his story is part of a series in support of America Saves Week 2021. Since 2007, this initiative has provided a call to action for U.S. consumers to save intentionally. Today’s theme is: Save to Retire.

Once you reach a certain age, nearly every dinner party you attend features a conspicuous conversation about the stock market. It’s an odd ritual, given that so few Americans own individual stocks or invest with brokerage accounts.

This may have more than a little to do with how Americans save for retirement now. Not so long ago, most workers could count on the guaranteed income of a pension—and they had virtually zero insight into how their pension plan was invested. Today, most workers have defined contribution plans like a 401(k) that require them to choose from a menu of mutual funds and do the lion’s share of the actual saving.

That turns most of us into market watchers. The more gray hairs on your head and the fewer years left on the job, the more you may find yourself fixating on the stock market and praying for good fortune when it comes time to hang up your spurs.

The obsession with markets is understandable, but it distracts retirement savers from what they should really be worrying about: outliving their money. And there’s a simple cure for that risk, except no one seems particularly interested.

Saving for Retirement Is Really Hard

You can only worry about a 401(k) balance or a pension plan if you have one to begin with. Many Americans have neither.

That’s not a new phenomenon: In 1989, 53% of workers had neither a 401(k) nor a pension, according to Boston College’s Center for Retirement Research. By 2019, this figure had ticked up a percentage point to 54%. So for the last 30 years, about half of Americans have been part of a continuing retirement crisis.

That’s not for a lack of trying. In the intervening three decades, Congress has passed a slew of laws and regulations to make it easier for people to enroll in employer-sponsored retirement plans, provide savings options for low-income Americans (i.e., the Roth IRA) and make it cheaper for small businesses to offer a retirement plan.

The result? The typical American family remains mostly dependent on Social Security for income once they stop working.

How dependent? The researchers at Boston College found that as of 2016, the average household led by someone between the ages of 55 and 64 has a total wealth of about $776,000. That may seem like a lot—until you understand that 60% of that figure (almost $470,000) is tied up in future Social Security payments. Another 17% is owned in a pension plan; just 5% is held in a 401(k) or individual retirement account (IRA). That number becomes even more concerning when you realize that Social Security typically replaces just 40% of someone’s pre-retirement income. And most people will need about 70% of their working years’ income to fund a comfortable retirement.

That’s why experts want you to start saving as soon as possible, no matter what amount you can afford to put away. The first goal is to simply get into the habit of putting money away for the future because it’s the future before you know it. And Social Security is only getting less generous. The second is to take advantage of as many compounding returns as you can: The longer your money is invested in the market—even if it’s a smaller amount—the longer it has to grow and generate increasingly larger returns. If you expect you’ll be in a retirement bind, every little bit of growth you can manage helps.

Out With the Pensions, In With Defined Contribution Plans

Half the country has either a pension or some kind of retirement plan. But there are important differences in how the lucky half of the country goes about saving.

In 1989, nearly one-third of workers had pension coverage, according to the Center for Retirement Research at Boston College’s analysis of Federal Reserve data. Thirty years later, only 12% of Americans have a pension. Meanwhile, more than a third of workers have defined contribution plans.

A pension guarantees a certain level of income for the rest of your days. Combined with Social Security and a decent amount of home equity, many Americans could enjoy a secure retirement with little planning.

“This paradigm excluded large swaths of Americans, but those with company pensions enjoyed comfortable retirements largely free of financial anxiety,” wrote Martin Neil Baily of the Brookings Institute and Benjamin Harris of the Kellogg School of Management in a recent paper.

Today, managing retirement and juggling your funds is not so simple. Regardless of the amount you have saved, you face the very serious issue of determining how much you can safely withdraw each year without depleting your funds prematurely.

You’ll need to factor in how long you may live, potential rates of return, inflation and future tax rates, among other issues. Nobody’s sending you a check each month; you have to figure it out yourself.

“That point from accumulation to decumulation is very complex, and timing it all is so difficult,” Mike Mansfield, program director at the Aegon Center for Longevity and Retirement, says.

The Stock Market Is a Distraction

Rather than divide your attention among these complex particulars, which have no easy answers, you might respond by over-indexing concern about stock market performance and volatility. After all, if the market returns are generous, you don’t have to worry so much about outliving your funds.

That said, what people believe they should be afraid of regarding retirement isn’t the same as what people should actually be afraid of, suggests research by Wenliang Hou, a former research economist at the Center for Retirement Research.

Hou’s research shows retirement savers are most concerned with market risk—that the value of their investments and home are declining. According to Hou, this is because people overestimate stock market volatility. But the biggest risk they should actually be concerned about is longevity—the risk of outliving their money. Compared to national averages, most people, Hou found, underestimate how long they will live. This can have enormous implications for retirement planning.

Remember that complicated list of considerations you need to make when withdrawing from a defined contribution plan? Life expectancy is chief among the factors that determine how much you can safely withdraw. If you underestimate how long you’ll live, you may find yourself in a situation where you’ve overspent in the early years of your retirement and are now left with just Social Security income in your later years. This phenomenon simply cannot happen with a pension plan—you’re guaranteed regular income payments for the rest of your, and sometimes even your spouse’s, life.

Make Your Own Pension With Annuities

Pension plans have largely withered away, but most workers can create their own pensions by choosing an annuity. Unfortunately, over the years, annuities have developed something of a bad reputation for high fees, overly complicated contracts and some sleazy sales tactics.

Annuities come in all shapes and sizes, and some, like a single premium immediate annuity (SPIA) or a deferred income annuity, can provide reliable, consistent monthly payments until your death, just like a pension. In fact, a qualified longevity annuity contract (QLAC) is specifically designed to help you stretch 401(k) funds into guaranteed lifetime income payments.

Despite this, most Americans aren’t buying annuities.

The U.S. retirement market had a little more than $33 trillion in assets in the third quarter of 2020, according to the Investment Company Institute. More than $20 trillion of that was in either IRAs or defined contribution plans. Government and private pensions took up about another $10 trillion. Just $2.4 trillion, or 7% of the total, was held in annuity reserves.

What’s even more concerning about this is that most of the appetite for annuities isn’t for the reliable pension-like version, but rather variable annuities, which more closely resemble a 401(k) by offering returns dependent on the stock market, according to the Brookings Institute. This introduces the potential for loss of income, just as you’d find in an investment account, which somewhat defeats the purpose of “guaranteed” income in retirement. These annuities are also more likely to charge high fees and structures confusing to the average consumer.

The Annuity Puzzle

Lack of consumer interest in annuities isn’t a new problem. Almost 60 years ago, Israeli economist Menahem Yaari coined the term “annuity puzzle,” noting that retirees would be happier using annuities, but few actually did. This annuity puzzle has now lasted well into the 21st century. This is an understandable, but unfortunate, phenomenon.

When you buy an annuity, you hand over a very large chunk of change for the promise of checks in perpetuity. Parting with so much cash immediately, giving away “your money,” is a difficult thing for some people to do.

People are also worried they’ll die before they get on the better end of the deal—annuities parcel out your payments based on an average life expectancy, and an early death could mean the annuity company makes a profit instead of you.

Depending on how your annuity contract is written, you also may forfeit your ability to pass on money to family, as in many cases the annuity company retains all unpaid funds when you die. This is unlike with a 401(k) or IRA, which is readily inheritable. There’s also the risk that you might give up better returns from a mutual fund or market investment that takes on more risk—but offers potentially greater returns—than annuity products do.

It’s easy to see why many hold these reservations. But lifetime payments are less about maximizing your gains than ensuring that you have money to spend if you live longer than you think you might. And depending on your situation, this certainty you gain may actually enable you to take on more risk in equities.

Let’s say you and your spouse have $1 million in an IRA, an amount that may or may not last as long as you do. If you bought an annuity with 40% of your portfolio, you could guarantee a monthly income of a little more than $2,000, depending on current rates. When combined with two monthly Social Security checks of about $3,750 or so, you can receive about $70,000 a year in guaranteed checks.

You’ll still have the rest of your portfolio, and you can invest the rest in equities, perhaps more aggressively than you would if you didn’t have $2,000 a month guaranteed by an annuity. In this case, then, an annuity is more like insurance that protects you against the (ironic) hazard that you’ll live longer than you imagined.

Should you be blessed with a long life, you don’t want to worry about how to pay for it.