Dealing with Risks of Outliving Resources in Retirement

Abstract Possibly the greatest shift in the character of the employer-sponsored retirement plan system over the past quarter-century has been the movement away from plans that provide retirees with an annuity for life to plans that provide workers with a lump sum of cash the day they walk out the employer’s door for the last time—whether it be into retirement or on to the next job. Aside from the shift toward defined contribution plans—which generally only pay lump sums—a growing number of defined benefit plans provide lump sums as a benefit option, and in most hybrid plans, the lump sum is the primary benefit form. Where individuals have the option of a lump sum at retirement, they tend to choose the lump sum over the annuity. This chapter explores the reasons behind the shift from annuities to lump sums and the consequences.