Avoiding an abrupt drop in living standard after retirement is a major risk for retirement plan participants and all other investors. Depending on spending and investment decisions over time, participants, particularly defined contribution participants, can reduce living-standard risk based on a lifecycle planning framework.
Investing and spending are not independent decisions. Spending too aggressively when young can be as risky, if not far more risky, as investing aggressively in determining where your living standard ends up in retirement. For this reason, spending and investing decisions are most sensibly considered together over time. However, investment advice based on conventional financial planning models assumes, in effect, that you've already made all your saving decisions. Consequently, your only task is to decide how to invest your savings and spend whatever you have earned at the end of the investment period, i.e., during retirement. In this framework, investors will enjoy a comfortable retirement if returns turn out well but will be disappointed if returns are small. This static, one-shot investment model dates to the 1950s. Although it provides many useful insights, it is disconnected from reality in many important ways.