How Do You Calculate Your Retirement Gap?
Estimate your annual retirement expenses (typically 70-85% of pre-retirement income), then subtract guaranteed income sources: Social Security, pensions, and annuities. The remaining amount must come from savings. If your projected portfolio withdrawals at a safe withdrawal rate fall short, the difference is your retirement gap.
What Causes a Retirement Gap?
Common causes include starting to save too late, underestimating retirement expenses, not taking full advantage of employer matches, carrying debt into retirement, failing to account for healthcare costs, and relying on overly optimistic return assumptions. Inflation and longer life expectancy also widen the gap.
How Can You Close a Retirement Gap?
Strategies include: increasing savings rate (even 1-2% more makes a difference over decades), maximizing catch-up contributions after age 50, delaying retirement by a few years (which both grows savings and shortens the withdrawal period), reducing planned retirement spending, and working part-time in early retirement to supplement income.
Frequently asked questions
What is the average retirement gap in the U.S.?
Studies suggest the median American household faces a retirement income gap of roughly 20-30% of what they will need. The gap tends to be larger for lower-income workers who rely more heavily on Social Security and smaller for high earners with substantial savings.
Can a retirement calculator show your gap?
Yes. Most retirement calculators estimate whether your current savings rate and portfolio will generate sufficient income. A well-designed calculator will quantify the gap and show how changes to savings rate, retirement age, or spending can close it.