The Retirement Problem
As the largest cohort in history begins to approach retirement, the financial landscape has changed dramatically since their careers began. With the percentage of private sector employees covered by a defined-benefit plan (DB) falling from 61% in 1979 to 13% by the late 1990s*, the onus for planning for one’s retirement is now squarely on the individual. Accompanying this shift in responsibility is the assumption by individual investors of longevity risk.
Often defined as “the risk of outliving one’s assets”, longevity risk is not a singular risk. It encompasses equity market risk, interest rate risk, inflation risk, and timing risk. These risks were assumed (to varying degrees) in the savings and payout phases of DB plans. The defined-contribution (DC) plans that have replaced DB plans generally offer little, if any, protection against these risks. As the marketplace absorbs the economic repercussions of this shift, mitigating longevity risk will become the dominant theme of retirement planning.
*The Center for Retirement Research at Boston College