How to measure your retirement income gap

“Do I have enough to retire?” is hard to answer because it is really three questions: how much income you will want, how much will arrive without touching your savings, and how much your savings can safely supply. Answer each one in turn and the overall picture becomes much clearer.

Start with the income you want

Begin with what you spend now, not with a percentage rule. Then adjust for what will change:

• Costs that may stop: a mortgage paid off, commuting, saving for retirement itself, children who become independent.
• Costs that may rise: healthcare, especially before Medicare eligibility, travel in the early years, and help at home later on.
• Taxes: withdrawals from traditional 401(k) and IRA accounts are taxed as income, so the income you want should be the amount you plan to spend plus the tax on it.

Your spending may also change by phase: more active in the first years, quieter in the middle, with health costs rising later. A single yearly figure in today’s dollars is a reasonable place to start.

Count the income you can rely on

Next, list the income that will arrive whether markets rise or fall.

• Social Security. Sign in at ssa.gov/myaccount to see your estimated benefit at different claiming ages. Claiming before your full retirement age permanently reduces the monthly amount; waiting beyond it increases the benefit until age 70. The rules and amounts are set by the Social Security Administration and can change, so use your own current estimate.
• Pensions. If you have one, check the survivor options too. Choosing an option that continues payments to a spouse usually lowers the monthly amount.
• Other income: rental income, part-time work, or a business you will keep.

Work out what your savings must supply

Subtract the reliable income from the income you want. The rest is what your savings must provide every year.

How much savings that takes depends on two things: how many years the money must last, and what it earns while you draw on it. Plan for a long life rather than an average one. Running short at 85 is a much bigger problem than leaving something behind at 95.

Why today’s dollars matter

A million dollars in 25 years will not buy what it buys today. The cleanest way to plan is to work in today’s dollars throughout: state every income and savings figure at today’s prices, and use returns after inflation. Then the numbers mean what they seem to mean. The free Retirement Income Gap tool works this way.

A worked example

A made-up saver, aged 45, wants $80,000 a year in today’s dollars from age 65 until 92. Their Social Security estimate is $2,500 a month. They have $300,000 saved and add $1,000 a month. It assumes returns of 6% a year before retirement and 4.5% during it, with 2.5% inflation: the rates the tool starts with. Figures are rounded to the nearest thousand dollars.

Income wanted each year

$80,000

Social Security: $2,500 × 12

−$30,000

Income savings must supply each year

$50,000

Savings needed at 65 to pay that until 92

$1,062,000

Savings projected at 65

−$929,000

Gap at 65

$133,000

Without changes, this saver’s money would run short at about age 87. Saving about $390 more a month from now would close the gap. So would working two more years, to 67, on its own: two more years of saving and two fewer years of withdrawals.

Made-up, rounded figures to show the method. Not a quote, an illustration of any policy, a prediction, or anyone’s real situation.

Put your own figures into the Retirement Income Gap tool to see your version, including the age your savings would last to and the extra monthly saving that would close any gap.

Five ways to close a gap

1. Save more, sooner

Extra saving does the most work when it has the longest to grow. Make sure you contribute enough to your workplace plan to receive any employer match first. The free compound growth calculator shows how much time adds.

2. Work a little longer

Each extra working year helps twice: one more year of saving and one less year of withdrawals. If it also lets you delay claiming Social Security, your monthly benefit is higher for life.

3. Spend differently

Small changes to the spending you plan for can move the gap a long way, especially costs that recur every year, such as housing.

4. Use the right accounts

What a balance can pay depends on how it is taxed. Money in a traditional 401(k) or IRA is taxed when you withdraw it. Qualified withdrawals from a Roth account are generally tax-free. Holding savings in more than one kind of account gives you more control over your tax bill each year in retirement.

5. Add guaranteed income

An annuity can turn part of your savings into income for life, which can cover essential costs however long you live. The trade-offs are real: less access to that money, surrender charges during the early years, and guarantees that depend on the insurer’s ability to pay. Fixed and fixed indexed annuities differ in how they credit interest, and each should be explained in plain English before anything is signed.

The risks averages hide

A plan built on average returns can still fail. Three risks deserve attention:

• Sequence of returns. A market fall early in retirement does more damage than the same fall later, because you are withdrawing while values are down.
• Inflation over decades. Even modest inflation steadily erodes what a fixed income buys over a 25- or 30-year retirement.
• Longevity and health. A long life is good news, but it is also the easiest risk to underestimate, together with the cost of care late in life.

Measure, then decide

The gap is not a verdict, just a measurement. Run it once a year, and again when something important changes: a new job, an inheritance, a move, a change in health. Each time, the question is the same: what combination of choices closes the gap with the least strain?

If you would like help weighing those choices, a free strategy session maps what your savings, Social Security and any pension will pay, and looks at the options for the rest.