CPD: Retirement income strategy choices

What are the retirement income strategies available for your clients?

There’s a wide variety of income strategies used across the market, with an equally wide variety of labels attached to these strategies. Each varies in complexity, its ability to mitigate the unique risks of decumulation and the degree of personalisation available.

Ranked in order of complexity and personalisation (lowest to highest), these strategies include:

1. The same strategy and asset allocation as used in accumulation
2. A more conservative allocation
3. Simple bucketing
4. Complex bucketing
5. Income layering

Terms such as ‘layering’ and ‘bucketing’ are frequently heard, although the definitions applying to these terms are not always consistent.

Common retirement income strategies

Bucketing strategies

A bucketing strategy aims to balance the need for ongoing income, capital preservation and capital growth throughout retirement by establishing and maintaining different pools of savings, each with their own purpose and liquidity needs. The central idea is to divide retirement savings into separate “buckets,” each with a specific purpose, time horizon and risk profile. The objective of a bucketing strategy is to ensure that retirees have sufficient liquidity to meet short-term needs, while still allowing a portion of their portfolio to grow over the long term.

A basic bucketing strategy typically consists of three buckets:

1. The short-term bucket: This is the most liquid portion of the portfolio, usually containing cash or cash equivalent investments. Its primary function is to provide stable and reliable income for immediate living expenses and typically covers the next one to three years. Because these funds need to be readily available, this bucket is invested for stability not growth and is therefore generally immune from volatility.
2. The medium-term bucket: This bucket serves as a bridge between short-term needs and long-term growth. It usually includes a more conservative or balanced portfolio, to strike a balance between income stability and some potential for capital appreciation. It typically covers a time horizon of three to seven years and may be used to replenish the short-term bucket as needed.
3. The long-term bucket: Designed for capital growth, this bucket contains higher-risk investments such as equities or growth-oriented managed funds or ETFs. It is intended to fund the later stages of retirement and combat inflation and longevity risk. Because of its longer investment horizon – typically more than seven years – this bucket can ride out market fluctuations, with the understanding that positive returns over time will support future income needs. Positive returns from the long-term bucket can be used to top-up or repair the short-term bucket. If the market falls, the aim is not to sell from this bucket.

When managed properly, this strategy allows retirees to draw income from the short-term bucket while giving the medium- and long-term investments time to recover from market downturns. More sophisticated versions of the strategy may involve additional buckets, each aligned with specific financial goals, and a more dynamic approach to rebalancing and replenishing the buckets based on market conditions and life events.

Layering strategies

Layering is a retirement income strategy that focuses on building financial security through distinct layers of income, each tailored to meet specific types of expenses or financial goals. Unlike bucketing, which is primarily an asset allocation approach based on investment time horizons and liquidity, layering involves aligning different types of financial products with the purpose of generating income to support various lifestyle needs throughout retirement.

Each “layer” corresponds to a different category of retirement spending:

1. The basic layer: This layer covers essential, non-negotiable living expenses such as food, housing, utilities and transportation. These are the costs that must be met consistently, regardless of market conditions or personal circumstances. Income for this layer is ideally sourced from stable, predictable products such as the Age Pension or guaranteed retirement income streams.
2. The contingency layer: This is designed to cover unexpected or irregular expenses, such as emergency medical costs, home repairs or the replacement of major appliances. Flexibility is key here, and funds for this layer often come from more liquid or easily accessible accounts, such as an account-based pension or savings account.
3. The discretionary layer: This layer funds the retirement lifestyle elements, expenses such as travel, hobbies, dining out or gifting. As these are not essential expenses, this layer can generally tolerate more risk and variability in income, although that may be dependent on the client’s retirement objectives. The discretionary layer is often supported by investment income from superannuation or other investments.
4. The legacy layer: For those who wish to leave a financial legacy, this final layer is aimed at estate planning and providing for beneficiaries. This can be achieved through investments, trusts or insurance-based products.

Innovative income stream products and annuities are increasingly being used to support this structured approach. Layering typically provides retirees with a flexible and resilient framework to navigate financial needs as they evolve over time.

Towards more retirement-risk aware strategies

Other common retirement income strategies include:

Protected income approach

The protected income approach focuses on ensuring a stable, predictable income stream to cover essential living expenses, regardless of market conditions or longevity. Central to this approach is the use of annuitisation, both immediate and deferred, to create a reliable income “floor” that safeguards clients against the risk of outliving their savings or experiencing substantial losses during market downturns.

At its core, the protected income approach aims to deliver downside protection in retirement by locking in a guaranteed income stream. This is particularly important for covering non-negotiable expenses such as housing and food. By securing income for these essential needs, your clients can gain peace of mind, knowing that their basic lifestyle is not dependent on market performance.

Total return approach

The total return approach involves drawing income from a diversified investment portfolio, rather than relying on fixed or contractual income sources such as annuities. This strategy is typically suited to individuals who value flexibility, prefer to retain control over their capital, and are comfortable managing a certain level of investment risk in exchange for potentially higher long-term returns.

Under the total return approach, clients would generate income by combining interest, dividends, and capital gains from a well-diversified portfolio. Capital growth helps preserve the portfolio’s longevity, counter the effects of inflation, and provide for future spending needs.

This approach requires careful asset allocation and regular portfolio rebalancing to maintain an appropriate level of risk and return. Typically, portfolios are diversified across a mix of equities, bonds, and alternative assets to balance growth potential with downside protection.

Risk wrap approach

The risk wrap approach is a modern retirement income strategy that aims to combine the growth potential of market-based investments with the security of guaranteed lifetime income. This approach is particularly attractive to clients who want to participate in market growth but also desire the peace of mind that comes with knowing a portion of their income is protected, irrespective of market performance.

At the heart of the risk wrap strategy are annuities and innovative income stream products that come with income guarantees. These products are often referred to as “wrapped” because they wrap a layer of protection – such as a guaranteed income benefit – around an investment portfolio. This allows retirees to remain invested in growth assets while still securing a minimum level of income for life.

For example, a client might invest in a product that tracks the performance of a diversified portfolio but includes a guaranteed minimum income feature. If the investments perform well, the retiree can benefit from upside growth through increased account value or income potential. However, if the market performs poorly, the product still delivers a pre-determined income floor, ensuring that the retiree will not run out of money, no matter how long they live.

This strategy addresses several key retirement risks, including longevity risk and sequencing risk. By blending protection with growth, the risk wrap approach provides a balanced solution that appeals to those who want both control and security.

Retirement Income Styles Assessment

The Retirement Income Style Awareness (RISA)^[1] assessment is a framework developed to help individuals better understand their personal preferences, attitudes and financial goals as they transition into retirement. The outputs from the RISA are based on a broader conceptualisation of risk as it pertains to income preferences and risk tolerance.

RISA identifies key psychological and financial decision-making traits that influence how a client might prefer to generate income in retirement. The goal of the assessment is to match clients with the retirement income strategies most aligned with their values, their comfort with risk, and expectations for security and flexibility.

Mapping individuals along two dimensions (optionality v commitment and safety-first v probability) allows them to be aligned with one of four retirement income strategies (figure one).

The RISA assessment evaluates individuals across two core dimensions. The first is ‘safety first’ versus ‘probability based’. This dimension captures a client’s preference for relying on market-based solutions versus guaranteed income sources.

Clients who identify as safety first generally prioritise guaranteed income and prefer contractual solutions such as guaranteed lifetime income streams.

Those clients who identify as probability based are generally comfortable depending on investment returns and managing portfolio withdrawals to support their retirement income.

The second core dimension is optionality versus commitment. This dimension reflects a client’s desire for flexibility and control versus a willingness to commit assets in exchange for financial certainty.

Those clients who are optionality focused prefer strategies that allow for future adjustments and maintain liquidity. Conversely, commitment focused clients value predictability and are open to locking in financial guarantees.

From these two dimensions, four primary retirement income styles emerge:

The RISA assessment is typically administered as a questionnaire that measures an individual’s preferences across these spectrums. Financial advisers can use the results to tailor retirement income plans that align with the retiree’s psychological comfort and lifestyle goals.

Although the RISA tool was developed in the United States, the theoretical underpinnings are equally applicable in other markets; except for questions relating to US-specific products and legislation, the questions used in the assessment are just as relevant in an Australian context.

Ultimately, the RISA framework can empower clients to make more informed, personalised decisions that increase the likelihood of financial satisfaction and security throughout retirement.

Retirement income product toolkit

Most advisers call on a small core of established, widely available product solutions to support the retirement income strategies they design for clients. Typically, a strategy will involve numerous solutions working in conjunction to deliver different objectives within that strategy (figure two).

The Age Pension can act as a crucial source of income certainty, and maximising pension eligibility is often a key objective for your clients. However, not all clients will be eligible for the Age Pension, and over time it is expected that the proportion of retirees who are entirely self-funded will grow.

Outside the superannuation system, the solutions called on by advisers will typically include those offering liquidity (such as cash and fixed interest) and those offering access to equity markets, including ETFs.

Traditional retirement income solutions

Annuities are used for a variety of purposes, either as de facto term deposits (term annuities), or to create a degree of income certainty (lifetime annuities).

Lifetime annuities are available inside and outside the superannuation system, and this is a class of product getting more sophisticated, with CPI and market-linked solutions available. The lack of flexibility in traditional lifetime annuities can, however, be a barrier for some.

The Account Based Pension (ABP) remains the most common decumulation solution for superannuation savings, offerings that are becoming more sophisticated.

New-era innovative lifetime income streams

New-era lifetime retirement income streams are a new style of retirement income product, designed to provide your clients with greater choice and flexibility when considering their retirement product options, helping them manage the risk of outliving their retirement savings and enhancing their standard of living in retirement. They are designed to overcome some of the common objections that your clients may have to traditional lifetime income stream products.

ABPs alone do not mitigate the key retirement risks

The flexibility of ABPs means they can work very well in conjunction with other solutions, such as the Age Pension and annuities, and subject to mandatory minimums, can be integral to a dynamic drawdown strategy. However, they are not a mitigant against sequencing risk, inflation risk, or longevity risk, and as such cannot offer income certainty to your clients.

Traditional solutions offer flexibility or certainty, not both

Today, more than ever, your clients want the confidence to spend and enjoy the continuity of their lifestyle once retired. For this, they need certainty and flexibility from their investment strategies, as well as solutions to the unpredictable financial outcomes they’ll likely face in retirement.

At one end of the spectrum, ABPs provide flexibility but can leave retirees shouldering significant investment and longevity risk and fail to fully address the financial fears held by retirees.

At the other end, traditional lifetime annuities involve trade-offs between income certainty and flexibility and are often limited in terms of how one can invest, withdraw or use their money.

The Age Pension, upon which many Australians rely on, barely provides enough income to sustain a subsistence level of retirement. As life expectancies increase and living costs rise, the strategies and products previously relied upon are becoming less effective in addressing the need for certainty.

Next-generation retirement income solutions can provide certainty and flexibility

A 2022 Actuaries Institute report^[2] noted that combining traditional products with new-era innovative lifetime income stream solutions could lead to a remarkable 30 percent increase in retirement income.

Further, the report noted that methods, such as using investment-linked lifetime income streams, have been shown to lift retirement income without increasing longevity risk: a win-win outcome that would see Australian retirees benefit from larger payments and a better quality of life without increasing the likelihood of outliving their savings.

The next generation of retirement products must improve on earlier efforts, with outcome-oriented solutions designed around core features, including:

While conventional wisdom suggests starting retirement income planning at least a decade before retirement, many individuals delay these critical conversations until much later. This delay can limit the effectiveness of available strategies. However, the emergence of new-era income solutions offers both an opportunity and a strong incentive to shift this timeline forward. By engaging clients earlier, during the accumulation phase, advisers can help build more robust, flexible retirement income plans that better support long-term financial wellbeing. Starting the conversation sooner is not just beneficial, it’s essential.

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Notes:
[1] Professor Pfau and Alex Murguia, CEO of Retirement Researcher, developed the RISA questionnaire and matrix after surveying scores of retirees about their preferences
[2] https://www.actuaries.asn.au/Library/MediaRelease/2022/TheDialogue.pdf

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at June 2025 unless otherwise specified and is for general information purposes only. It is not comprehensive or intended to give financial product advice. Any advice provided in this material does not take into account your objectives, financial situation or needs. Before acting on anything contained in this material, you should speak to your financial adviser and consider the appropriateness of the information received, having regard to your objectives, financial situation and needs. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material.