Up until relatively recently most folks retiring were covered under defined benefit pension plans where a pension payment was received each month usually based on some percentage of their salary during their final few years of work and their life expectancy through retirement. These pension payments, supplemented by Social Security, would continue for the rest of the retiree’s life (or their spouse’s life it they opted for a reduced joint survivor benefit). The work and risk of managing the investment portfolio needed to fund these pensions was borne by the companies not the employees.
Planning for retirement with a pension is very straightforward. You just have to adjust your monthly spending to match your income which is very predictable.
But starting in the 1980’s and 1990’s companies in the US began shifting away from these defined benefit pension plans to defined contribution plans where employees make contributions to tax advantaged retirement accounts usually with a company match. The employee now bears the risk of ensuring that they save enough and hope that the markets are kind to them.
Where these defined contribution plans get really tricky is in figuring out how much you can safely withdraw during retirement. A traditional pension plan has hundreds or thousands of employees so the law of large numbers comes into play. Some retirees will die before their life expectancy and some will live longer. The folks who die early essentially fund those who live longer and the company actuaries can with fairly good accuracy predict what the average will be.
But with a defined contribution plan there is only one employee in the plan and he or she has to manage withdrawals with the possibly in mind that they might be someone who lives well past their “average” life expectancy or that they will run into a tough bear market. As a result, to ensure you do not run out of money during a long retirement you must establish a conservative withdrawal plan. A rule of thumb for someone retiring at age 65 is 4% (which is simplistic but directionally correct). Thus to replace a $100,000 income (and assuming $30,000 per year in Social Security) you would need a $1.8 million retirement portfolio.
However if the retiree lives an average life expectancy and the markets perform reasonably well in all likelihood they will end up with a substantial estate to leave to the children. That was not the case with a traditional pension where the payments stopped with the death of the parents. Thus in many cases this second generation will be beneficiaries of this shift from defined benefit pensions to defined contribution 401K’s at the expense of their parents who had to be very frugal during their retirement years.