How to Calculate Your Retirement Income Gap: Social Security vs. Annuities

Retirement planning isn’t one-size-fits-all. To show how different income sources can work together, here’s a practical example focused on a United States reader around age 62–65.

• The goal: create a predictable income floor for essentials while preserving flexibility for surprises.

• How: Use our income gap calculator.

"The Player" (Alex) : Retirement income planning example for a 62-year-old.

The player

• Alex, age 62: Plans to claim Social Security at 66, with a modest employer pension.

• Focus: Aware there may be a retirement income gap in his portfolio.

• Savings and investments: About $500,000 across 401(k)/IRA and taxable accounts.

• Needs: Cover essential living expenses (housing, healthcare, utilities, food) and maintain some flexibility for emergencies and discretionary spending.

• Risk posture: Moderate; wants steady income but doesn’t want to give up all growth potential.

Three Practical Paths to Address the Retirement Income Gap

Option A: Minimal annuity involvement (maximize flexibility)

Income sources	Pros	Cons
Social Security at 66: about $24,000/year (illustrative; actual benefit varies) Pension: $10,000/year (guaranteed) Investments: Withdraw 3.5–4% of the portfolio per year for discretionary spending (roughly $17,500–$20,000 initially)	Maximum liquidity and control; no long-term lock-in. Potential for investment growth if markets perform well.	Greater sensitivity to market downturns and sequence-of-returns risk early in retirement. Longevity risk remains if withdrawals outpace growth over time.

Option B: Moderate annuity integration (balanced approach)

Income sources	Pros	Cons
Social Security at 66: about $24,000/year Pension: $10,000/year Annuity: A fixed lifetime income annuity covering essential expenses, e.g., $18,000/year Investments: Withdraw the remaining amount needed for discretionary spending, roughly $6,000–$8,000/year initially (more for flexibility as needed)	Predictable baseline to cover essential expenses, reducing required withdrawals from investments. Longevity protection; guaranteed income continues if you live a long time.	Some loss of liquidity and upside if markets rally; annuity costs and fees apply. Need to ensure the annuity fits within your overall tax and financial plan.

Option C: Greater annuity emphasis (more guaranteed income)

Income sources	Pros	Cons
Social Security at 66: about $24,000/year Pension: $10,000/year Annuity: Larger share of essentials covered by guaranteed income, e.g., $28,000/year Investments: Smaller discretionary draw, e.g., $2,000–$5,000/year	Strongest foundation of guaranteed income; reduced portfolio stress and withdrawal risk.	Reduced liquidity and flexibility; higher reliance on annuity terms and fees. Less upside potential from investments; inflation protection depends on riders or contract terms.

Key takeaways from these 3 Pathways

1. Start with essentials If you can cover essential costs with guaranteed income, you reduce the risk of depleting assets.

2. Align with Social Security timing Delaying Social Security increases lifetime income; use it strategically alongside any annuity.

3. Balance guarantees with flexibility An annuity can anchor essential income, while investments provide growth and liquidity for nonessential needs.

4. Inflation and riders matter If inflation is a concern, discuss inflation riders or contracts with built-in growth features, but be mindful of added costs and complexity.

5. Tax considerations Withdrawals from accounts and annuity payouts are taxed in your marginal bracket. Plan withdrawals to optimize your tax position over time.

Bottom line

Blending Social Security, a pension, and a thoughtfully chosen annuity can create a stable income floor, reduce pressure on investments, and help guard against longevity risk for many near-retirees in the United States. The right balance depends on your comfort with liquidity, fees, and how much guarantees you want in place.