How does this calculator work?
Enter your monthly essential expenses, your Social Security benefit, any pension, other guaranteed income, your age and sex. The calculator subtracts your guaranteed monthly income from your essential expenses to show your monthly and annual gap, then estimates the premium a single premium immediate annuity would need to close that gap for life, using typical current payout factors for someone your age.
How much guaranteed income do you actually need?
Your retirement income gap is the difference between what you must spend every month and what shows up automatically from Social Security and any pension, guaranteed or not. Someone spending $5,150 a month against $2,900 of guaranteed income is short $2,250 every month, a $27,000 annual hole with zero protection if markets turn rough. The calculator above converts your own numbers into that gap, then estimates roughly what an immediate annuity would cost to close it.
How to use the retirement income gap calculator
- List your essential monthly expenses. Roll in your mortgage or rent, groceries, insurance, transportation, and healthcare costs including Medicare premiums, the bills that get paid regardless of what the market did that month.
- Total your guaranteed monthly income. Include Social Security and any pension, but leave out planned withdrawals from savings, since those are not promised to be there every single month.
- Review the output. The tool nets your guaranteed income against your essentials to surface the monthly shortfall, then translates it into an estimated annuity premium.
Why the monthly shortfall matters more than a single lump sum
Most retirees fixate on one giant target number, a total they hope will be "enough" someday. A better question asks how much guaranteed income is still missing each and every month once Social Security and any pension are counted. Expenses do not bill you once a year, they hit monthly: rent or a mortgage, the grocery run, Medicare. Whenever guaranteed income comes up short against those recurring costs, something has to bridge the difference, whether that is regular portfolio withdrawals or a stream of income built to guarantee itself.
Funding the shortfall with a guaranteed income source keeps your essentials paid regardless of what markets do next, which frees the remaining portfolio to grow, cover emergencies, or eventually go to family. Once you have your gap number, run it through the immediate annuity calculator to see what a specific payout would look like.
Watching a couple work through their numbers
Take Nate and Priya, both 66 and just retired with the house paid off. Add up their must-pay costs, property taxes, groceries, Medicare, utilities and insurance, and they land at $5,000 a month. Between the two of them, Social Security delivers $2,750 monthly. Subtract that and they are staring at a $2,250 shortfall every month, the same $27,000-a-year figure a lot of couples end up with.
They decide to erase the whole thing using a joint-life immediate annuity, so payments keep coming as long as either one of them survives. Pricing that near a 6% payout rate, replacing $27,000 a year of guaranteed income calls for a premium in the neighborhood of $450,000. Their remaining $650,000 in savings stays fully invested, available to grow or handle a surprise.
Knowing the essentials are locked in no matter what, Nate and Priya no longer flinch at a rough quarter in the market. The rest of their portfolio funds vacations and help for their kids, not the utility bill.
Two very different price tags for the same shortfall
Closing an income gap generally comes down to one of two approaches, and the capital required is nowhere close between them.
Approach one, the 4% rule, has you withdraw 4% of an investment portfolio the first year and increase that dollar figure with inflation from there. Replacing $27,000 a year this way needs roughly $675,000 set aside up front. Approach two, an immediate annuity, pools mortality risk across every buyer in the contract, letting the carrier pay a higher rate per dollar than an individual portfolio safely could. The identical $27,000 a year drops to around $450,000 at a 6% payout, meaning roughly $225,000 stays free in your accounts for growth, a rainy day, or your heirs.
| Method | Capital needed for $27,000 a year | Guaranteed for life? |
|---|---|---|
| 4% rule withdrawal | About $675,000 | Only as long as the portfolio holds up |
| Immediate annuity (6% payout) | About $450,000 | Yes |
Plenty of retirees blend the two, letting guaranteed income cover the essentials while keeping the remaining balance free for discretionary spending. Someone who has not yet started Social Security should keep in mind that the benefit amount shifts every figure here, so it makes sense to check the claiming age math with the Social Security claiming calculator before locking in how large an annuity to buy.
Alternatives worth weighing
Buying an immediate annuity closes the gap outright, but a few other tools can get you there too.
- Single premium immediate annuity. Hand over a lump sum and payments generally begin inside of a month. It produces the strongest income per dollar of any option here, but growth stops and access to the principal is limited from that point forward.
- Income rider on a fixed index annuity. Lifetime income switches on later while the account itself keeps a shot at growth in the meantime. Expect a smaller check per dollar than an immediate annuity, offset by a death benefit and remaining upside.
- A MYGA as a stopgap. Planning to hold off on Social Security or a pension for a while? A shorter-term MYGA can lock a fixed rate to bridge the years until that guaranteed income actually starts.
A licensed strategist can shop payout rates across several top-rated carriers before you sign anything, and there is no charge to you for that comparison.
Blending two or three of these tools often beats picking just one. A retiree might use a short MYGA to bridge the years before claiming Social Security, then convert part of that MYGA into an immediate annuity once claiming age arrives and the remaining gap is smaller and better defined.
What this tool does not account for
- Rising prices. A fixed annuity payment never grows on its own. Building a ladder of annuities purchased over time, or attaching a cost-of-living rider, can help offset this, though a rider typically starts you off at a lower payment.
- Healthcare inflation. Medicare premiums and related out-of-pocket costs have a habit of outpacing general price increases, so plan in some cushion.
- Taxes. An annuity funded with after-tax dollars taxes only the growth portion of each payment through an exclusion ratio, while one paid for with IRA money is taxed in full as ordinary income when it comes out.
- What happens to a surviving spouse. Picking a joint-and-survivor structure shaves the monthly payment down somewhat, but that tradeoff typically pays off, since payments then run for whichever spouse outlives the other rather than stopping the moment the first spouse passes.
Frequently asked questions
What exactly is a retirement income gap?
It is the shortfall left over after you line up your must-pay monthly bills against the income you are guaranteed to receive no matter what. Total your non-negotiable costs, things like housing, groceries, healthcare and utilities, then subtract Social Security and any pension you are owed. Whatever remains is the piece you have to fund some other way, either by drawing down savings or by adding a source of guaranteed income.
How big a lump sum does closing my gap actually take?
That depends on the size of the shortfall and the method you use to fund it. A $2,250 monthly gap adds up to $27,000 a year, and covering that under the traditional 4% withdrawal rule would call for setting aside roughly $675,000. An immediate annuity paying near 6% could close the identical gap for closer to $450,000, since the insurer spreads longevity risk across a large pool of buyers instead of any one person having to fund their own worst-case lifespan alone.
Is the 4% rule better than buying an annuity?
They solve the problem in different ways. The 4% rule has you pull 4% from an investment portfolio the first year and adjust upward for inflation after that, aiming to stretch the money across roughly three decades, but nothing guarantees it will actually last that long. An annuity is a contract: hand over a lump sum and the carrier is obligated to pay you a set amount for as long as you live. You trade flexibility and upside for certainty, and the annuity typically needs less capital to produce the same income.
Does buying an annuity truly guarantee income for life?
Yes. Whether it is an immediate annuity or a lifetime income rider on another contract, the payment continues for as long as you are alive regardless of how markets behave or how long you end up living. That promise rests on the financial strength of the company that issued the contract, so checking the carrier's rating matters, and choosing a joint payout stretches the same guarantee across both spouses' lifetimes.
How does inflation change my gap over time?
It widens it, because your essential costs keep climbing while a level annuity check stays exactly the same size year after year. A gap of $2,250 today could look considerably larger a decade from now. A few common fixes: add a cost-of-living rider to the contract, ladder several annuities over different years so newer money captures higher payout rates, or leave a portion of savings invested for growth to backstop the guaranteed piece.
Sources
Educational only, not investment, tax or legal advice. Tax Free Wealth Plan LLC is a licensed insurance agency, not a registered investment adviser or broker-dealer. Annuities are not bank deposits, are not FDIC insured and are not guaranteed by any government agency. Guarantees are backed solely by the claims-paying ability of the issuing insurance company. Features, rates and availability vary by state and change over time; the contract and disclosure documents govern.