To ponder preparing for retirement in the U.S. these days depends very much upon who is doing the pondering. On the one hand, there is great freedom over the when and how of it. Some retire and find a second career, or shift into a public-service phase of life. Others are choosing to never retire at all.

On the other hand, many never get the luxury of choice. Age discrimination makes finding or keeping a job after 55 harder than ever, and a surprisingly large slice of the population hasn’t set aside an adequate nest egg.

Many might be ready for retirement, but it’s not at all clear that retirement is ready for them.

“Longevity is increasing around the world faster than many of us can fathom. In fact, demographers say the baby who will live to be 200 has already been born. This perspective can make insurance and health care providers blanch, as most are not yet thinking about how to manage truly consequential longevity risk,” says Olivia S. Mitchell, Wharton professor of business economics and public policy, and executive director of the school’s Pension Research Council.

Moreover, the mechanisms intended to gird Americans retiring now are already under considerable strain: Social Security is inadequately funded; defined benefit pension plans have all but disappeared; and the government’s insurance program meant to take over for failed defined benefit pension plans is itself under-capitalized.

“I do think there is a lot more uncertainty,” says Dara Smith, a litigation attorney for AARP. “Many workers are waiting longer to retire,” she says, either because they haven’t saved enough, are facing cost of living increases, haven’t yet recouped 2008 losses in their retirement funds, or need to hang onto their employer medical insurance.

“But people also want to work longer,” she says. “They just want to be productive and be employed longer.”

Adding to the uncertainty about what modern retirement looks like is the danger that a good swath of the population has come to believe that the current bull market is the new normal, says Christopher Geczy, Wharton adjunct finance professor and academic director of Wharton’s Jacobs Levy Equity Management Center for Quantitative Financial Research and of the Wharton Wealth Management Initiative.

“All these challenges are resonating against the background of a U.S. equity market that has reached new heights and in fact has extended the highest run for equities in history,” he says. “In addition, if you look at the pattern of attitudes toward risk, it’s been quite time-varying, and we know it’s time-varying especially for those in the youngest cohort, 35 and under. In fact, what we’ve seen in the data and received wisdom suggests, it looks like today young people have a higher risk aversion than people of the same age did in the late 1990s.”

So the question for many regarding preparing for retirement, he says, remains: “How are we going to get there?”

The Enduring Age of Age Discrimination

Just work longer. That’s the answer for a lot of workers who can’t afford to retire. Many, though, don’t have that option. Between 1992 to 2016, 56% of older workers reported being either laid off or pushed out of a job at least once, according to a study by ProPublica and the Urban Institute that analyzed data from the Health and Retirement Study. Only one in 10 workers reported earning as much in their new jobs as their old ones.

Even in a tight labor market, many employers want to get rid of older workers and are hesitant to hire older ones, says Peter Cappelli, management professor and director of Wharton’s Center for Human Resources.

What would it take for age discrimination to become a thing of the past?

“All these challenges are resonating against the background of a U.S. equity market that has reached new heights and in fact has extended the highest run for equities in history.”–Christopher Geczy

“It takes a belief among the leaders that this is a priority,” says Cappelli. “The odd thing is that executives who are themselves older may feel pressure to show that they do not fit the negative stereotypes of aging by being disproportionately negative about older candidates.”

Some of the interest in getting rid of older employees is because it saves more money, he says, “and some of it is because people who have been stuck in positions for a long time are bored and disengaged — those are also older. In hiring, though, none of that is an explanation.”

The bad news about age discrimination comes by way of recent court decisions that inexplicably conclude that protections against it do not apply to job seekers, only to current employees, Cappelli notes.

Protections for older workers were put into place long ago. The Age Discrimination in Employment Act of 1967 prohibits age discrimination against workers 40 and older, but a 2009 Supreme Court decision weakened that act, putting a higher level of burden on older workers to prove discrimination than on those claiming discrimination because of race, religion or gender.

In situations where workers are being laid off to cut costs among the ranks of the higher paid, just because those workers happen to be older does not prove age discrimination, the Supreme Court has found.

“Culturally, we just don’t take age discrimination as seriously as other civil rights. People see it as an economic issue, not a civil rights issue,” says the AARP’s Smith. Stereotypes persist that older worker are checked out, slowing down or resistant to learning new skills. “Those assumptions are so baked in, and we see in this country the idea that younger workers should have their turn now.”

For older workers who may have been pushed out, it’s “very easy to blame yourself, to lose confidence,” says Stew Friedman, director of the Wharton Work/Life Integration Project and author of Total Leadership. But when considering a second act, it’s important to do an inventory of “what you know, what you’re good at, what you’ve accumulated in terms of the value you have,” he says. “One good way to do that is to talk to people who know you about what they see as your strengths. That can be really helpful and affirming. We know from research on social capital and leadership that the more you can reveal about who you are and the help you need, as well as what you can contribute, the easier it is for other people to be helpful to you. It starts with knowing what you need and being willing to ask for help. Nobody is going to hand it to you. At 55, you know that.”

Shaky Pillars of Retirement

If the timing and concepts around preparing for retirement are shifting, so are the financial tools for getting there. Workers in the U.S. saw the rise of various retirement innovations in the 20th century — Social Security, defined benefit plans, the now-ubiquitous 401(k) — and each has proven to have its vulnerabilities. One in three Americans has less than $5,000 in retirement savings, with one in five reporting no retirement savings at all, according to a 2018 Northwestern Mutual survey of more than 2,000 adults.

There is Social Security, but the system is threatened by a shortfall that currently exceeds $14 trillion in the next 75 years, and $43 trillion over the long haul, says Mitchell. Moreover, the Trust Fund will run dry in just 15 years, by 2034.

In her view, what’s needed to fix Social Security is a set of solutions sharing the burden across generations — reducing benefits, raising retirement ages and increasing taxes to pay for longer lives. “In fact, it’s actually more straightforward to restore Social Security to solvency than to fix Medicare, which is also running short of money,” says Mitchell. “Nevertheless, we still have to persuade the requisite number of politicians to go along with a reform package.”

This can be done, Mitchell argues, as it was done before. In 1983, she points out, “the system was three months from running out of cash to pay benefits, so it may take a cash crunch like that again, unfortunately.”

“Executives who are themselves older may feel pressure to show that they do not fit the negative stereotypes of aging by being disproportionately negative about older candidates.”–Peter Cappelli

At the same time, it’s no secret that defined benefit plans have dwindled. These pension plans in the U.S. peaked at more than 112,000 in 1985, declining to 47,000 in 1996 and to 25,607 by 2011, according to the Pension Benefit Guaranty Corp. Many of the remaining plans have obligations that far outstrip assets, and when they cease to be solvent their obligations may be taken over by the PBGC. The agency paid $5.8 billion to more than 861,000 retirees from 4,919 failed single-employer plans, and paid $153 million in financial assistance to 81 insolvent multi-employer plans, according to its 2018 annual report.

It claims responsibility for insuring the pensions of nearly 37 million people, whose benefits are valued at $3 trillion. But the PBGC’s own finances are underwater. The agency’s risk of insolvency is rising rapidly and is likely to occur by the end of FY 2025, according to the 2018 report.

The crisis is getting attention. Pension consultant David Blitzstein has written that the only hope would be a recapitalization of the PBGC with a minimum of $50 billion that would allow troubled plans to partition and spin off their “orphan” liabilities — the accrued liabilities of employers no longer contributing to the plans. Surviving plans might consider mergers, he wrote in a Wharton Pension Research Council post on Forbes.com.

One proposed piece of legislation, the Butch Lewis Act, recommends shoring up underfunded multiemployer pensions by lending them money at a low interest rate. Mitchell, though, calls this rescue plan “fatally flawed.” The act calls for the money to be repaid in 30 years with interest, but Mitchell says if the pension plan cannot do so, the bill permits loan forgiveness or refinancing of some as-yet-unforeseen obligation, leaving taxpayers on the hook. “A better solution would be to shut down this system now and deal with it today, while stopping the plans from underfunding further,” she says.

Another is the first substantial piece of retirement legislation in more than a decade. The Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, was passed by the House and appears poised to clear the Senate at some point.

It would provide for tweaks in retirement law, but also some real changes. Among them: delaying the required minimum distribution to age 72 from the current 70½; making it easier for small employers to set up and offer 401(k) plans and allowing the creation of “open” Multiple Employer Plans; removing age limitations on IRA contributions; eliminating the 10% penalty tax to pay for a qualified birth or adoption; and opening up more options for annuities within retirement plans.

Annuities: Complex and Critical

This last change is being seen by many as the addition of an important tool in the transition to retirement, but not all annuities are created equal.

“It starts with knowing what you need and being willing to ask for help. Nobody is going to hand it to you. At 55, you know that.”–Stewart Friedman

“It makes sense as long as it’s optimal,” says Geczy about annuities, “but there is a lot of controversy about where and how and why, and that is because the annuities space is complex more generally and in some cases potentially more costly, although that definitely varies across products and features. But think about what you are asking for — for someone to give you in advance in essence a long-dated put contract or a hedge, and that can be a useful, if costly, proposition. The thing is, there is at some point annuitization, but most academics will tell you that at some point and in some form, it’s the optimal strategy for many or most investors.”

The vast majority of the act is positive, says David F. Babbel, Wharton professor emeritus, whose teaching and research at Wharton was split between the finance and insurance departments. The new rules regarding annuities are generally a good thing, he said, as annuities are the only financial products designed to provide income throughout one’s remaining lifetime. But the problem with annuities, he says, “is that they are long-term products that gradually erode in value if inflation picks up again. Even if the annuities include an escalation feature, these are usually pre-fixed and may not track the cost of living closely and, more importantly, an individual’s own cost of living,” he notes.

The erosion can be considerable. Babbel points out that if you look at every 20-year period since 1971, the dollar lost between 36% and 70% of its purchasing power by the end of the 20 years, depending on the period. This means that $10,000 per month at the outset of retirement would, 20 years later, have the purchasing power of only $3,000 to $6,400, depending on when you happened to retire.

“Looking to the future, the value erosion might be much less, but may even fall beyond these bounds,” he says.

Babbel advocates an innovative strategy to hedge against the rising cost of living needs by using what he calls a “staggered annuitization” (rather than the commonly understood concept of “laddered annuitization”) approach. He recommends putting a significant portion of one’s savings as one approaches retirement into a variety of deferred fixed annuities. At retirement, some are “activated” or annuitized to provide monthly income, while the others remain gaining value and are annuitized, as needed, depending on the rise in one’s own cost of living. While the deferred annuities are held in abeyance, they not only grow in tax-deferred value but each year as you age their payout rates per dollar of deferred value rise substantially. His personal approach is easy to implement, he says, and structured to guard against insolvency risk.

Of course, preparing for retirement also requires a certain amount of financial literacy, not to mention an awareness that the only constant is change — in legislation, retirement products, inflation rates, performance of the markets, and the economy.

“It’s actually more straightforward to restore Social Security to solvency than to fix Medicare, which is also running short of money.”–Olivia S. Mitchell

Many Americans may understand the general concept of shifting the balance of retirement assets as retirement draws near, but they have put much of their faith in target date funds that start out in a risk and growth mode at the beginning of a career and gradually shift to less risk approaching the draw-down phase. In 2018, assets of this kind in mutual funds and collective investment trusts had grown to more than $1.7 trillion, according to Morningstar.

But the “glidepath” approach only makes sense within a few years of retirement, say the authors of a March working paper for the Centre for Applied Macroeconomic Analysis at the Australian National University. Switching between assets and cash in a more frequent, systematic way may produce better results, according to “Absolute Momentum, Sustainable Withdrawal Rates and Glidepath Investing in U.S. Retirement Portfolios from 1925.”

Among the findings: “Smoothing the returns on individual assets by simple absolute momentum or trend following techniques is a potent tool to enhance withdrawal rates, often by as much as 50% per annum,” the paper states.

Can the average worker really be expected to approach preparing for retirement with such attention to detail?

“In the last two decades, the financial system has become disintermediated,” says Mitchell. “By that I mean that people must increasingly manage their own finances, instead of their employers handling their needs via health insurance and defined benefit pensions, or the government taking care of them. At the same time there has been substantial deregulation of financial products, and more complex financial products have come to market.”

As a result, plotting out one’s own retirement, she says, is getting tougher.

“People must increasingly manage their own finances, instead of their employers handling their needs via health insurance and defined benefit pensions, or the government taking care of them.”–Olivia S. Mitchell

And don’t expect robo-advisors to come to the rescue — at least, not anytime soon. Mitchell and Julie Agnew have a forthcoming volume on computerized financial advice models entitled The Disruptive Impact of FinTech on Retirement Systems. The book shows that services that use computer algorithms to provide financial advice and manage customers’ investment portfolios aren’t quite ready for retirement prime time yet.

“While many of these services try to help consumers save more or manage their budgets, they tend to ignore the fact that people have complex financial lives,” says Mitchell. “Does your partner have savings or a business? Do you need to put aside money for a disabled child? Additionally, few online financial algorithms help people spend down their money in retirement, or how to buy an annuity so as not to run out of money in old age. Fewer still tell you whether you should buy long-term care insurance, or whether to move to or out of a state that taxes your pension.”

Retirement, in the end, is as individualized as people. The answer? Says Mitchell: “Since retirement planning is so nuanced and complicated, it would behoove many to work longer, save more, and expect less.”