Modern Retirement Theory: Reaching Client Goals in Every Market

Abstract

In contract to rational utility theory, prospect theory has shown individuals to be loss averse. Loss aversion and emotion often clouds an individual's financial decision-making. This paper offers an a priori framework approach to guide client's decision processes for individual retirement planning.

The primary concepts of modern retirement theory (MRT) that individual financial plan be established on the basis of two individually unknowable facts: longevity and conditions within longevity. These facts are both unknown and unknowable in individual client terms. Advisors and planners can build more robust plans that balance work around these two concerns to provide retirees peace of mind through a liability matching process displayed in the MRT pyramid. The image of a hierarchical pyramid show the prioritization for the individual to offset individual retirement risks in an unknowable context. Four conceptual funds that can be used to offset the individually unknowable are: Base Fund, Contingency Fund, Discretionary Fund, and Legacy Fund.

Keywords: Modern Portfolio Theory, Behavioral Finance, Retirement Planning, Prospect Theory, Modern Retirement Theory