Find Your Retirement Income Gap: Spending Minus Guaranteed Income

Some retirement income pays every month for as long as you live, whatever the market does. The rest comes from a pile of savings that shrinks every time you spend from it and can, if you spend too fast or markets fall at the wrong moment, run out while you still need it. The whole planning problem sits in the space between them.

That space is the income gap. It is the spending guaranteed income leaves uncovered.

The calculation

Guaranteed income keeps paying without you selling anything. Social Security, a pension and any income annuity already in place all qualify. Rental income and dividends don’t count here. They can shrink.

Get each figure from the source. Your Social Security estimate is on your statement in the “my Social Security” account. A pension figure comes from the plan’s benefit statement, which should also say whether payments rise with inflation, whether a surviving spouse keeps receiving them after your death, and at what reduced amount if you chose a joint option. Social Security gets a yearly cost-of-living adjustment. Many pensions do not, and a flat pension buys a little less each year, which widens the gap slowly over a long retirement even if spending never changes.

When you claim Social Security changes the $28,000, sometimes by a lot. The Social Security claiming calculator shows how the figure moves between 62 and 70, and the course on timing your Social Security claim covers that choice in full.

The gap changes by phase

The $32,000 assumes every source is already paying. Often they are not. Retire at 62 with the pension starting at once and Social Security put off until 67, and for those five years the only guaranteed income is the $12,000 pension, so the gap is $72,000 - $12,000 = $60,000 a year, nearly double the later figure, all of it drawn from savings in the years when a market fall does the most damage.

Write the gap out for each phase. One line for the years before Social Security, one for after, and one for after Medicare starts if you retire before 65. Each phase has its own number.

Necessities and extras

Now split the $72,000. Necessities are the bills you’d pay in a bad year: housing, food, utilities, insurance, health care, taxes. Extras are travel, gifts, hobbies and eating out. They’re real, and they can be cut.

Suppose necessities come to $45,000 and extras to $27,000. Guaranteed income is $40,000, so it falls $5,000 short of necessities.

That shortfall is the number to watch. Ideally guaranteed income covers every necessity, because then a bad market can only cost you extras, and you can sit through a crash without selling anything to keep the lights on. A household in that position can take more risk with its savings. A household far short has to be careful. The last lesson looks at ways to close the difference.

Costs people forget

Some lines are easy to leave out of spending.

The first is tax. Withdrawals from a traditional IRA or 401(k) are taxed as income, part of your Social Security may be taxed too, and the tax comes out of the same money you planned to spend. Put your expected tax bill in as its own spending line.

The second is health insurance before 65. Medicare starts at 65. Retire at 62 and you need three years of other coverage. Those premiums can be one of the largest bills in the budget. After 65, Medicare premiums and out-of-pocket costs stay on the list.

Add both and the gap grows. That’s fine. A gap that is too small is worse than one that is honest.

The guide to how much you need to retire turns a gap into a savings target, and the retirement withdrawal calculator lets you test the number against a portfolio.

The next lesson turns the $32,000 into a withdrawal rate. It then adds guardrails, so the rate can adjust when markets do.