This study investigates the risk inherent in defined contribution (DC) pension plans on an individual and aggregate basis, based on U.S. data. Our aim is to gain insight into the consequences of a DC pension scheme becoming the predominant pillar of retirement income for an entire society. Using the stochastic simulated output of a DC flexible age-of-retirement model, we first determine the optimal investment strategies. We then examine the demographic retirement dynamics of an entire population of DC pension plan participants.We observe that even for the most risk-averse plan members there is a high level of uncertainty in an individual's age at retirement. At the aggregate population level, we find that this uncertainty does not get dampened to any great extent by a diversification effect. Instead, the central role played by the market in determining retirement dates results in significant variation in the dependency ratio (the ratio of retirees to workers) over time. In addition, an attempt to ameliorate the outcome by introducing additional realistic features in the DC population modeling did little to dampen this volatility, which suggests that countries dominated by DC schemes of this type may, over time, be exposed to significant risk in the size of its labor force.

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How do, could, and should retirees draw down their financial savings? This article reviews over 100 papers on this topic from the perspective of individuals, families, governments, and financial institutions. Three significant conceptual/methodological weaknesses in the existing literature are identified: (1) analysts have examined a limited range of self-managed drawdown strategies; (2) nearly all have ignored home ownership, pensions, debt, and government taxes and transfers when quantitatively evaluating alternative drawdown strategies; and (3) there is a well-acknowledged gap between the behavior implied by economic models and that of real-life individuals, particularly when it comes to voluntary annuitization. Expanding the set of drawdown strategies evaluated (e.g., including larger payouts when life expectancy is reduced after the onset of a significant health condition, or using savings as bridge income to delay the take-up of Social Security payments), refining the income concept used, and more exact modeling of the trade-offs underlying individual decision-making will likely increase the appeal of self-managed drawdown strategies and help resolve the "annuity puzzle" that has long dominated this line of research. It may also lead to advice and financial products that will better meet the needs of retirees.