The Five L’s – A needs-based framework for retirement planning
As retirement planning grows more complex, we believe a clear set of priorities helps you give clients greater clarity and confidence in how their money will last.
2 minutes
Retirement planning is complex. The uncertainty of lifespans, the range of risks to be managed, the variety of client needs and the apparent trade-offs between various priorities can be challenging for both advisers and clients.
We believe this challenge benefits from a structured approach, which adds clarity for advisers and can aid understanding and instil confidence in clients.
As a first step, let’s consider the various types of financial ‘needs’ retirees may have during their retirement. This classification of needs could be done in various ways – for example, by itemising various spending buckets such as housing, health, food, leisure etc.
However, to develop a robust retirement planning framework, it’s helpful to categorise needs in a different way – using the Five L’s as set out in figure 3.
This categorisation of needs into the Five L’s promotes consideration by advisors and clients of the relative levels of different types of retirement spending – such as what is ‘essential’ living and what is ‘lifestyle’ – and also the trade-offs between spending ‘now’ and the desire or need for later life or bequest spending.
The Five L’s is a cascading hierarchy of needs from left to right.
For example, clients with only sufficient funds to cover liquidity and living expenses will have limited focus on lifestyle or later needs.
Too often, legacy planning is reactive or inadvertent – beneficiaries often receive ‘whatever is left over’, which ironically can be higher than anticipated due to underspending because of fear of running out (FORO).
However, clients with sufficient funds to allocate to each need have an ability to proactively manage legacy needs earlier, with greater effect.
The next step in a structured framework is allocating assets to needs using available solutions and strategies to optimise client outcomes.
A starting point for retirement advice using this framework is set out in Figure 4 below.
The Five L is part of our Retirement Philosophy – a practical template that helps you deepen your thinking on retirement advice and develop a clear, confident philosophy for your practice.
Written by AMP’s Director of Retirement, Ben Hillier, it offers you a structured framework to simplify how you deliver coherent, comprehensive retirement advice.
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