Not your father's retirement

Ten years from now, the typical 70-year-old will still have foreign travel on his or her mind, but perhaps with a few new twists.

Getting time off from work could be one. Exotic locales, meanwhile, could lose pride of place as the inspiration for wanderlust to a search for affordable health care.

Welcome to the future of retirement — underwritten by meager 401(k) accounts and financially repressed capital markets that offer scant room for living off of investment income.

It's a future many retirement experts see as fundamentally bleak — so much so that the possibility of a new pillar of retirement saving being introduced shouldn't be ruled out, some say.

“I would be surprised if we don't have some supplement to Social Security that isn't currently here,” said Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. A cash balance plan at the state or national level to supplement 401(k) plans could be one option, he said.

But for the flood of baby boomers now approaching 65, with little hope of a policy-driven rabbit being pulled out of a hat, a fundamental re-examination of retirement expectations is the only recourse.

In a telephone interview, Glen Hiemstra, a Seattle-based consultant and founder of thefuturist.com, said when he began predicting 20 years ago that a growing number of people approaching 65 would choose to keep working in an economy increasingly dominated by information technology, it was a thesis anchored on “personal preference.”

Today, after a devastating financial crisis and a 401(k) experiment that's showing every sign of falling short of meeting retirees' needs for sufficient income, it's no longer a question of choice. The “end of retirement,” as Mr. Hiemstra titled a 1995 forecast, is being driven now “as much by financial necessity” as by the changing nature of work, he said.

“People will work longer ... they're not going to have much choice economically,” he said.

Signs of that trend are apparent already.

In a recent telephone interview, Brigitte Miksa, Munich-based head of international pensions with Allianz Asset Management, noted research showing the percentage of income coming from employment for couples where the head of the household was 65 or older stood at 31% in 2010, up from 8.2% in 2000.

At present, there's still plenty of people heading into retirement with defined benefit plan coverage, but over the next 10 to 20 years, people relying on defined contribution plans and Social Security to fund retirement at 65 will find themselves falling “way short” of what they need, warned Alicia H. Munnell, the Boston-based director of Boston College's Center for Retirement Research.

It's the people retiring in 20 or 30 years who will bear the brunt of the shift in market risk and longevity risk posed by the shift to a defined contribution-centric retirement system, agreed Gary Koenig, Washington-based director of economic security with the AARP's Public Policy Institute. However, among the people retiring a decade from now, those who lost jobs in the financial crisis of 2008 or saw their retirement savings decimated will experience a foretaste of those tougher times to come for younger cohorts, he said.

Ms. Munnell cited the need for a “new tier of retirement income” to promote participation for everyone — not just for those lucky enough to have access to employer-sponsored plans. Barring that, improving the 401(k) system — with mandatory contributions, auto-enrollment and auto-escalation — would be a step in the right direction, she said.

For now, however, working longer is the best option people have to improve their odds of sufficient income to live on in retirement, she said, noting that workers who wait until age 70 to retire will enjoy monthly Social Security payouts roughly 75% higher than they would get if they retired at 62.

Health care, however, remains a fly in the ointment.

According to Olivia Mitchell, executive director of the Pension Research Council and director of the Boettner Center on Pensions and Retirement Research at the University of Pennsylvania's Wharton School, Philadelphia, one surprising finding from a recent book put out by the council, “Redefining Retirement: How Will Boomers Fare?,” was that baby boomers were less likely than the preceding cohort of retirees to say they were in good health, and mentioned more problems with mental health and depression.

That could be a bad omen.

According to an AARP study released early this year, titled “What are the Retirement Prospects of Middle-Class Americans,” rising out-of-pocket medical costs are the prime factor threatening retirement security.

The report notes that median out-of-pocket medical expenses for 70-year-olds currently come to $2,800, or 8.2% of annual income. For middle-income workers aged 45 to 54 in 2012, that figure should rise to $5,600, or 15.3% of income, when they reach 70, while for those between ages 25 and 34, those expenses are likely to rise to $11,000, or 20% of income.

With those rising medical outlays, the AARP study concluded “future retirees are less likely than current retirees to maintain their standard of living during retirement.”

With U.S. health-care costs spiraling higher at a faster clip than elsewhere in the developed world, retirees might well begin traveling to developed countries in Europe or elsewhere for operations that don't have to be done on an emergency basis, and at a fraction of the cost they'd face at home — even accounting for airfare and hotels, said Mr. Hiemstra.

Sara Robinson, a Seattle-based consultant and writer on social trends, calls the retirement conundrum facing baby boomers an ironic twist for a generation that, until now, has enjoyed “more of everything ... money has always been there, for everything they've ever wanted, and now it's not.”

Still, the outlook for boomers isn't as bad as the retirement prospects of the Gen-X generation that follows them, said Ms. Robinson.

That generation, now in its mid-30s to early 50s, will be the last cohort to spend the bulk of its work life in the period ending now, where faith in public programs and government in general was upended by an ascendant focus on individual rights — both left-wing versions and right-wing ones, Ms. Robinson said.

Ms. Munnell likewise expressed more concern for the cohorts following the baby boomers, noting the heavy debts carried by recent university graduates — debts that effectively delay life milestones such as marriage, buying a house and saving for retirement.

Whether that dire outlook for retirees two or three decades from now can be improved “largely depends on what we do today,” said Mr. Koenig. If Social Security is strengthened sufficiently to cover future obligations but the rest of America's retirement system is left unchanged, “you may not see an explosion of poverty, but you'll see a lot of people who are going to have to cut back, to accept a lower standard of living in retirement,” he said.