Addressing the Pension Decumulation Phase of Employee Retirement Planning

Abstract

Longevity increases and population ageing create challenges for all societal institutions, particularly those providing retirement income, healthcare, and long-term care services. At the individual level, an obvious question is how to ensure all retirees have an adequate, secure, stable, and predictable lifelong income stream that will allow them to maintain a target standard of living for, however, long the individual lives. In this chapter, we review and discuss the main pension decumulation options by explicitly modelling consumers’ behaviour and objectives though an objective function based on utility theory accounting for consumption and bequest motives and different risk preferences. Using a Monte-Carlo simulation approach calibrated to US financial market and mortality data, our results suggest that purchasing a capped participating longevity-linked life annuity at retirement including embedded longevity and financial options that allow the annuity provider to periodically revise annuity payments if observed survivorship and portfolio outcomes deviate from expected (or guaranteed) values at contract initiation deliver superior welfare results when compared with classical annuitization and non-annuitization decumulation strategies.