Filling in The Gaps in Your Retirement Income

A retirement income gap represents a shortfall between the income you will need to pay your essential (and possibly some non-essential) expenses in retirement and the amount that you actually have coming in.

While you may be able to sustain this pattern for some period of time, you will eventually run out of money. Then what? So, before it is too late, it is critical that you implement a strategy for filling in the gaps in your retirement income.

There are several steps involved in determining whether or not you may have an income gap in retirement – and if you will, strategies for closing it. These include:

• Estimating your expenses
• Determining where income will be generated
• Developing ways to increase income, reduce costs – or both

Similar to your pre-retirement years, it is important to draw up a budget for estimating your expenses in retirement. While some costs may go down after you leave the working world, it is possible that others will increase (such as travel, entertainment, and fun).

When creating your retirement budget, you should also separate out essential and non-essential costs. For instance, some common essential living expenses can include:

• Housing
• Utilities
• Food
• Healthcare
• Toiletries

It is also important to keep in mind that, due to inflation, your expenses will likely increase over time.

Although you may receive income from just one source – such as a job or a business – during your working years, it is possible that you could have several generators of retirement income. These could include one or more of the following:

• Social Security
• Employer-sponsored defined benefit pension plan
• Reverse mortgage
• Rental income
• Interest and/or dividends from savings or investments
• Annuity

When it appears that you will have an income shortfall, there are some strategies that you could use. These may include one or more of the following options:

• Working part-time. Income from a part-time job may be enough to fill in what you need in order to maintain your intended lifestyle.
• Reducing your expenses. You may find that there are some items or services that you’re paying for, but that you really don’t need. For instance, is there a gym or club membership that you’re paying for but never use? Do you really need all of the cable TV channels in your plan? Could you shop for a better rate on your car and homeowner’s insurance coverage? All of these savings can really add up.
• Delaying your retirement date. If you delay your retirement date, it could give you more time to save and invest for the future. In addition, if your employer offers a retirement plan, you may be able to add more to this, as well.
• Waiting to claim Social Security retirement income benefits. The longer you wait to file your Social Security, the higher your benefit will be. For instance, each year that you wait between your full retirement age and your filing date, you could give yourself an 8% “raise.” (Note that the 8% increase stops when you reach age 70).
• Drawing income from non-taxable sources. By taking tax-free income (such as that from a Roth IRA), it can reduce the amount of income that you are taxed on. With lower taxes comes more net spendable cash flow.
• Purchase an annuity. Annuities are designed for paying out a regular income stream for either a pre-determined time – such as 10 or 20 years – or for the remainder of your lifetime. If you opt for the lifetime income, you can rely on a steady stream of incoming cash flow, regardless of whether you need it for a few years or several decades!

It is best to determine whether or not you will have an income gap sooner rather than later. That way, you can come up with strategies for closing it. Before you commit to any plan, though, it is recommended that you first talk with a retirement income specialist who can guide you along the way.

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