The Retirement Income Gap: How to Bridge the Space Between Savings and Needs

Calculating Your Retirement Income Gap

The retirement income gap is simply the difference between your projected income in retirement and your projected spending. Start with a realistic spending estimate. Research consistently shows that retirees spend more in early retirement (the "go-go years") as they travel and pursue new activities, less in mid-retirement (the "slow-go years"), and more again in late retirement when healthcare costs rise.

A common benchmark is 70-80% of pre-retirement income, but this is a rough starting point. A more reliable approach is to build a retirement budget from the bottom up — housing, food, transportation, healthcare, travel, and discretionary spending. Don't forget to factor in inflation: at 3% annual inflation, $80,000 of today's spending becomes $108,000 in 10 years and $145,000 in 20 years.

Income Sources: Building Your Floor

Before relying on portfolio withdrawals, identify all guaranteed or near-guaranteed income sources that will cover baseline spending. Financial planners call this the "income floor" — the portion of expenses covered by income that doesn't depend on market performance:

• Social Security: The most important income source for most Americans. Delaying benefits increases them permanently — by 8% per year from FRA to age 70. A couple optimizing their claiming strategy can often add $100,000+ to lifetime Social Security income.
• Pension: Defined benefit pensions provide a guaranteed income floor. If you have a pension, model whether taking the lump sum or the annuity payment makes more sense given your health, other assets, and survivor needs.
• Rental income: Real estate rental income can serve as a reliable cash flow source, though it comes with management responsibilities and concentration risk.
• Part-time work income: Even modest part-time earnings significantly reduce the portfolio withdrawal burden, especially in early retirement.

Part-Time Work as a Bridge Strategy

Working part-time for even 3-5 years after your primary retirement can dramatically improve your financial picture in two ways: it reduces portfolio withdrawals during the critical early retirement period (reducing sequence of returns risk), and it allows the higher-earning spouse to delay Social Security, maximizing the permanent benefit level.

The math is compelling: earning $30,000 per year for 5 years in early retirement reduces portfolio withdrawals by $150,000, preserving those assets to compound for later years. If that $150,000 grows at 6% over the following 15 years, the early part-time work effectively added over $350,000 to your terminal portfolio value — from only $150,000 in reduced withdrawals.

Annuities as an Income Bridge

A simple single-premium immediate annuity (SPIA) or deferred income annuity (DIA) can fill part of the income gap with guaranteed lifetime income — converting a portion of your portfolio into a pension-like payment stream. This is particularly useful if your income gap exceeds what Social Security will cover.

In 2025, a 65-year-old male can purchase approximately $6,500-7,000 per year in lifetime income from a $100,000 SPIA premium. For a couple seeking a joint-and-survivor annuity, the payout is lower but provides income as long as either spouse is alive. The tradeoff is loss of liquidity and no participation in market upside — annuities make sense for covering baseline, non-discretionary expenses, not for your full retirement income.

Monte Carlo: Measuring Your Success Probability

Once you've calculated your income gap and identified your income sources, Monte Carlo simulation translates that picture into a probability of success across thousands of possible market scenarios. Rather than assuming a fixed return, Monte Carlo draws from the distribution of historical returns to test whether your portfolio survives varying sequences of good and bad markets.

Target a Monte Carlo success probability of 80-90% for your retirement income plan. Below 80%, the plan carries meaningful risk of running short. Above 90%, you may be over-saving or under-spending in ways that reduce quality of life. If your current trajectory falls short, the levers available are: save more before retirement, retire later, reduce planned spending, increase guaranteed income (through Social Security optimization or an annuity), or plan to work part-time in early retirement.