Vice President Miguel Diaz-Canel Bermudez, 52, an electrical engineer and former minister of higher education, is now first in the line of succession, Castro said Sunday.
Diaz-Canel's selection "represents a definitive step in the configuration of the future leadership of the nation," Castro, 81, told lawmakers at a conference of legislative leaders in Havana Sunday.
Arturo Lopez Levy, a former analyst with the Cuban government, told The New York Times the new vice president is considered a technocrat and described him as a "regional czar whose power is discrete but tangible."
"He was a senior Communist Party official for Villa Clara and Holguin provinces, where there were important openings with foreign investment in tourism," Lopez Levy said, adding Diaz-Canel often functioned as an intermediary between the central government and the military.
"In that sense, he will face the challenge and opportunity to prepare a smooth landing for a new type of civil-military relationship in the future," Lopez Levy said.
Castro described Cuba as at a moment of "historic transcendence," delivering "new generations the responsibility to continue building socialism," as he explained he would retire in 2018 after he completes his second term.
"This will be my last term," Castro said in an address shortly after National Assembly re-elected him.
His 35-minute speech -- in which he said he hoped to establish two-term limits and age caps for political offices including the presidency -- was attended by his brother Fidel Castro, 86, who made a rare public appearance.
Fidel Castro stepped down in 2006 because of a near-fatal illness, and Raul Castro formally assumed power in 2008.
Cuban officials, until now, were regularly criticized for failing to promote younger politicians to leadership positions, favoring instead older revolution-era friends, the Los Angeles Times reported.
Raul Castro also promoted Foreign Minister Bruno Rodriguez Parrilla, 54, to the Communist Party's Politburo, or executive committee.
But despite the appointments, Cuba's leadership remains very old.
Ten of the 15 Politburo members are in their 70s and 80s, El Nuevo Herald reported.