Milliman Paper - bespoke solutions is new black

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Milliman White Paper
Retirement planning:
Bespoke retirement solutions
are ‘the new black’ in 2015
Prepared by:
Colette Dunn
Emma Hutchinson, FIA
Chris Lewis, FIA
Commissioned by:
AXA Wealth
JANUARY 2015

TABLE OF CONTENTS
FOREWORD 2
EXECUTIVE SUMMARY 3
RETIREMENT PLANNING AND RISK MANAGEMENT 4
Risks are different in retirement 4
The transfer of retirement risk after April 2015 5
Today’s solutions do not have all the answers and need to evolve 9
BUCKETS, LAYERS, AND LOGIC 12
THE RETIREMENT FRAMEWORK: A ‘BLENDED SOLUTION’ 14
Practical considerations for advisers 15
Financial illustrations 16
Benefits of the framework 16
CONCLUSION 18
APPENDIX 19
AUTHORS 20
ACKNOWLEDGEMENTS 20

Retirement planning: Bespoke retirement solutions
Colette Dunn, Emma Hutchinson, Chris Lewis
2 JANUARY 2015
FOREWORD
David M Brown, Director of Strategy, AXA Wealth
Wednesday, 19 March 2014 was a historic day for those involved in retirement planning. In his
Budget, George Osborne announced that the government was going to 'introduce the most
fundamental reform to the way people access their pensions in almost a century by abolishing the
effective requirement to buy an annuity.' And so, after April 2015, the long-standing link between
pension pot and annuity purchase at retirement will effectively be severed.
As we approach the introduction of the new pension freedoms, people coming up to retirement, their
advisers, and industry providers are considering the most effective and efficient way to use the new
pension flexibility while also balancing the various risks that come with this freedom of choice.
This paper recognises that, for the majority of people, limited financial resources mean that tough
choices will need to be made to help achieve often conflicting retirement objectives.
We have found that, while the products historically used for retirement planning may still be relevant,
the way in which they are used is likely to change in the future. We have identified that after April
2015, the individual products of yesterday will increasingly be combined with innovative solutions
to create personalised retirement portfolios. Professional advice is going to be key to ensure people
are able to meet their individual financial and emotional retirement needs. Through this paper we are
introducing a retirement framework that will help advisers and their customers assess their needs
and plan for their future.
AXA Wealth has commissioned Milliman, the world’s largest independent actuarial consultancy, to
produce this white paper, providing expert analysis and commentary on the key issues of financial
planning for individuals and advisers arising as a result of the forthcoming pension changes.

JANUARY 2015Retirement planning: Bespoke retirement solutions
3
EXECUTIVE SUMMARY
Retirement just got interesting!
No longer will individuals have to secure an income for life through an annuity. This brings
opportunities, but also risks and challenges both for individuals and their advisers.
Entering into this new world, we need to absorb some key messages:
ƒ Post-retirement risks are different from pre-retirement risks, and this will become more important
after April 2015
ƒ Responsibility and therefore risk has now been passed fully to the individual
ƒ Individuals will need more support from their advisers to help navigate their way through retirement
ƒ Existing products and solutions need to evolve to meet the new needs, and innovation can
therefore be expected
This paper considers the ‘Big Four Retirement Risks’ which need to be considered as part of any
retirement solution, namely:
ƒ Longevity
ƒ Inflation
ƒ Lack of flexibility
ƒ Volatility
In everyday life, individuals tend to break down their spending into different layers or ‘buckets.’ For
example, paying the mortgage is in a different ‘bucket’ from going on holiday. Putting money aside
to pay for these different types of spending is often separated too. Individuals have different risk
attitudes toward the savings for each of these ‘buckets.’ For example, individuals are likely to want
to take less risk with the ‘essential’ money they have put aside to pay for the mortgage than with
the money they have saved for a ‘discretionary’ spend, such as a holiday. These attitudes should be
carried across into any retirement solution.
This paper introduces a practical and pragmatic retirement framework which aims to address the four
risks, at the same time blending together the requirements of the individual’s financial and emotional
objectives. The framework uses a ‘bucketing’ approach to meet expected spending requirements
throughout retirement. This approach helps to make it easier for an individual to understand their
needs and varying attitudes toward risk and to make informed decisions about trade-offs.
For advisers, this framework can be used to help facilitate the advisory discussion and to build a
bespoke and intuitive value-adding portfolio solution for their clients—in effect, a new retirement
service proposition.

4 JANUARY 2015
RETIREMENT PLANNING AND RISK MANAGEMENT
Retirement planning is very different from planning in the accumulation phase: Risks are different,
requirements are more specific, the whole process is more complicated. The changes announced in
the 2014 Budget give more choice to the individual for retirement planning, but with that extra choice
comes increased responsibility and risk. Existing products, used in the way they have been, will no
longer be suitable for everyone. After April 2015, advisers’ roles will evolve to reflect the wider choice
of solutions available for individuals at retirement. Advisers’ roles will carry more responsibility, as their
clients expect them to determine the ‘right answer’ for the investment and drawdown of their assets.
Risks are different in retirement
Risk evolves and changes over a lifetime, reflecting the balance between an individual’s ability
to generate future wealth by their earning potential (human capital) and accumulation of assets
(financial capital). Figure 1 illustrates the trajectories of human capital and financial capital through
the typical phases of an individual’s life cycle before, at, and during retirement, and how this capital
is used to provide income. It is clear that the most significant risk change point is when people move
into retirement.
FIGURE 1: HUMAN CAPITAL AND FINANCIAL CAPITAL
Throughout the two earliest stages, when career and family dominate an individual’s life, human
capital is at its highest. As a result, the typical individual needs insurance products that provide
financial protection in the case of loss of income, death, or disability—events that would significantly
curtail their ability to make a living and to save for when they are no longer working.
As retirement approaches and the individual’s financial capital grows, that individual’s risk exposure
changes and the new priority of protecting their accumulated assets becomes uppermost. Unlike
the earlier life stages, where there is still time to recover from market downturns, at this stage of
their lives the ability to replace lost savings through salary is reduced as they are unlikely to re-enter
the workforce and there is a limited time horizon to recapture capital losses through waiting for
investments to recover. This is when individuals might look at strategies that provide some form of
guarantee against financial loss in order to protect their retirement income streams.
When working life transitions into retirement and saving moves to spending, the Big Four Retirement
Risks shown in Figure 2 come into play, threatening both the financial capital built up to fund
retirement and the income this capital can produce.
Human Capital
Risk
Change
Point
Financial Capital
Health Care
Core
Discretionary
25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Pre-family Family Pre-retirement Active Passive Care
Real Wage Income Core Discretionary Health Care
OUTGOINCOME

5
FIGURE 2: THE BIG FOUR RETIREMENT RISKS
The period after an individual has retired can be considered in three broad stages, as noted in
Figure 1. They are: active phase, where good health combines with more free time as work life
transitions into personal life and individuals look to make the most of the change in lifestyle they’ve
been saving for; passive phase, as individuals age and activity levels gradually decrease; and care
phase, where, for the very elderly, long-term support is often the central reality of the final stage of
life. Taken together, these contribute to what is often referred to as the ‘retirement smile’ pattern of
retirement spending.
By taking a holistic view and combining it with the simple fact that, for many, the financial capital available
to fund retirement is fixed, risks with respect to retirement income and savings become evident.
The transfer of retirement risk after April 2015
For the last 100 years, retirement risk has been managed by focusing on longevity through the
‘compulsion’ of annuities and the setting of maximum income levels from drawdown contracts. The
Budget changes remove this established, but arguably simple, risk management framework, by
introducing some fundamental changes for individuals. After April 2015 the legislation will:
ƒ Increase choice for individuals
ƒ Give responsibility for decision making at retirement to individuals
ƒ Shift risk to individuals
In reality, the cost (and opportunity) to the individual of increased choice in retirement is that the
individual is now responsible for managing the Big Four Retirement Risks (longevity, inflation,
flexibility, and volatility).
They are complex risks, even for the most seasoned financial services professional, and will be
daunting for the majority of individuals approaching retirement. Even more so than before, it is key
that financial advisers are able to determine the appropriate balance of objectives for their clients,
obtain the client’s buy-in, and therefore recommend a retirement solution which best meets those
objectives whilst appropriately managing risk.
Longevity
“the risk of outliving
your assets”
Inflation
“the risk of your
income falling in real
terms”
Flexibility
“the risk of not being
able to access your
assets as required,
or on death”
Volatility
“the risk of volatile
investment returns
impacting your
income”

6 JANUARY 2015
In addition to the fundamental risks, individuals and their advisers will need to consider a number of
other factors. Thoughts that should be kept in mind include:
ƒ Retirement is for a long and, importantly, unknown time frame (and many underestimate this time frame)
ƒ Financial needs change over time
ƒ Attitudes to risk will change during the period of retirement
ƒ Choices will need to be made. Very few of us are wealthy enough to not need to prioritise our
objectives in retirement
ƒ It is expected and acceptable that sometimes emotions drive decisions. For example, not selling
the family home to trade down to release equity, or taking lower-risk options even though they give
lower returns because they provide peace of mind
During decision making, advisers acknowledge that their clients have competing objectives and
that any solution is therefore likely to satisfy a blend of both pure financial and emotional objectives.
Ultimately, the role of the adviser is to create a good retirement outcome in all situations while taking
an appropriate level of risk.
LONGEVITY
The increased flexibility and choice for individuals introduced by the Budget is accompanied by the risk that individuals will live longer
than they expect. Those who underestimate the duration of their retirement may make inappropriate investment decisions and run out
of money too early. Research conducted by MGM Advantage has shown that approximately 82% of people approaching retirement
age in the UK believe that they will die sooner than they are statistically likely to, with men underestimating by five years on average and
females by 10 years. These findings highlight the benefits of securing a guaranteed income for life, a role that traditional annuities have
historically performed. Removing the danger of exhausting funds too early is something retirees will need to take into account when
deciding on how best to invest and draw down their funds.
The graph below shows a projection of survivorship of 1,000 males aged 65. Over half of them (approximately 56%) will be
expected to survive for 20 years (in fact 50% are expected to reach age 87—i.e., survive for 22 years), while approximately one in five
will live to age 95 and one in 20 to age 100.
This variation in life expectancy in retirement makes retirement planning a challenging prospect and suggests that planning
for probability of survival (e.g. 33% chance of living to age 90) rather than expectancy (on average will reach 87) may be a
logical approach.
It is worth noting that while people
might live longer than they expect,
there is no guarantee that their
health will remain good throughout
their remaining lifetimes. In fact,
statistics suggest that on average
a 65-year-old has a healthy life
expectancy of 11 years (male) and
12 years (female), highlighting the
need to maintain a level of flexibility
in retirement planning to be able to
fund for the impacts of failing health
in later life.
Source: Office of National Statistics – Health
Expectancies at Birth and at Age 65 in the United
Kingdom 2009-11. ‘Healthy’ is defined as ‘very good’
or ‘good’ health—the top two of a five-point scale.Basis: England and Wales population tables England, National Life Tables 2011-13; plus Continuous Mortality Investigation
Projections model, CMI_ 2014, with a long-term mortality improvement of 1.5% p.a.
65 70 75 80 85 90 95 100
Number of people alive at each age assuming retirement of 1,000 males at age 65
1000
900
800
700
600
500
400
300
200
100
0
Age
Over half live
to age 85
Approx 1 in 3
live to age 90
Approx 1 in 5
live to age 95
Approx 1 in 20
live to age 100

7
INFLATION
For investors who choose a fixed level of income in retirement, it is important to fully comprehend how its value may change over time
due to inflation with the same notional sum of money affording a gradually decreasing quantity and/or quality of goods and services.
At some point, funds may become insufficient to meet even basic needs.
Often, it is difficult for working individuals to imagine this reality, as employment provides a real income which keeps pace with,
and may even outperform, inflation. However, erosion of purchasing power is a reality for many individuals in retirement, and failing
to anticipate and account for its impact can have a very damaging effect on longer term financial well-being.
The graph below illustrates the impact of inflation over time, at 2%, 4% and 6% p.a., on the real value of a fixed income stream of
£10,000 p.a. for a 65-year-old retiree. It clearly shows that the impact is magnified over an extended period, with the real value
of money reducing by between one-third and two-thirds by age 85 under these three inflation scenarios. Furthermore, it is worth
noting that unknown future economic conditions result in an expanding funnel of doubt with regard to the actual cumulative inflation
observed over the retirement period.
It is also worth noting that over the last
seven years, effective inflation has been
higher for individuals in retirement than for
the population as a whole, as illustrated by
the following increases in living costs from
September 2007 to November 2014:
Age 50 – 64:. . . . . . . . . . . . . . . . . . . . . . . 24.6%
Age 65 – 74: . . . . . . . . . . . . . . . . . . . . . . . 27.3%
Age 75+:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.6%
Whole population (RPI):. . . . . 23.6%
Source: Saga Services Limited Inflation Bulletin, December 2014
65 70 75 80 85 90 95 100
Impact of Inflation on Real Income
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Age
£p.a.
2% 4% 6%
FLEXIBILITY
The future is uncertain. People often associate retirement with a laid-back lifestyle, a time to relax and take things easy.
In reality, however, it is a time when significant changes may occur (e.g. ill health, the birth of a grandchild, moving house).
It is impossible to know when we may have to call on funds or alter investment strategy as our needs, wants and general
circumstances dictate. For this reason, many individuals are reluctant to lock up their money. No one can deny the security
a fixed income annuity provides but, at the same time, the
downside of sacrificing access to one’s capital can also
not be ignored. Those approaching retirement together
with their advisers must carefully consider how best to
achieve what is most important to them when it comes to
accessing capital or guaranteeing income. While some
individuals will choose the extremes of a pure annuity or
pure drawdown, for many the most appropriate solution
will be somewhere in between, involving a blend of both
income guarantee and capital access.
Annuity
High
High
Low
Income
Guarantee
Capital
Access
Low
Drawdown
Blend

8 JANUARY 2015
VOLATILITY
Volatility can hurt. If invested funds are not required for a long time, then, more often than not, investors can ride out the inevitable
highs and lows of market returns. However, when an income is required for retirement now, and withdrawals are being made
regularly, investment volatility can have a significant impact on the retirement fund and hence future income potential. Big price falls
at early stages are difficult to recover from, especially if income continues to be taken at the same level.
In the accumulation phase, the concept of ‘pound cost averaging’ is well known–i.e., that an improved outcome can be achieved
by making regular investments in volatile markets, as more assets are bought when markets are low. In the decumulation phase, the
opposite is true–taking a fixed regular income depletes a higher proportion of the retirement fund following market falls.
The graph below uses a simplified example to illustrate this point, based on a £200,000 starting fund and a fixed income of £10,000
p.a. Scenario 1 assumes investment returns (net of all charges) in the first five years of 20%, 10%, 0%, -10% and -20% respectively,
whereas Scenario 2 has these same returns, but in reverse order, i.e. negative returns occur early on in retirement. After the initial
five-year period, both assume the same return of 4% p.a.
The lines on the chart show retirement fund values for each scenario (left-hand axis), while the bars on the chart show the difference
in the fund values for each scenario expressed as a multiple of the annual income amount (right-hand axis). Immediately after the
five-year period, the difference in fund value is equivalent to around two years’ income, but this rises to nearly four years’ income by
the time the Scenario 2 fund has been depleted. In other words, the impact of market falls early on in retirement causes the fund to
run out a full four years earlier, even though the ‘average’ (i.e. non money-weighted) return is the same. This is commonly known as
the ‘sequence of returns’ issue.
Pure drawdown product structures, with no guarantees and full exposure to relatively volatile asset classes, may provide the potential
of high returns but are also higher risk, and are best left to those who have sufficient capital to tolerate this higher downside risk. For
others who want exposure to investment upside, a solution which tempers extreme market swings is most likely a wiser choice. This
could be achieved, for example, by investing a proportion of retirement funds in less volatile assets (e.g. cash or near cash) to provide
shorter-term income needs, thereby avoiding the necessity to sell assets when values are depressed, or through careful selection
of guaranteed and non-guaranteed elements of the retirement solution. In this way, total funds are split between a number of sub-
portfolios or buckets, ranging from short-term, low risk to long-term, higher risk. Volatility-protected fund strategies are also likely to
play an increasing role in retirement planning as we move into the new environment.
0 5 10 15 20 25
Impact of Investment Volatility
£300,000
£250,000
£200,000
£150,000
£100,000
£50,000
£0
Difference As Equivalent No. Years IncomeRetirement Fund – Scenario 1
Retirement Fund – Scenario 2
14
10
8
6
4
2
0

9
Today’s solutions do not have all the answers and need to evolve
Before the Budget 2014 announcement, at the point of retirement an individual’s decision for his
or her pension pot was relatively straightforward: an annuity or drawdown (although drawdown was
not positioned as a mass market product), with additional investments available to complement
the central choice. As always with limited choice, the options suit some but not others. Traditional
annuities are suitable for some individuals looking for income certainty, as they match their risk
profiles and needs perfectly. Similarly, drawdown, with its focus on flexibility and market exposure,
is a suitable match for others. Guaranteed drawdown (also known as variable annuities) provides a
middle ground between what have been, up until now, the two most widely used retirement products.
However, the limited choice means that not everyone is satisfied or has their needs met. The table
in Figure 3 compares the features of these three retirement options against the Big Four Retirement
Risks, with a colour-coded rating (red, yellow, green) as a high-level assessment against each risk.
Figure 3 demonstrates that both income drawdown and annuities, while meeting some of the Big
Four Retirement Risks, fail to meet others.
HOUSING WEALTH
Housing, probably more than any other asset, carries emotional attachments for the individual and is a prime example of where
consumers may prioritise emotional objectives above pure financial objectives.
For many individuals at or approaching retirement, their houses will be a substantial asset, in some cases worth significantly more
than their pension funds.
Housing wealth may form part of an individual’s retirement plans—but the extent to which this is so will vary from person to person.
Retirees fall broadly into three camps:
ƒ Those who are very happy to consider using housing wealth in some way to boost retirement income (downsizing, equity release,
rent out and move to alternative accommodation)
ƒ Those who ideally do not want to use it, but are prepared to acknowledge it may be used if required (i.e. as a backstop should
other funds be close to exhaustion) and hence it may influence their risk attitude
ƒ Those who do not want it to form part of their retirement planning—i.e., they are essentially looking to preserve the house as
a bequest
There is some evidence, however, that attitudes are changing and that consumers are placing a lower emphasis on passing on a
legacy and more on ensuring a higher quality of life.
It is also recognised that using the housing asset comes at a cost (whether via downsizing or equity release) and it may therefore
be financially beneficial if it is used later in retirement rather than sooner.

10 JANUARY 2015
FIGURE 3: HOW CURRENT PRODUCTS ADDRESS THE 'BIG FOUR RETIREMENT RISKS'
Income Drawdown Annuities
Guaranteed Drawdown
(variable annuities)
Longevity
“the risk
of outliving
your assets”
• No guaranteed income
or return.
• Fund may be exhausted,
or severely depleted,
long before death.
• Protects against
longevity risk.
• Payments are guaranteed
for life, with no risk of
running out.
• Option can be chosen to
receive lifetime income,
which protects against
longevity risk.
Inflation
“the risk of
your income
falling in real
terms”
• Fund can be invested
with the aim of matching,
or outperforming,
inflation.
• However, income is
not guaranteed and
linking income to inflation
could simply deplete
funds quicker.
(see
note1)
• Real value of fixed annuity
payments will be eroded
over time by inflation.
• Escalating and inflation-
linked annuities are
available as options to
preserve spending power.
• But starting income levels
are lower, significantly
so for inflation-linked
payments.
• Fund can be invested
with the aim of matching,
or outperforming,
inflation.
• Payments are not explicitly
inflation-adjusted and thus
there is a risk that their
real value may be eroded
over time.
• Some product designs
include ratchets to
increase income level.
Flexibility
“the risk of
not being
able to
access your
assets as
required, or
on death”
• Immediate access to
capital is available, with
the level of income taken
ranging from zero to
total fund value.
• Funds available
for inheritance by
dependents
upon death.
• No access to funds
while living.
• Capital is exchanged for a
series of future payments
which will cease upon
death.
• If a spouse’s income
or guarantee period is
selected, then payments
may be inherited by
dependents.
• Withdrawals of capital
may also be permitted,
subject to a proportionate
reduction in the
guarantee.
• Funds available
for inheritance by
dependents upon death.
This may be some
guaranteed amount
or equal to current
fund value.
Volatility
“the risk
of volatile
investment
returns
impacting
your
income”
• The level of payments is
dependent on the fund
performance and therefore
consumers are exposed to
investment risk.
• Asset allocation is an
important consideration
here as this will determine
the range of possible
outcomes. Furthermore,
withdrawing high levels
of income following poor
returns will lead to
capital erosion.
• Income is fixed,
increasing at a level
rate or increasing with
inflation irrespective of
market conditions.
• No ability to alter
payment pattern.
• The level of payments
is dependent on the
fund performance and
therefore consumers are
exposed to investment
risk. Having said this,
volatility-protected funds
are typically available to
help manage this risk.
• Assuming a guaranteed
minimum income for life
is selected, then this acts
as an underpin if fund
performance is poor.
Note 1: Inflation-linked annuities would be allocated a 'green' rating, but are currently rarely purchased.
Note 2: It is recognised that individual companies’ products may offer slightly different features—this table is intended to be a high-level indication of the typical products currently on offer.
Key: High Risk Some Risk Low/No Risk

11
BACKLASH AGAINST ANNUITIES?
Sales of UK annuities have plummeted since the Budget in March 2014, with companies experiencing huge reductions in sales.
The latest data shows that the number of annuities sold fell by around 50% compared to the same period in 2013 (ABI).
Comparisons with other countries also imply a much lower level of annuitisation in the absence of compulsion. There is a wide
body of research which can be looked to as to why this is the case.
Common criticisms of annuities include:
ƒ They are perceived by many as poor value, particularly in today’s low interest rate environment
ƒ The retirement fund is passed over to an insurance company and hence the individual loses access to the funds both while
living and on death. Optional death benefits, e.g., guaranteed periods, help to maximise or improve the death benefit
ƒ They are inflexible
ƒ Inflation protection via an annuity has proved expensive
Conversely, an annuity clearly provides the protection of income for life, which meets many individuals’ primary fear—that of
running out of money in old age.
It is recognised that up until now the tax rules around annuities have been restrictive and have prevented product innovation.
Some of these restrictions will be lifted after April 2015 and it remains to be seen whether companies will offer, and individuals
will embrace, alternatives to the traditional annuity.
DEMAND FOR GUARANTEES REMAINS
A recent study commissioned by AXA and conducted by Simon Kucher & Partners (SKP) assessed the UK retirement market
for guarantee products. This study concluded that investment protection is required by over 80% of people 55 to 70 years old
with £50,000 to £500,000 to invest. These findings clearly suggest that, while demand for annuities may be falling, guarantees
continue to be valued by individuals.
Source: AXA research September 2014.

12 JANUARY 2015
BUCKETS, LAYERS, AND LOGIC
As outlined previously, at-retirement decisions after April 2015 will be more complex and risky for an
individual and for an adviser.
As individuals approach retirement, they and their advisers will, as always, need to:
Step 1: Understand all their assets and future sources of income, e.g., various pension pots,
investments, property equity, state pension
Step 2: Assess and articulate their needs through retirement, acknowledging that these will change
over time
Step 3: Make choices about which objectives are most important and understand the risks they are
willing or need to take in order to have the best chance of meeting these objectives
Step 4: Investigate and understand the array of financial options available for them to match
Steps 1, 2, and 3
Such a process is very complicated, because it is as much an emotional as it is a financial analysis
(as previously discussed, decisions are reached through emotional as well as logical considerations
and the reality is that limited capital in retirement means trade-offs will need to be made).
In everyday life, individuals naturally break down their spending into different ‘buckets’ (e.g. paying
the electricity bill is in a different ‘bucket’ from going on holiday). People often tend to save for things
in different pots and have different risk attitudes to the savings for each of these ‘buckets,’ depending
on the ‘need’ and priority.
Using a ‘bucket’ approach to discuss expected spending requirements throughout retirement can
make it easier for individuals to understand their needs, their varying attitudes toward risk, and
the necessary trade-offs. This approach can also be used by advisers to build a bespoke portfolio
solution for a client.
Maslow's hierarchy of needs is the theory in psychology that Abraham Maslow proposed in
his 1943 paper ‘A Theory of Human Motivation.’ The basic idea is that human needs can be
categorised into layers and that not all needs are addressed simultaneously, but layer by layer.
An individual feels the incentive to fulfil the needs of a certain layer only if the layer below it is
already fulfilled, otherwise the lower level will get all their attention.
Maslow’s Hierarchy
self-
actualization
morality, creativity,
spontaneity, acceptance,
experience purpose,
meaning and inner potential
self-esteem
confidence, achievement, respect of
others, the need to be a unique individual
love and belonging
friendship, family, intimacy, sense of connection
safety and security
health, employment, property, family and social stability
physiological needs
breathing, food, water, shelter, clothing, sleep

13
Maslow’s needs hierarchy can serve as a useful way of framing retirement spending in various
progressive layers, simplifying the process and allowing for an informed discussion about the priority
of spending needs and, following on from this, the way in which investments can be matched to the
risk an individual is willing to take around achieving these prioritised needs (see Figure 4 below).
FIGURE 4: MATCHING INDIVIDUAL NEEDS TO INVESTMENT RISKS
The benefits of matching prioritised needs to specific levels of risk within a bucketing framework are:
ƒ It simplifies an even more complex retirement challenge following the March 2014 Budget changes
ƒ It ensures that a suitable and logical level of risk is taken for each prioritised retirement need,
so the overall risk for the investor is appropriate across the portfolio because it is based on the
individual elements within the portfolio
ƒ The risks relating to each bucket are more easily understood, meaning that individuals are less
likely to make poor decisions when unforeseen events occur, e.g., cashing in equity investments in
response to short-term market movements
self-
actualization
morality, creativity,
spontaneity, acceptance,
experience purpose,
meaning and inner potential
‘Legacy’
Discretionary
Spend
Essential Spend
Low
High
Attitude to RiskRetirement PrioritisationMaslow’s Hierarchy
Needs Strategy
self-esteem
confidence, achievement, respect of
others, the need to be a unique individual
love and belonging
friendship, family, intimacy, sense of connection
safety and security
health, employment, property, family and social stability
physiological needs
breathing, food, water, shelter, clothing, sleep

14 JANUARY 2015
THE RETIREMENT FRAMEWORK: A ‘BLENDED SOLUTION’
Any retirement framework should seek to determine an individual’s needs, desires, and wishes
in respect of their anticipated retirement spend and to match them with solutions that allow for
uncertainty over a range of factors—not least longevity, investment performance and uncertainty of
spending patterns.
This section introduces a practical retirement planning framework which incorporates the benefits of
matching prioritised needs to specific levels of risk, as outlined in the previous section, and aims to
address both the financial and emotional objectives of individuals and then to blend them into a
retirement solution.
The retirement prioritisation can be mapped to an asset allocation which aims to address the
individual’s retirement objectives.
FIGURE 5: MAPPING ASSET ALLOCATION TO INDIVIDUAL RETIREMENT OBJECTIVES
Mapping this concept to allow for the timing over the retirement planning horizon, and allowing for
the ‘retirement smile’ of expected, changing spending patterns can be illustrated in Figure 6.
FIGURE 6: RETIREMENT PLANNING HORIZON
Equities
Guarantees
‘Legacy’
Discretionary
Spend
Essential Spend
Retirement Prioritisation Framework Investments
Asset AllocationObjectives
Remaining
fund e.g.
legacy,
annuity
Remaining
fund e.g.
legacy,
annuity
Long-term investments
(more growth focus)
Medium-term investments
(more stable/income focus)
Cash to
cover
Short Term
Disc.
Spend
(e.g up to
3 years)
Diversified Portfolio to meet Discretionary Spend and any remaining fund
Guaranteed Income to cover Essential Spend
1
2 3
4
5
Discretionary
spend –
holidays, meals
out etc
Essential
spend – food,
utility bills etc
Planning horizon
Prioritised
retirement
needs
Risk-based
Retirement
Framework
2
1
3 4 5

15
Essentially, this framework combines guarantees, a diversified portfolio and cash to create five
‘buckets’ that help manage retirement risk while delivering the required income pattern over time:
Bucket 1: A guaranteed income makes sure that ‘essential’ spend is covered for life, so that
individuals know that, whatever happens, their ‘must pay’ bills are always met. This may include other
sources of income such as state pension provision and any defined benefit pensions (longevity risk).
Bucket 2: A cash account to cover planned spending over the short term (perhaps one to three
years), so that individuals don’t need to worry about short-term market movements.
Bucket 3: More stable, medium-term investments often with an income focus, which will be used to
top up the cash account over time. This bucket helps to reduce the impact of longer-term market ups
and downs (volatility risk).
Bucket 4: Longer-term investments with more of a growth focus to help protect from inflation over the
longer term (inflation risk). Returns from this bucket may also be used to top up the cash account.
Bucket 5: (optional) Any amount remaining after the essential and discretionary spend is covered
over the chosen planning horizon is available for legacy purposes, or could potentially be used for a
later-life annuity, or to provide additional flexibility for long-term care provision.
Other than any capital ‘locked in’ to provide the guaranteed income, any residual capital remains
accessible in case circumstances change (flexibility).
Practical considerations for advisers
Bucketing approaches are widely used in other countries (e.g. the US and Australia), but, as with any
bespoke retirement solution, they do require ongoing monitoring and potentially adjustment to ensure
that they will continue to meet the individual’s needs. In particular, the buckets will need rebalancing
over time.
Initially, it is important to determine the amount to be held in the cash bucket, which will be
dependent on the individual’s attitude toward risk, and could be one to three years’ expected
discretionary spend. This bucket acts to provide the required short-term peace of mind.
When viewed at an overall portfolio level, the existence of the cash bucket allows more risky assets
to be used in the other buckets, whilst ensuring that the entire retirement portfolio takes the right
amount of risk in aggregate. This trade-off and allocation of risk to buckets will form a key initial
element of the advisory discussion. By taking this holistic view of risk, there is no need to view the
use of cash as a drag on overall investment performance.
One significant aspect of this framework approach is that it reduces the inclination to sell down
assets from the longer-term, more volatile bucket in times of market stress, as individuals can be
secure in the knowledge that their short- to medium-term needs will still be met and that they have
the flexibility to wait for markets to (hopefully) rebound.
As the individual ages, the relative proportion of assets held in the longer-term fund will typically
reduce as the planning horizon shortens. The adviser will need to reassess the appropriate balance
in each bucket on a periodic basis.
The bucketing approach can be thought of as a ‘bottom up’ approach to determining the retirement
solution, which is both intuitive and easy to explain to clients. In addition, sophisticated modelling
tools are available which an adviser can use to validate and/or fine tune the overall asset allocation
within and between buckets – i.e. taking a ‘top down’ or diversified portfolio level approach.

16 JANUARY 2015
Financial illustrations
The Financial Illustrations sidebar on page 17 shows high-level comparisons of projected income
and capital positions for a level annuity, a pure drawdown product, and a blended framework solution
(which for the purposes of this example has been taken as a 50/50 combination of a pure drawdown
and a guaranteed drawdown with an income for life underpin). Results are illustrated at ages
representing 75%, 50%, and 25% survival probabilities.
Under both the drawdown and, to a large extent, the framework solution, the level of income taken is
at the choice of the individual—clearly a higher level of income will exhaust the underlying fund more
quickly and vice versa. In order to better illustrate the relative performance of the three options, the
results are also presented in terms of cumulative income plus the available capital (this latter being
zero for the annuity) at the relevant survival probability point. This presentation is significantly less
sensitive to the levels of income selected and the commentary therefore focusses on the cumulative
income plus the available capital.
The express aim of the framework solution is to provide a balance between the various retirement
risks and it can be seen that this is indeed the case in the majority of outcomes, where the projected
results sit somewhere in between the annuity and the drawdown.
For the higher-growth scenarios, the pure drawdown is the best performing option, although
the framework solution is only marginally behind (which is due to the implicit charges for the
underlying guarantee).
As would be expected, when future investment returns are low, the annuity provides a higher level
of income, although at the expense of no return of underlying capital. In this case, the cumulative
income and capital from the drawdown and framework solutions are higher initially, but fall below
that of the annuity at older ages, as the funds are depleted and the higher guaranteed income of the
annuity comes to the fore.
As designed, the framework delivers the best performance, in terms of providing a balanced solution
able to cope with a range of risks and outcomes, performing well across the range of terms and
under different investment conditions and in particular in those scenarios where the annuity or the
drawdown each individually performs badly. As would be expected, in individual scenarios, other
solutions may outperform, effectively by taking more risk.
Benefits of the framework
The framework can be used by advisers as part of the retirement planning process and can be
tailored to individual circumstances, taking into account both financial and emotional needs. It meets
the three previously identified benefits, namely:
ƒ Simplifying a complex retirement into a structured approach
ƒ Ensuring that an appropriate level of risk is taken for each prioritised retirement need and that the
overall level of risk for the portfolio is appropriate for the individual
ƒ By segmenting into buckets, and thereby providing a higher level of certainty in the short to
medium term, it provides individuals with peace of mind and helps to avoid the potential for
overreaction to market shocks
In addition:
ƒ It addresses the Big Four Retirement Risks, but in an individually tailored and flexible way
ƒ It provides individuals with a way of thinking about their retirement planning which aligns with the
way that many people like to think about their finances, i.e., by earmarking amounts of money to
cover expected needs, whilst retaining flexibility should circumstances change
ƒ Guarantees are purchased, but only to the level required by the individual. Because guarantees
come at a cost, this eliminates unnecessary spend on guarantees that are not strictly needed
ƒ It provides a framework for advisers to discuss needs with clients by approaching the client
conversation in a structured and intuitive manner
ƒ It provides the basis for an ongoing rich and dynamic discussion that can underpin ongoing good
decisions in retirement

17
FINANCIAL ILLUSTRATIONS
In order to illustrate the potential outcomes of using a framework such as this, we have projected the income and capital positions
comparing a level annuity, a pure drawdown product, and a blended solution. For the purposes of this illustration, the blended
solution has been modelled as 50% of a drawdown product, plus 50% of a guaranteed drawdown with a guaranteed income
benefit for life—clearly other combinations are possible.
The charts below show, for a range of terms, the annual income under each option and also the cumulative income and residual
capital amounts. The terms chosen have been selected to represent early death, average age of death, and later-than-average
death. For the purposes of these illustrations we have taken them as the ages at which 75%, 50% and 25% of the individuals
remain alive (ages 79, 86, and 93 respectively for a male aged 65 at outset).
The illustrations have been presented using the illustration growth rates (before charges) of 2%, 4% and 6% p.a. Full assumptions
underlying the modelling are included as an appendix.
4% P.A. GROWTH RATE
Under this central return scenario, there
is no clear winner—the annuity provides a
higher level of income throughout, while
the drawdown and framework options
provide higher overall returns, other than
at the 25% survival point (age 93).
6% P.A. GROWTH RATE
The annuity provides a higher level of
income throughout in this higher-return
scenario. However, the drawdown
and framework options provide higher
overall returns. The framework solution
delivers slightly lower overall returns than
drawdown, but not materially so, which
is due to the charges for the minimum
income guarantee.
2% P.A. GROWTH RATE
In the low-return scenario, the annuity
provides the best overall outcome, other
than on early death when there is still some
residual capital available. In this scenario,
the combination of low investment returns
and high longevity exhausts the underlying
drawdown fund. With the framework, the
underlying funds are also exhausted, but
the presence of the guarantee provides
continuing income throughout life.
SUMMARY
As would be expected, in the majority of cases the framework (blended) solution sits somewhere in between that of the annuity and
the pure drawdown. It provides protection against the combination of low investment returns and high longevity, whilst also allowing
upside participation should investment returns be favourable. It is also worth noting that the framework offers some protection from
volatile markets, particularly if volatility-protected funds are used. It allows for a degree of participation in equity upside in periods of
high growth while simultaneously providing a level of guaranteed minimum return to guard against poor performance. Furthermore,
the participation and income ratchet features we have used in these illustrations should also provide protection from inflation as
annual income is expected to grow in line with underlying investments, helping to preserve its real value. In this way, the framework
can be seen as a balanced solution to meeting retirement needs.
75% Survival 50% Survival 25% Survival
Income p.a.
15
10
5
0
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
Guaranteed Not Guaranteed
£000’s
Cumulative Income + Capital
350
300
250
200
150
100
50
0
£000’s
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
Cumulative Guaranteed Income Cumulative Non-Guaranteed Income Residual Capital
500
400
300
200
100
0
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
£000’s
Income p.a.
15
10
5
0
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
£000’s
350
300
250
200
150
100
50
0
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
£000’s
Income p.a.
14
12
10
8
6
4
2
0
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
AnnuityFram
ew
orkDraw
dow
n
£000’s

18 JANUARY 2015
CONCLUSION
This paper identifies how the changing retirement landscape in the UK will influence individual’s
actions and adviser’s roles in the new world.
The considerations and risks in retirement are very different from those in the accumulation
phase and will require new thinking and approaches. This is particularly so given that the focus
of the previous regime was based around the management of longevity risk, through annuities or
capped drawdown products, whereas the new regime removes these restrictions and places more
responsibility, and consequently also more risk, on individuals and their advisers.
We have introduced the Big Four Retirement Risks which need to be considered as part of any
retirement solution, namely:
ƒ Longevity
ƒ Inflation
ƒ Lack of flexibility
ƒ Volatility
Every retirement discussion will be different. Recognition that retirement planning requires a balance
between pure financial needs and emotional needs is essential when building a bespoke retirement
solution for an individual.
The retirement framework presented in this paper identifies the ‘essential,’ ‘discretionary’ and ‘legacy’
spend expectations of an individual. It simplifies a complex thought process into a manageable
advisory discussion and then allocates assets (including guarantees, but only as strictly required) to
specified ‘buckets’ which, taken individually, meet the specific and prioritised retirement needs of the
individual. Taken in aggregate, they allow the ‘right’ level of risk for the individual across the portfolio.
Existing products, used in the way they have been, will no longer be the solution for everyone.
Advisers’ roles will evolve after April 2015 to reflect the wider choice of solutions available for
individuals at retirement. Advisers’ roles will carry more responsibility as individuals need them to
determine the ‘right answer’ for the investment and drawdown of their assets.

19
APPENDIX
ASSUMPTIONS UNDERLYING ILLUSTRATIONS
ƒ Illustrations are based on an initial retirement fund of £200,000.
ƒ All are based on a single male life, a nonsmoker with no medical impairment, aged 65 at
retirement.
ƒ Annuity rates are based on the top quote from the Money Advice Service as at 25 November
2014. A level annuity rate of 5.721% p.a. (no guaranteed period) has been used in illustrations.
ƒ Investment return assumptions (before charges) on funds underlying drawdown and variable
annuity products are:
Base 4%
High 6%
Low 2%
ƒ Other assumptions for drawdown product:
AMC 1.00%
Start income 5.00%
In order to adapt the level of income to market conditions, maximum and minimum income levels
have been imposed as a percentage of the underlying fund value:
Maximum income 25.00%
Minimum income 5.00%
ƒ For illustration purposes, the 'framework' option is based on a combination of 50% standard
drawdown product and 50% guaranteed drawdown with guaranteed withdrawal benefit for life
underpin and ratchet.
ƒ The assumptions for the guaranteed drawdown with underpin and ratchet are:
AMC 1.00%
Guarantee charge 1.00% of purchase price, or increased fund value
Guaranteed income 4.25% of purchase price, or increased fund value

20 JANUARY 2015
AUTHORS
Colette Dunn is a senior consultant in the London office of Milliman.
Contact her at colette.dunn@milliman.com.
Emma Hutchinson, FIA, is a consultant in the London office of Milliman.
Contact her at emma.hutchinson@milliman.com.
Chris Lewis, FIA, is a senior consultant in the London office of Milliman.
Contact him at christopher.lewis@milliman.com.
ACKNOWLEDGEMENTS
We would like to extend our thanks for his work on this report to Wade Matterson, FIAA,
principal and senior consultant in the Sydney office of Milliman.

ABOUT MILLIMAN
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largest providers of actuarial and
related products and services. The
firm has consulting practices in life
insurance and financial services,
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healthcare, and employee benefits.
Founded in 1947, Milliman is an
independent firm with offices in
major cities around the globe.
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serving clients from offices in
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milliman.com
Copyright © 2015 Milliman, Inc. All Rights Reserved.
Milliman does not certify the information in this update, nor does it guarantee the accuracy and completeness
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