What Is a Retirement Income Gap? How to Find and Fix Yours

How Do You Calculate Your Income Gap?

Step 1: Determine annual retirement spending ($84,000/year in this example) Step 2: Sum guaranteed income sources: - Social Security (both spouses): $48,000/year - Pension: $18,000/year - Total guaranteed: $66,000/year Step 3: Income gap = $84,000 - $66,000 = $18,000/year

This $18,000/year gap must come from your portfolio. At a 4% withdrawal rate, you need $450,000 in investments to fill it. At a conservative 3.5% rate, you need $514,000.

The size of your gap — not your total portfolio — is the number that matters most. Someone with a $500,000 portfolio and a $12,000 gap (2.4% withdrawal rate) is in a stronger position than someone with $1.5M and a $75,000 gap (5% withdrawal rate).

What Are the Most Effective Ways to Close the Gap?

In order of impact:

1. Delay Social Security: Every year of delay from 62 to 70 increases benefits by 6-8%. Delaying from 62 to 70 can add $15,000-25,000/year to guaranteed income — directly reducing the gap.

2. Reduce spending: The spending sensitivity table shows the success rate at various spending levels. Even a $300/month reduction ($3,600/year) meaningfully closes the gap.

3. Part-time income: $15,000-20,000/year for 3-5 years eliminates the gap entirely during the critical early retirement period.

4. Pension annuity (keep it vs. lump sum): The pension closes the gap with guaranteed income. The lump sum closes it with portfolio assets. The analysis compares both.

5. SPIA purchase: Convert a portion of your portfolio to guaranteed income, directly reducing the gap.

Want to Calculate Your Income Gap?

The analysis at myaifinancialplan.com calculates your income gap automatically — showing the exact amount your portfolio needs to cover and the withdrawal rate this implies. Start free at myaifinancialplan.com.