How to Calculate Your Retirement Income Gap (Why It Matters)

Why Retirement Income Gaps Are So Common

For many retirees, the fear isn’t dying too soon—it’s living too long without enough money. Even diligent savers can discover that Social Security and investments alone may not cover all their expenses. That’s where the concept of an “income gap” comes in.

Your retirement income gap is the difference between what you’ll need to live comfortably and the reliable income you’ll have coming in.

According to the Employee Benefit Research Institute, only about 1 in 3 retirees feel “very confident” their savings will last their lifetime. This lack of confidence usually comes down to not knowing how big their income gap really is—or how to close it.

Step 1: Estimate Your Retirement Expenses

To calculate your gap, first outline what you’ll need annually in retirement. Be sure to include:

• Essential expenses: housing, utilities, groceries, healthcare, insurance premiums.
• Lifestyle expenses: travel, hobbies, dining out, gifts for family.
• Inflation factor: prices tend to rise over time, so build in an annual increase of 2–3%.

👉 Example: You expect to spend $70,000 per year in retirement, including essentials and lifestyle extras.

Step 2: Tally Your Guaranteed Income

Next, identify your predictable, guaranteed income streams. These may include:

• Social Security benefits
• Pension payments
• Annuity income (if owned)

👉 Example: Between Social Security ($28,000) and a small pension ($12,000), you’ll receive $40,000 per year guaranteed.

Step 3: Identify the Gap

Subtract guaranteed income from projected expenses.

👉 Example: $70,000 (expenses) – $40,000 (guaranteed income) = $30,000 income gap per year.

This gap will need to be filled by withdrawals from savings or other income strategies.

Step 4: Review Savings and Investments

Suppose you’ve saved $500,000 in retirement accounts. How long will that last if you need to pull $30,000 per year, especially during market downturns?

• If invested in the market, a downturn could shrink your balance just as you need income.
• If withdrawn too aggressively, savings may run out in 15–20 years.

This is why relying solely on savings can be risky—especially with people living into their 90s.

Strategies to Fill the Retirement Income Gap

1. Fixed Indexed Annuities (FIAs)

An annuity can turn part of your savings into a personal pension, guaranteeing income for life. FIAs in particular allow for potential growth without market losses, making them popular for bridging income gaps.

Benefit: Removes guesswork. You’ll know that part of your gap is permanently covered.

2. Social Security Optimization

Claiming Social Security at age 62 may be tempting, but delaying can increase your benefit by as much as 8% per year until age 70.

Benefit: A higher monthly check for life reduces your gap.

3. Life Insurance with Living Benefits

Permanent life insurance can build cash value, which may be tapped for supplemental income. Some policies even include long-term care riders, helping with medical expenses that otherwise widen your gap.

4. Smart Tax Planning

Taxes reduce the money you keep. Strategies like Roth conversions, charitable giving, or managing withdrawals across different account types can shrink the income gap by lowering your tax burden.

5. Adjusting Lifestyle Expectations

Sometimes filling the gap isn’t about more income—it’s about trimming expenses. Downsizing a home, cutting debt, or adjusting travel expectations can close the gap without financial strain.

Common Mistakes When Addressing the Income Gap

• Relying only on investments: Market volatility can devastate retirees who withdraw during downturns.
• Ignoring inflation: A plan that works today may fail in 10 years if inflation isn’t factored in.
• Failing to plan for healthcare: Medicare doesn’t cover everything, and medical bills can widen the gap fast.
• Not reviewing annually: Life changes—so should your retirement plan.

Taking Action Today

National Financial Planning Awareness Month is the perfect reminder to measure your retirement income gap and take action.

Ask yourself:

• Do I know my annual expenses in retirement?
• Do I know how much guaranteed income I’ll have?
• Do I have a strategy to cover the difference—without risking running out of money?

If the answer is “no” or “I’m not sure,” now is the time to work with a qualified financial professional.

Final Thoughts

Knowing your retirement income gap gives you control. Instead of hoping your savings will last, you’ll have a clear plan to bridge the shortfall with guaranteed income, smart tax moves, and careful lifestyle planning.

Small steps now can turn uncertainty into confidence—and help you enjoy retirement the way you’ve always envisioned.

🧑‍💼 Written by Brent Meyer, founder of SafeMoney.com. With more than 20 years of experience helping families navigate retirement and legacy planning, Brent is committed to making financial education simple, clear, and trustworthy.

Disclaimer: This article is for informational purposes only and should not be considered financial, legal, or tax advice. Please consult a licensed financial professional about your individual situation. SafeMoney.com is not affiliated with or endorsed by any government agency.