This paper addresses the issue of lifetime ruin, which is defined as running out of money before death. Taking into account the random nature of the remaining lifetime, we discuss how a retiree should invest in order to avoid lifetime ruin. We also discuss the conditional time of lifetime ruin and the notion of bequest or wealth at death.

Using analytical approximations based on comonotonicity, we provide a new approach which is easy to understand and leads to very accurate results without computationally complex calculations. Our analytical approach avoids simulation, which allows to solve very general optimal portfolio selection problems.

We present empirical evidence on the funding and portfolio allocation of around 200 Dutch corporate pension funds over the period 1996-2005, with a special focus on the influence of the sponsoring firm. We find that unprofitable and small firms contribute less to their pension funds than profitable and large firms, consistent with theories of capital market imperfections. Sponsor contributions are found to be positively correlated with leverage, suggesting that tax effects play a role. Defined benefit funds invest relatively more in equity and less in bonds than their defined contribution counterparts, which is in accordance with the risk shifting theory.

The paper provides a framework for the conceptualization, definition and measurement of the legacy costs that needs to be addressed in a reform that transforms an unfunded (or non-financial) defined benefit (NDB) scheme into an equally unfunded notional (or non-financial) defined contribution (NDC) scheme. During a transition from NDB to NDC a financing gap typically arises due to accrued to date liabilities from the old system in excess of the NDC scheme's sustainable flow of benefits. This gap – or legacy cost – needs to be estimated and best explicitly financed. We illustrate different techniques to gauge the scope of the cost. The paper applies the proposed approach to a hypothetical NDC reform in China.