Webinar Replay

Click Here to Download Summary Below

Modern Retirement Theory (MRT): Retirement Planning Through Four Prioritized Funds

Modern Retirement Theory (MRT) is a product-agnostic, safety-first retirement income planning framework designed to help retirees retire and stay retired amid longer lifespans, the decline of pensions, and human behavioral biases. Presented by Jason Branning and hosted by Tom Dickson, MRT reframes retirement planning away from pure probability and toward purpose-driven income security, risk management, and adaptability.

Why MRT Exists: Three Structural Forces

1. De-pensionization – Since ERISA (1974), responsibility for retirement income has shifted from employers to individuals, increasing longevity and sequencing risk.
2. Longevity expansion – Retirement can last 25–40 years; women live approximately 5–6 years longer than men on average.
3. Behavioral reality – Prospect Theory (Kahneman & Tversky) shows retirees are loss-averse and emotionally sensitive to income volatility, making purely mathematical plans fragile in practice.

MRT’s Six Core Premises

1. Retirement is an absolute goal – Clients don’t just want to retire; they want to stay retired.
2. Individuals are not averages – Mortality tables inform planning but cannot predict individual outcomes.
3. Ambiguity must be embraced – Retirement plans must adapt to unknown and unknowable risks.
4. 3S Income is essential – Core income must be:
   • Stable (predictable, non-volatile),
   • Secure (contractually or institutionally backed),
   • Sustainable (longevity- and inflation-responsive).
5. Expanded “retirement sheet” – Planning must include off-balance-sheet income such as Social Security, pensions, annuities, and housing.
6. Four-fund hierarchy – Resources are prioritized by purpose, not percentage allocation.

The Four Prioritized Funds (Hierarchy, Not Buckets)

1. Base Fund (Essentials First)
   Funds non-discretionary expenses (food, utilities, healthcare).
   Best matched with 3S income, such as Social Security, pensions, inflation-adjusted annuities, or other guaranteed sources.
   Objective: Eliminate market and longevity risk for survival expenses.
2. Contingency Fund (Risk Management Layer)
   Designed to protect the Base Fund from shocks such as:
   • Health events
   • Long-term care
   • Market crashes
   • Major home repairs
     Uses the 3R Risk Matrix:
   • Recognition – Name risks explicitly.
   • Reduction – Avoid, mitigate, retain with buffers, or transfer (insurance).
   • Residual – Accept that no risk can be fully eliminated.
     Tools may include LTC insurance, asset-based LTC solutions, liquidity reserves, standby reverse mortgages, or life-plan communities.
3. Discretionary Fund (Lifestyle Spending)
   Covers wants such as travel, hobbies, and leisure.
   Because spending is flexible and delayable, this fund can tolerate greater market risk and volatility.
4. Legacy Fund (Last Priority)
   Represents excess assets intended for heirs or charity.
   Longest time horizon, highest tolerance for risk and illiquidity.
   MRT cautions against undermining client security to maximize inheritance.

Income Strategy Categories in MRT

MRT recognizes three valid income approaches, selected based on client preference—not math alone:

• Agreement-based (time-bound) – Rentals, royalties, term-certain annuities.
• Mortality-based (risk-pooled) – Social Security, pensions, annuities, reverse mortgages.
• Historically-based (probabilistic) – Guardrail withdrawals, bond ladders, diversified portfolios.

Tools such as Wade Pfau’s Retirement Income Style Awareness (RISA/RESA) help identify whether clients prefer safety-first or probability-based solutions.

Key Distinction from Traditional Models

• Modern Portfolio Theory (MPT) optimizes returns and volatility.
• Insurance-only approaches transfer risk but may reduce flexibility.
• MRT integrates both, focusing on liability matching, behavioral comfort, and adaptive resilience rather than forecast precision.

Practical Takeaways for Advisors

• Income planning should prioritize security before growth.
• Risk cannot be eliminated—only managed thoughtfully.
• Retirement success is about resilience, not prediction.
• Advisors add the most value by structuring income around human behavior and real-world uncertainty.

External Fact-Check Sources 

• ERISA overview and retirement system changes
  https://www.dol.gov/general/topic/retirement/erisa
• U.S. life expectancy and gender longevity data
  https://www.cdc.gov/nchs/products/life_tables.htm
• Prospect Theory (Kahneman & Tversky, 1979)
  https://www.princeton.edu/~kahneman/docs/Publications/prospect_theory.pdf
• William F. Sharpe on retirement decumulation (“The nastiest problem in finance”)
  https://web.stanford.edu/~wfsharpe/retecon.htm
• Social Security benefit structure and COLA mechanics
  https://www.ssa.gov/benefits/retirement/
• Society of Actuaries Longevity Illustrator
  https://www.longevityillustrator.org
• Wade Pfau – Retirement Income Style Awareness (RISA/RESA)
  https://retirementresearcher.com/risa/
• Reverse mortgage (HECM) consumer overview
  https://www.consumerfinance.gov/consumer-tools/reverse-mortgages/