Part V: The Perspective of the Individual in Decumulation

Having looked at the question of retirement planning—and in particular the accumulation of assets during a working lifetime—from the perspective of the system, we now turn to the postretirement period and to a different perspective: that of the individual retiree. This change of perspective is necessary because the role of the individual is different and harder to manage after retirement. Throughout this book so far, we have taken the view that during the savings phase the needs of the many are best met by a system built around sensible, efficient default paths. If an employer has a defined contribution (DC) plan, then workers should (as a general rule) be put into that plan unless they actively elect not to participate. Unless they specify otherwise, their retirement assets should be in a growth-oriented strategy (even though that runs the risk of losses over some time periods), which gradually changes over time to reduce risk as the assets grow because that offers the most likelihood of competitive long-term returns. And so on. In short, employers should bake sound investment accumulation practices into their plan design.

But in the postretirement period, the link between the participants and the employer is substantially weaker: They no longer work for the firm. Plan sponsors have therefore traditionally paid much less attention to plan design features that affect the decumulation phase than to the features that affect the savings phase. But bearing in mind the 10/30/60 rule (which states that 60 percent of the total payout from a DC savings plan is typically earned after retirement), it is a phase that needs close attention. Plan sponsors can—and increasingly will—do more to ensure that their plan design is adequate to the task of managing the postretirement phase. But the individual has a role to play, too, even those who played little or no active role in the accumulation of their retirement assets.

The dynamics of decumulation center around three variables, or dials, as we will refer to them: spending, longevity protection, and investment. In this part, we will consider each of these in turn, addressing ourselves to the individual reader. We will finish the part with a description of new products aimed at decumulation. Then, when the individual's issues in decumulation are understood, we will turn in the next part to the role that the DC plan sponsor can play in helping the individual to cope with them.

This part is addressed directly to the individual approaching or already in retirement, and to financial planners. It will also provide background material for sponsors, since it forms the basis for the final part of the book, which is addressed to them.