Retirement Income Gap Analysis: How to Calculate Yours

What counts as an income gap

Your income gap is the space between the bills you cannot avoid and the income that arrives whether or not the market cooperates. Working through the numbers puts a real figure on both sides, so you can see precisely how much extra guaranteed income to line up and roughly what building it will cost.

Non-negotiable costs, housing, food, health premiums, insurance, taxes and getting around, make up the essential side of the ledger. Flexible spending on travel, dining, gifts and hobbies sits somewhere else entirely and never enters this exercise. On the other side sit the checks that show up automatically for life: Social Security, a pension if you have one, and any annuity payment already flowing, none of which cares what the market did last week.

When guaranteed checks already cover the must-pay bills, there is no gap to speak of, and everything else in your portfolio can chase growth or fund fun spending without a second thought. When those checks fall short of the essentials, you are carrying a shortfall, and closing it with a dedicated income source usually needs to happen before you lean hard into market risk with what remains.

This distinction sounds simple, but most people skip it and run one blended budget instead of splitting the two buckets apart. Blending them makes it nearly impossible to tell how much of your plan actually depends on guaranteed money versus how much rides on the market having a good year. Separating the two is what turns a vague sense of "I think I will be fine" into an actual number you can plan around, negotiate with, and revisit as your situation changes.

How to total your essentials and your guaranteed income

Gather a full year of bank and credit card statements and pull out whatever repeats month after month. Build in a realistic healthcare figure that covers Medicare Part B, Part D, and either a Medigap policy or an Advantage plan. Layer on property tax, home insurance, and a rough yearly figure for medical bills you pay out of pocket.

For most retirees, must-pay spending falls somewhere in the $4,000 to $7,500 monthly range, swinging mostly on housing cost, health status and geography. Flexible spending tends to add another $1,000 to $4,000 a month on top of that, but this slice comes from a sustainable portfolio withdrawal rather than a guaranteed check.

With essentials nailed down, total up everything guaranteed: your Social Security figure at the claiming age you have in mind, a pension if applicable, and whatever an existing annuity already pays out. Take that combined figure away from your essentials, and what is left over is the monthly number you are solving for. Plug your own household numbers into our retirement income gap calculator and it will do this arithmetic for you.

Run this exercise for both spouses individually as well as for the household combined. A couple with a comfortable combined picture can still discover that one spouse's Social Security alone would fall badly short of essentials, which matters enormously if that spouse ends up the survivor. Catching that gap now, while both of you are healthy and able to plan, is far easier than trying to patch it after the fact.

The paycheck floor idea

Think of the paycheck floor as the slice of your must-pay spending that a guaranteed check needs to handle entirely, before any market-linked withdrawal enters the picture. The idea behind it is straightforward: nobody should have to unload stocks during a downturn just to cover the power bill. A properly sized floor also takes the sting out of longevity risk, because a guaranteed deposit keeps landing every single month regardless of how many years you end up living.

Say your essentials run $6,200 a month and Social Security delivers $3,600. Your floor is short by $2,600 a month, or $31,200 a year. That $31,200 becomes the specific dollar target your annuity ladder is built to hit.

A real-world gap example

Ray and Diane are 66 and 64 and getting ready to retire. Their essential spending comes to $7,100 a month: a $1,500 mortgage, $1,300 in healthcare premiums, $1,100 in groceries, $750 in utilities, $650 a month averaged for property tax, $550 in insurance, $450 for transportation, and $800 for everything else that has to get paid.

Between the two of them, waiting until full retirement age puts Social Security at $5,100 a month, and Diane brings in another $900 a month from a small pension. Total guaranteed money coming in: $6,000, which leaves a $1,100 monthly shortfall against their essentials, or $13,200 over a year.

Pricing a joint-life SPIA to close that $1,100 shortfall would land somewhere around $220,000 to $270,000, using a general planning assumption of roughly $200,000 to $250,000 of premium for every $1,000 of guaranteed monthly income at this age. As an alternative, a hypothetical 5-year MYGA ladder of $60,000 earning around 5.5% could bridge them to age 70, at which point a delayed Social Security claim would likely close the gap on its own. Both routes solve the same problem at different costs and with different trade-offs.

Ways to fill the gap with annuities

There are three common approaches, ranked from simplest to most involved:

A single SPIA. One premium, one contract, one guaranteed check that starts almost immediately and continues for life. This fits best when the gap is small, stable, and you would rather not manage anything further.

A MYGA bridge. Stack a 3 to 5 year MYGA or two to hold you over while you push your Social Security claim out to 70, a move that permanently boosts that benefit by around 24% versus filing at full retirement age. When that bigger check finally starts, it typically wipes out the gap by itself, and the MYGAs have served their purpose. This works especially well when the priority is a larger lifetime benefit without disturbing your market investments along the way.

A full ladder. Combining MYGAs, a SPIA and a deferred income annuity covers early, middle and late retirement separately. It takes more coordination to set up, but it is typically the most dollar-efficient and the most resilient option of the three. Our SPIA vs DIA vs MYGA guide breaks down how to combine them.

Which of the three fits your household usually comes down to how large the gap is and how much you enjoy managing moving parts. A gap under a few hundred dollars a month rarely justifies the complexity of a full ladder. A gap in the thousands, especially one that needs to hold up for a 30-year retirement, often benefits from splitting the job across more than one product so no single purchase carries the whole plan.

Mistakes that distort a gap analysis

The most common error is leaving healthcare out of the essentials column entirely. Medicare premiums, supplemental coverage, prescriptions and out-of-pocket costs typically run $750 to $1,600 a month for a couple and tend to climb faster than general inflation. Skip this line and your gap will look smaller than it really is.

Error number two: plugging in the gross Social Security figure rather than what actually lands in your account after tax. About 40% of beneficiaries end up owing federal tax on part of their check, and higher earners can see as much as 85% of the benefit taxed. Pull heavily from a traditional IRA and even more of that benefit becomes taxable, so a $5,100 gross check might really behave like $4,400 once tax is accounted for.

The third error is ignoring what happens when a spouse dies. The smaller of two Social Security checks disappears, and the household is left with only the larger one. A gap that looked fully closed for the couple can reopen for the survivor, which is exactly why joint-life payouts on a SPIA or deferred income annuity matter so much for married couples.