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Three Retirement Models for Defined Contribution Pension Plan Members : A Simulation Study

As defined-contribution (DC) pension plans grow in importance, so too should our understanding of their implications on an individual and aggregate level. In the present paper, we examine the retirement behavior of workers under a DC pension scheme. Using a simulation approach, we compare and discuss the outcome of three retirement decision models: the option-value model, the two-thirds replacement-ratio benchmark model, and a newly developed ‘myopic’ model. Our findings suggest that central features of the myopic model could be suitable for a DC participant, while the two-thirds model appears overly simplistic, and the option-value model, originally applied to defined benefit plans, results in inappropriate retirement patterns when applied in a DC environment. The myopic model is concluded to possess numerous advantages over the other two models. It is theoretically more appealing, less complex, and its formula structure implies a more logical relationship between an individual’s pension and their age.