What's a retirement income gap?
Last updated: January 1
You’ve taken the important first step toward a comfortable retirement by saving and planning for your future. You may even have a budget in mind for your golden years and an understanding of how your retirement income — from sources such as Social Security, pensions or a 401(k) — can help fund that dream. But rising costs and unexpected expenses can mean your retirement income may fall short of your actual needs.
The difference between your retirement income and actual expenses is known as a retirement income gap, says U.S. News and World Report.
What causes it?
As lifespans increase and the economy faces unexpected shifts, the amount of money needed in retirement may be greater than you'd anticipated or saved for. Greater longevity, says Kiplinger, can mean a longer duration of retirement and a greater potential money shortfall. And rising healthcare costs can mean a bigger budget expense than you'd anticipated.
But Kiplinger says economic factors also play a role. Lower interest rates, for example, can mean reduced returns on some investments. And a rising age for full Social Security benefits may mean less income than expected in early retirement. Plus, changes in tax rates, higher costs of living and shifts in the market can occur at any time and affect your budget, says Kiplinger.
How can I avoid a shortfall?
Despite these threats to your retirement budget, it's possible to plan for a gap. A financial professional can help review your retirement plan and suggest strategies to avoid retirement income gaps.
Strategies such as boosting pre-retirement savings, planning on working longer, or delaying Social Security payments can all help decrease the likelihood of a shortfall, says Time.
It's also important to understand which sources of income you'll use toward essential expenses, such as food and housing, and which you'll use for non-essential discretionary spending.
Experts at Time and Kiplinger recommend earmarking guaranteed retirement income streams, such as Social Security or pensions, toward essential expenses. An annuity, says Kiplinger, is another good way to secure a steady stream of lifetime income to cover essential expenses during retirement. By combining an annuity with other guaranteed sources of retirement income, you can have peace of mind of knowing your essentials are covered.
The funds you've designated for discretionary spending can be invested in assets with greater market exposure and opportunity for growth, such a stocks, Exchange Traded Funds (ETFs), or mutual funds, says Kiplinger. This can enable you to keep up with rising costs and better handle unexpected expenses. And by having multiple sources of retirement income, you reduce the overall risk to your budget should any single source falter.
Income gaps in retirement can't always be foreseen, but there are ways to reduce the risk that they'll affect your budget. And with a little planning, you can have greater comfort and financial freedom during your golden years.