We can do a better job converting savings into retirement income, but it requires commitment.

The historical mainstay of pension planning, the defined benefit (DB) pension plan is disappearing across the developed economies, with now less than half of current pension assets. In Canada it is projected that there will be no new DB plan members after 2026.

For the retiree, the attractive features of a DB plan are:

  • income for life
  • a known and fixed income at retirement
  • the employer is responsible for any shortfall.

DB plans offer the investor a direct connection between savings today and income tomorrow. This is a quality shared by the Canadian Pension Plan (CPP), and is what most people would understand as a basic property of any pension plan. The main replacement for DB plans is the defined contribution (DC) savings plan. In a typical DC plan, the employee and the employer contribute a fraction of the employee’s annual salary to a tax-advantaged fund. The employee is responsible for how the funds are invested, and the connection between savings and future income is lost. The responsibility for converting savings into retirement income, a process known as decumulation, falls to the individual investor.

We observe that the DC plan is not a pension plan, but a savings plan. The DC plan member is exposed to investment risk during both the accumulation and decumulation phases, as well as longevity risk and income risk during decumulation. Most retirees would prefer certainty of income but, unless they have sufficient capital to generate risk free income, they are always going to be exposed to stock markets and the risk of running out of money. The typical components of a retirement savings plan are an employer DC plan and individual RRSP accounts which, collectively, we will consider as a tax-advantaged savings plan. Our goal in this paper to consider different strategies for generating retirement income from a savings plan that matches as closely as possible the DB plan experience.

We proceed by considering some conventional approaches involving annuities, and investment strategies using a pre-defined allocation to stocks, before exploring an adaptive strategy we call Target Wealth. To make the discussion more concrete we introduce Bob, as an example of an investor who would like his savings strategy to match the DB experience as closely as possible.


This report was written by Graham Westmacott, PWL Capital Inc., Peter A. Forsyth, University of Waterloo, and Kenneth R. Vetzal, University of Waterloo. The ideas, opinions, and recommendations contained in this document are those of the authors and do not necessarily represent the views of PWL Capital Inc.

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