What happens if a current world champion decides to retire before(or during) the next WCC cycle begins or he simply can't defend his title? How would the next champion be selected? Would the winner of the next cycle for challenging the champion be selected as the world champ?

I don't think there is something worked out for this, Alekhine died when he was still a world champion, so they organised a match tournament for the best players alive, and the winner was awarded with the title.

When Fischer refused to defend his title Karpov got it by default, so far it has happened 2 times, and both times there where different solutions.