The 4-Life framework: Building blocks for creating a personalised retirement plan

There is a seismic shift underway in the UK pensions market, with responsibility for retirement moving from employers to individuals. The issues may be well-known, but they are difficult to solve for — especially given the intensely personal nature of retirement and how to fund the lifestyle and legacy each client wants to build. To help solve these challenges, Invesco has created the 4-Life framework, designed to drive better outcomes for retirees.

What is the 4-Life framework?

By dividing the retirement journey into four manageable building blocks, the 4-Life framework helps individuals prioritise and achieve their own specific retirement goals — and it helps financial professionals better frame what products and solutions can best serve the needs and aspirations of all retirees.

A full exploration to the framework is available here, including detailed examples of how each building block may be managed for different client personas. Below, we highlight a few client needs and investment implications within each category to consider as a starting point. 

1. Life events: Cash is king, but not forever

• Client needs: Life events can include anything from weddings to births to health issues. Holding an easily accessible cash buffer reduces the stress of paying for these events. It also introduces the need for a longer-term plan to manage this cash. After all, holding cash provides comfort, but holding too much cash could mean a person’s savings do not last long enough — especially if that cash is earning a low rate of return in a bank account.
• Investment considerations: One way to think about the decision spectrum for how much cash to hold is the timeframe over which the cash is needed versus maintaining the real value of that cash for future purchasing power. Ultimately this becomes a tradeoff between market volatility, which could impact how much cash is available when needed, and inflation, which will erode its real value.

2. Lifestyle: Balancing income with lifestyle aspirations

• Client needs: This category considers month-to-month spending based on the lifestyle that each person wants to enjoy in retirement. There are two layers – essential spending and additional spending. One way to start thinking about the lifestyle component is to carry out cash flow analysis to map out cash needs in the future and the level of income needed to cover them.
• Investment considerations: Certainty of income needs to be weighed against flexibility. Guaranteed income products like annuities are potentially the right tool to use for this component if there is 100% certainty of circumstances and future income needs. But people’s circumstances can change very quickly. This can be accounted for by investing in a blend of different income products to balance certainty with flexibility.

3. Lifetime: Ensure savings last as long as they need to

• Client needs: No-one knows how long they will live for or when they may need to increase their month-to-month spending. The lifetime planning component of our framework is designed to ensure retirees’ savings can last as long as possible and explicitly addresses longevity risk.
• Investment implications: The idea of a guaranteed income later in life is likely to be very attractive. However, guaranteed income products need to be paid for upfront, so it is important to plan for that earlier on in a retirement journey. Alternatively, a more flexible income solution may be more appropriate. Assessing the required level of growth to reach one’s personal retirement goals is crucial, and the outcome of this analysis directly drives the types of products that are suitable. Investors can manage exposures themselves through individual investments or look to a multi asset fund or model with the appropriate risk and return characteristics.

4. Life legacy: Paving the way for future generations

• Client needs: Life legacy is a very personal part of retirement planning. It can range from passing on a property or a cash lump sum to future generations of a family, or creating a charitable legacy to benefit a cause that’s meaningful to the person. Whatever the legacy, planning properly is essential.
• Investment implications: The nature of the legacy impacts which products are most suitable. The majority of guaranteed income products are not able to be passed on, but some have better terms than others. Given those restrictions, using a more flexible income fund for income requirements could more easily allow that pot of money to be passed on after death. It’s also important to note that separating out the life legacy component can have a direct feedback loop to the products or approach taken in the other three component parts of the 4-Life framework, to ensure it is appropriate for the retirement goals of the retiree.