What Is Income Gap In Retirement And How Can You Prepare?

by | Mar 30, 2023

Regarding retirement planning, the income gap can be a major factor.

With rising costs of living and unexpected expenses, ensuring you have enough finances to maintain your lifestyle can feel overwhelming and daunting.

Combating the income gap requires pre-emptive planning and a solid understanding of how Social Security is set up and how much it will cover those who qualify for its various benefits.

In this blog post, we’ll explore how the retirement income gap works, provide tips on better preparing yourself financially before retiring, outline what Social Security benefits are available to those in need of assistance with the income gap in retirement, and more!

Read on to learn what you should know about bridging the financial gaps created by fluctuating market conditions while protecting your hard-earned savings – no matter where life may take you!

Calculating Your Retirement Gap

A financial adviser can help estimate the amount you’ll need for retirement, whether as a regular monthly sum or a one-off lump payment.

They will evaluate your current finances and then use their knowledge of pension plans, investments, and other strategies to make an educated guess about how much money you should have saved when you reach retirement age.

Ultimately, this aim ensures you have enough financial resources to enjoy your golden years without worrying too much about money.

This calculation requires subtracting the amount you assume you will need for retirement from the estimated amount you will have – the resulting figure is your retirement income gap.

Types of Income Gaps To Prepare For

Aside from the Longevity Income Gap, generated by a combination of beneficial developments and inadequate preparation, two other varieties of income gaps should be considered.

Your Total Income Gap

This is the gap between what you wish to earn and the guaranteed lifetime income acquired from your work, including pension payments, Social Security, and deferred compensation.

For example, retirees wanting to maintain their lifestyle while allowing for inflation need an income of $160,000 annually.

However, their current Social Security and pension only amount to $62,500 annually.

This results in a Total Income Gap of almost $100,000 each year. She must make 5% annually from her $2 million retirement funds and capital appreciation to achieve the desired income level.

Your Planning Income Gap

Our friend’s savings in the present market only provide her with an annual income of $72,000 – a difference of more than $25,000 from the expected amount.

Consequently, she has encountered a Planning Income Gap, which needs to be filled with the money she budgeted to acquire from her assets.

Bridging Income Gaps With A Smarter Plan

  1. An annuity can be added to your savings retirement accounts, consisting of two payments – one beginning immediately and the other starting at a future date, both continuing for the duration of your life. This will help supplement what you earn from investments in bonds. Allocating some of your savings to lifetime income annuities can bring more income and tax advantages.
  2. Investing in ETFs with both high-dividend and value-oriented characteristics is a smart choice for those seeking increasing income, the potential of greater share price appreciation, low fees, and lower taxes. Furthermore, incorporating fixed-income ETFs using artificial intelligence for security selection could improve your investment return. A.I. technology allows portfolio managers to select securities with better prospects of outperforming their benchmark indices while managing risks more efficiently.
  3. Under this system, you can control your IRA withdrawals from an account invested in a combination of low-cost growth and fixed-income exchange-traded funds. Managing your withdrawal amounts makes creating a steady income stream possible instead of just satisfying the required minimum distributions (RMDs).
  4. If the Planning Income Gap persists after trying out the steps mentioned above, a moderate equity withdrawal from a primary residence may be an option until age 85. Reversing mortgages are usually used in such cases, but other home-equity extraction products are available. She ensures her income is secure and limits withdrawals until she reaches the age of 85 by combining drawdown with longevity protection.

What Can Cause The Income Gap

Inflation and a longer life expectancy than expected are two major factors that can reduce the buying power of a retirement fund. In America, people usually plan for an average lifespan of around 80.

The average life expectancy considers those who pass away before they can experience their retirement years.

The Social Security Administration estimates that men will have 19 retirement years on average, while women can expect 21 years – a significant disparity in life expectancy.

At 65 years old, this is the expected difference in lifespan.

In the last decade, the U.S. has had a historically low inflation rate of just 1.7 percent per annum.

This could prompt savers to think this pattern will persist when they retire.

From June 2017 to June 2018, the U.S. Labor Department reported an inflation rate of 2.9 percent – lower than the country’s historical average of 3.2 percent – however, it is still considerable considering that prices will double approximately every two decades at this rate.

How Can You Avoid Or Prepare For The Projected Income Shortfall

You can still plan for a retirement projected income gap, even with the potential threats to your budget.

Professional financial advice may help analyze your retirement plan and develop an Investment strategy to help you avoid any future problems.

Time, a professional financial state that measures things like increasing pre-retirement savings, planning to work longer, and postponing Social Security payments, can reduce the possibility of a deficit.

It is essential to figure out which sources of income should be allocated for essential costs, such as food and rent, and which can be used for discretionary expenses.

Time and Kiplinger experts suggest allocating guaranteed retirement income streams, like Social Security or pensions, for necessary costs.

Additionally, Kiplinger recommends an annuity to obtain a consistent income stream in retirement to cover essential expenses.

You can feel secure in your retirement by combining an annuity with other reliable sources of income to ensure that your necessities are taken care of.

Kiplinger suggests that the money you have set aside for flexible spending can be put into asset allocation investments with more potential gains and a larger presence in the market, like stocks, ETFs (Exchange Traded Funds), or mutual funds.

By having multiple sources of retirement income, you can keep up with increasing costs and manage unanticipated expenses more effectively.

Additionally, diversifying your retirement savings lessens the overall risk to your budget in case one source fails.

Social Security – Timing Is Everything

For most individuals aged 65 and up, Social Security is the main income source for their retirement. Roughly 88% of pensioners are provided with regular payments from this program.

They can begin receiving benefits at 62, mostly the normal retirement age.

It is essential to comprehend the influence that beginning to claim Social Security benefits early has on the amount of money you are entitled to each month.

Commonly, individuals envision retirement age as 65 years old. Nevertheless, with Social Security, the full retirement age differs depending on when an individual was born.

Reaching full retirement age is significant, as it marks when a person can start receiving unreduced retirement benefits.

Understanding An Income Gap In Retirement

Retirement is a time to enjoy life, spend time with family, and not worry about money.

Unfortunately, the income gap among retirees makes it difficult for many to realize their full retirement dreams.

But realistically, you can be more prepared than most by understanding and accounting for these income gaps within your financial plan.

The Social Security retirement benefit is an important piece of the puzzle. Still, today’s strategies provide valuable alternatives to bridge the retirement income gap and keep you on track toward achieving your unique retirement vision.

To ensure your retirement plan includes all the necessary components, take action now and speak with a qualified financial advisor to help craft a smarter plan that will adequately prepare you for any eventuality during your golden years.


  • Scott Hall

    Scott realized about 5 years ago that he was woefully behind on retirement savings and needed to catch up. He began writing about it on Assets.net

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