Spotlight: Olivia S. Mitchell
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Data from the study indicates that we incur higher out-of-pocket medical expenditures as we grow older -- mostly for prescription drugs. How much should Americans put aside, in addition to regular retirement savings, to account for unexpected health events and cover the cost of medicines?

Changing face of aging

• Boomers working longer. • Soaring cost of prescription drugs. • College grads not retiring early. • Incentives encouraging work. • Pension Protection Act impact. • Shift to defined-contribution plans. • Reduced retirement spending. • Marriage and gender differences. • Wealth beyond housing. • Skipping long-term care insurance.

Nobody knows for sure, since future medical care costs are some of the most difficult to predict -- along with possible medical breakthroughs. Knowledgeable groups have estimated $250,000 is likely to cover the expected present value of out-of-pocket costs for a 65-year-old retiree (including premiums). The number is higher for an early retiree not yet eligible for Medicare. But this assumes that Medicare benefits can continue to be paid as now, and this is a big "if" since the system is facing shortfalls.

The study queried people in their mid-50s to find out if they expect to be working after age 65. The highest percentage of those answering yes came from respondents with some college education or college degrees. Next were those with some high school or with high school degrees. What factors drove this outcome? Is it the nature of work/benefits offered to the specific demographic or does it have to do with varying levels of financial knowledge?

People who are more educated are more likely to have jobs where they can keep working into their later years, which is one explanation for deferred retirement. Also, people who are more educated tend to be higher paid, so Social Security doesn't provide as large a benefit for them, relatively speaking, as it does for lower earners. For this reason, working longer can contribute to higher saving and an eventually better-funded retirement for the more highly educated. Finally, the better-educated were also the most likely to understand the need to plan for retirement and to carry out a plan. So working longer is likely to be consistent with this plan.

According to your study, the recent reversal of the trend toward early retirement may be due to changes in retirement incentives in the Social Security program and the elimination of mandatory retirement. Another factor may be the rising popularity of defined-contribution plans, such as 401(k) plans, as opposed to defined-benefit plans (traditional pension plans). Could you briefly describe how these changes/trends affect today's overall retirement landscape?

In the past, defined-benefit plans tended to encourage working up to a given age -- usually somewhere in the early 60s. Then pension values were generally cut for anyone who remained on the job after that point. Faced with these disincentives, most workers left their jobs early. In the past, mandatory retirement rules also strongly discouraged continued work. Now, mandatory retirement is outlawed for most jobs, and defined-benefit plans have, in many cases, been replaced by 401(k) plans along with other defined-contribution pensions. In defined-contribution plans, longer work years mean more contributions, which grow one's pension more. As a result, the implied and explicit incentives to leave early have been eroded.