What Is a Retirement Income Gap?

Two numbers decide whether there is a gap. The first is your desired monthly income: the amount you would like to have arriving each month to cover housing, food, health care, travel and everything else. The second is your recurring monthly income: the money you expect to receive month after month regardless of what markets do.

Recurring retirement income usually includes:

• Social Security benefits for you and, if applicable, your spouse
• Employer or government pension income
• Other income you count on every month, such as annuity payments or rent you rely on

Subtract recurring income from desired income. What remains is the gap that has to come from somewhere else — most often from your savings.

The gap in this example is not a crisis and it is not a guarantee of a shortfall. It is a measurement: this household needs roughly $2,000 a month from savings or another income source, and now knows the size of that number instead of guessing at it.

• No gap: your expected recurring income and estimated savings income cover the monthly amount you named. The planning question becomes protecting that income rather than creating more of it.
• A modest gap: savings may cover it comfortably, and small changes — the age you claim benefits, the amount you spend early on, the mix of income sources — can matter a lot.
• A large gap: the majority of your monthly income would have to come from savings, which makes how long those savings last the central question.

A gap figure is an estimate in today's dollars based on the numbers you enter. It does not predict markets, taxes or inflation, and it is not a recommendation to buy or change any product.

Once you know your gap, two related questions usually follow: how badly early market losses could affect savings you are drawing from — see sequence of returns risk — and how much of your future withdrawals will be taxable, which is where required minimum distributions come in.