A Building Block Approach to Retirement Income Design

Abstract

This paper addresses the retirement income planning problem from the perspective of the four main building blocks of retirement income: state pension, mortality credits, investment strategies and drawdown schedules. We detail how these building blocks interact to form a retiree’s overall retirement income portfolio, and what trade-offs and interactions must be considered. We find that while access to each building block increases the retiree’s certainty equivalent consumption, the most substantial contributor to this increase is from utilization of the mortality credit building block (i.e., annuities).

Keywords: Retirement income, Building blocks, Mortality credits, Default design

JEL Classification: C61, D14, D15