging Clients' Cognitive Abilities
Michael Finke, Ph.D., CFP®, professor at Texas Tech, shares research findings on the aging mind and what they mean for financial planning.
While retirement specialists typically recommend a 4-percent withdrawal rate, Dr. Michael Finke and Duncan Williams in the Texas Tech Department of Personal Financial Planning (PFP) recently published award-winning research that questions whether a one-size-fits-all strategy makes sense for retirees.
They suggest that an optimal rate of between 3 and 7-percent, based on a client’s willingness to accept risk and how much income they receive from non-investment sources, might be the smarter strategy.
Professors and graduate students in the Department of Personal Financial Planning at Texas Tech University conduct a wide range of research relating financial decision-making to issues of cognition and neuroscience. Methodologies of investigation include functional Magnetic Resonance Imaging (fMRI), diffusion tensor imaging (DTI), electrodermal skin conductance response, and analysis of cognitive skills measurements on large national surveys.
For more information visit: http://www.encouragegenerosity.com/neuroscience.htm
2011 Academic Thought Leadership Award
The Retirement Management Journal announced today that Duncan Williams, a Ph.D. student in Personal Financial Planning, and his advisor Michael Finke are the winners of the 2011 Academic Thought Leadership Award for their research article titled “Determining Optimal Withdrawal Rates: An Economic Approach.” Williams and Finke will receive a $5,000 award and their work will be published in the RMJSM.
The RMJSM and the Thought Leadership Awards are sponsored by Allianz Global Investors (AGI), a firm recognized for its support of academic research in the fields of retirement income and investment strategies for pensions and retirement.
The article documents takes a different approach to optimal withdrawal rates from retirement accounts by considering not only the risk of running out of assets in retirement, but also the loss that occurs when a retiree spends too little money and dies with a larger bequest than they intended. By including the loss from unspent wealth in retirement, the authors were able to estimate an optimal spending rate that is higher than suggested in the previous retirement literature. “If a retiree can tolerate a certain amount of risk, then it may make more sense to spend at a higher rate than commonly assumed,” said Finke. “Many who have accumulated considerable assets over their lifetime are afraid to spend their money in retirement out of a fear that they will outlive their savings. If the retiree doesn’t have a strong desire to leave a bequest, this often leads to a real loss in happiness from taking fewer vacations, spending less on eating out, or spending less on health care. Our study estimates this tradeoff and prescribes an optimal savings path based on risk tolerance and asset allocation.”
While the prior literature suggests that retirees only spend about 3 or 4% of assets each year in retirement in order to ensure only a slightly possibility of running out of money late in life, Williams and Finke estimate that this level of withdrawal is only appropriate for the most risk averse retirees. More risk tolerant retirees are better off spending 7 or 8% of their assets each year and holding a portfolio more heavily weighted toward stocks. “Our recommendations are guaranteed to lead to a bigger shortfall risk for a few retirees who live into their 90s or beyond,” says Finke. “However, you don’t necessarily get the most out of life by taking the fewest risks.”