Longevity risk and retirement

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By Zorast Wadia | 24 April 2012

Over the last 25 years, defined contribution (DC) plans have replaced defined benefit (DB) plans as the primary retirement plan sponsored by employers. In the long run, this remarkable shift is problematic because having benefits from a DC plan as a primary retirement source subjects plan participants to longevity risk—the risk of running out of money during retirement.

Based on average life expectancy statistics, we know that half of the population will survive beyond its life expectancy and half of the population will not. This creates challenging circumstances for people to manage withdrawals from their retirement accounts. In addition, there is the added challenge of managing investments.

This article is not meant to compare the advantages and disadvantages of DC and DB plans; rather, it is meant to promote a new retirement paradigm where both types of plans can coexist and complement one another. This paper offers this new retirement model as a solution to the longevity risk problem.

This article was first published in the Spring 2012 issue of the Actuarial Digest.