Point: Prepare for a Scary Income Gap in Retirement

Americans' finances
Americans' finances

According to recent research by Fidelity Investments, generationsof Americans are facing threadbare finances in retirement. Judging by what they expect to receive after the stop working, Fidelity reports that the average person will see their income drop by about 28%. And judging by what they expect to spend, the gap between income and outgo will be major.

To illustrate just how bad it can become, that same research claims that 38% of current retirees don't generate enough income to cover their expenses and are thus already living on borrowed time.

It gets worse, because the deeper into retirement you get, the tougher it is to go back to work and earn a decent living, as your skills are viewed as less relevant. And of course, at some point, if you spend more than you take in, you run out of assets to sell and are forcedto take a substantial cut in your lifestyle.

How Big a Gap Is it?

While that spend-down could be rendered moot if it takes place over decades, the reality is that most people's retirement spending is expected to far outpace their incomes by enough to quickly evaporate their savings.

The chart below shows just how big the expected monthly gap is on average, for each generation:

Monthly Incomes and Gaps
Monthly Incomes and Gaps

Source: Fidelity Investments.

This multigenerational problem is a gap of about $1,650 to $2,100 per household, per month. That's not chump change, especially when looked at as a portion of total expenses.

Of course, as my Motley Fool colleague Dan Caplinger points out in his counterpoint article, typically, retirees have considerably more flexibility to cut back their spending than those working to support a family and mortgage do.

Still, that flexibility only goes so far. If it were really that easy for retirees to cut back, why would nearly 40% of current retirees be unable to cover their costs already?

What Can You Do About It?

Those big, red deficit bars aren't going anywhere, and unless you can live on less than you're taking in, your choices become rather stark. You can:

  • Hope you pass away before the money runs out.

  • Hope you can keep borrowing yourself deeper in debt you'll never have to pay back.

  • Hope that when you do run out of money, family members or charities will take care of you.

  • Hope that the when your lifestyle gets forcibly downgraded, you'll be too old to be all that active anyway.

When it comes to retirement funding, "hope" is not a successful strategy.

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Gen X and Gen Y, Use Your Years Wisely

The good news, though, is that, especially for Gen Xers, and Gen Yers, there's still enough time to cover that gap and save enough for a comfortable retirement. For boomers who haven't yet prepared, however, it may be getting too late to cover the gap through savings alone.

The chart below shows what typical members of each generation need to save each month to cover that gap from their savings alone, with the "Savings Needed" number based on the 4% rule for retirement withdrawals:



Savings Needed

Monthly Savings Needed, Assuming
4% Returns

Monthly Savings Needed, Assuming
8% Returns

Baby boomers

10 years




Gen Xers

20 years




Gen Yers

30 years




Source: Author calculations, based on the Fidelity study.

Even for boomers, though, there are still some options besides starving in old age. Generation-specific opportunities for those who are at risk for those gaps appear below:


  • Work longer.

  • Kick your kids out of the house, or at least charge them for rent, utilities, and food.

  • Downsize what you can while it's still your choice what goes.

Gen Xers:

  • Make sure your retirement is funded before your kids' college educations.

  • Seek higher returns while you're still young enough to recover from typical volatility.

  • Maximize matching money and deductible contributions to eke every bit of input you can.

Gen Yers:

  • Pay off your debts, then immediately turn that cash into investment contributions.

  • Increase your contributions as much as you can every time you get a raise.

  • Consider saving even more aggressively, given the Social Security trust fund's pending collapse.

Regardless of your age and how many more years you plan to work, the sooner you start, the more time you have on your side. The more time you have, the easier the adjustments and the less cash you have to put away to reach your goal. There's no better time than right now to get yourself on track to close that retirement gap.

Motley Fool contributor Chuck Saletta welcomes your comments. Click here for a free video research report on Social Security, Medicare and your retirement from The Motley Fool.