Will You Have a Retirement Income Gap? How to Fill It
To ensure your expenses in retirement are covered, you need to know what sources of income you'll have and where to turn to make up for any shortfall.


As you approach retirement, it’s essential to have a clear understanding of your financial situation. Knowing what your expenses will be and ensuring you have sufficient income to cover them is crucial.
When you don’t have enough income to cover all your expenses, that creates what is known as an income gap.
If this gap is not filled, you might be forced to draw down your retirement assets more rapidly than planned and risk running out of money during your retirement years. If you’re like most pre-retirees, you’re more worried about running out of money in retirement than dying.
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To help avoid running out of money, you need to identify and overcome any potential income gap, which you can do by tracking your pre-retirement spending, creating a retirement budget, determining your retirement income sources and comparing your expenses to your income. I’ll walk you through that process in this article.
Step No. 1: Track your pre-retirement spending
You can use an app to track your spending or simply pull out your phone and check your online banking app, making a quick list of your expenses and the amounts attached to them. You can divide those expenses into two categories:
- Fixed. Housing, childcare, insurance, subscription services, taxes, cell phone, emergency and retirement savings
- Variable. Food, utilities, transportation, entertainment, travel, maintenance, clothes, haircuts, etc.
Track your expenses over six months to give yourself a good idea of what they are over time. Average the amounts in each category to get a solid number. Then add those expenses to establish a baseline spending average.
Step No. 2: Create a retirement budget
Consider your current expenses and then subtract any that apply only while you’re working, such as commuting costs, retirement plan contributions, work attire, flexible spending account (FSA) contributions and your contribution to employer-sponsored health care costs.
Remember to include the new expenses that come with retirement and aging, such as Medicare premiums, out-of-pocket medical expenses and long-term care expenses. If you plan on traveling or plan to take up a new hobby, consider those costs.
Altogether, these expenses give you a ballpark figure of your expected costs in retirement, forming the foundation for determining how much income you will need.
Step No. 3: Determine your retirement income sources
Now, it’s time to identify your sources of income. Most retirees can count on Social Security — you may also have a defined benefit pension, rental properties, part-time work or other income sources.
These should all be added together to determine your total income in retirement.
Step No. 4: Compare your expenses to your income
When you’ve got a solid idea of your income, match your income with your expenses. If your income meets or exceeds your expenses, congratulations! If not, you’ve just identified your income gap. This needs to be filled, or you may run the risk of being forced to withdraw from your retirement savings earlier than you had planned, depleting your assets faster than expected and potentially affecting future returns. This is why it’s essential to plan for this gap well before you retire.
Consider the hypothetical* case of John and Susie, a retired couple who had an income need of $9,000 a month with $5,500 a month in Social Security and John’s $1,600-a-month pension, leaving an income gap of $1,900 a month.
Their plan to close their income gap involved withdrawing $1,900 a month — or 5% a year — from their $450,000 IRA. However, after a market drop, the value of their IRA declines to $360,000. That means they need to withdraw 7% a year to meet their income needs.
Then, the unthinkable happens — John passes away. Susie is left with his Social Security and half of his pension, a total of $4,000 and a much-reduced nest egg of $270,000. That’s because when one spouse dies, the surviving spouse gets the higher-valued Social Security. The defined benefit pension was reduced because John chose a 50% survivor option when he claimed his pension.
The good news is that there are investments and financial products designed to generate income specifically for these situations, which include:
- Annuities offer guaranteed** income to fill an income gap but also have downsides, such as expenses and a lack of liquidity
- Dividend stocks, funds and ETFs provide ongoing income but aren’t guaranteed
- Bonds, bond funds and ETFs offer ongoing income subject to certain risk
With proactive planning, you can choose the best investment or financial product to close your income gap to avoid a retirement like John and Susie’s.
A final word
Retirement is a significant life transition, and being financially prepared is crucial. By understanding your expenses, identifying your income sources and planning how to fill any income gaps, you can create a more protected and enjoyable retirement. The time to start planning is now, before you retire so that when the time comes, you can focus on enjoying life rather than worrying about money.
* The scenario shown herein is for illustrative purposes only and is based on hypothetical assumptions. John and Susie are not actual clients of the financial professional or firm.
** Guaranteed lifetime income available through annuitization or the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged. Annuities are long-term, tax-deferred vehicles designed for retirement and contain some limitations.
Amy Buttell contributed to this article.
Licensed Insurance Professional. This information has been provided by an Investment Adviser Representative and does not necessarily represent the views of the presenting adviser. The statements and opinions expressed are those of the author and are subject to change at any time. Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy.
Investing involves risk, including possible loss of principal. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. We are not affiliated with any government agency.
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My focus at Safe Haven has always been creating educated clients before making any financial decisions. I work closely with clients to tailor holistic wealth management strategies that align with their unique budgets, ages, values and lifestyles. When I am not at my office helping clients, I enjoy spending time with my wife and two children.
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