In one sense, the way that a retirement plan works is not very complex: Money is set aside for a number of years and then, later, that money (along with any additional money that those savings have been able to generate through investment returns) is withdrawn to support an individual once they are no longer working. What makes it complex is that there are so many variables that can affect the operation of a plan like this. In the four chapters that follow we will explore the nature of the most important of those variables.
This section is intended to lay the groundwork for the rest of the book: For example, in order to understand why the design of the decumulation products available to retirees is important, it is first necessary to have a feeling for what the biggest financial risks faced by retirees are. It is background for all of our intended readers: plan sponsors and their advisers, individuals and their advisers, and opinion leaders.
The first of the four chapters is devoted to the question of life expectancy (or longevity). This is a subject that has been largely ignored in much of the retirement savings debate in the past. However, if the goal of a retirement system is to provide income throughout retirement, it is important to know how long that retirement is likely to be.
The second variable that we will explore is the level of saving that is put into the plan: How much is enough? And how confident can we be in our answer? The ...