The Retirement Income Gap

by | Aug 27, 2018 | Institutional Services

Many American workers participate in company retirement plans, methodically contributing to their accounts over time to fund for life after work. Beyond benefiting from employer-funded plans, retirees commonly draw from additional savings tucked away in IRAs or after-tax savings accounts as well. Add Social Security payments to the mix and it should be a recipe for a secure retirement, right? While many retirees thoroughly plan for their retirement, the rising cost of living and unforeseen expenses can mean the retirement income may fall short of anticipated needs. The difference between your retirement income and actual expenses is known as your Retirement Income Gap.

What Can Cause a Shortfall?

Along with unexpected expenses, increased life expectancy and inflation top the list of culprits that can erode the purchasing power of your retirement account. In the US, average life expectancy is just under age 80 and is the age commonly used as a target for planning. But, that average includes the number of people who die young and unfortunately never see their retirement years. For those that have reached age 65, the Social Security Administration estimates that men will live to approximately age 84 and women to about 86, presenting a significant difference in the estimation of years in retirement. Additionally, in the last decade the US inflation rate has been historically low, averaging just 1.7 percent per year. This may lead savers to believe that this trend will continue into retirement. For the 12 months leading up to June 2018, the U.S. Labor Department published a 2.9 percent inflation rate, which is more in line with the U.S. historical average of 3.2 percent. That doesn’t sound so bad until you realize that at this rate prices will double every 20 years.

How can participants avoid a shortfall? Making sound decisions about the areas of retirement planning that employees can control goes a long way. Let’s look at the two biggest sources of retirement income and some guidance on how to maximize their benefits.

Social Security – Timing is Everything

Social Security is the most common source of retirement income for those over age 65, with 88 percent of retirees relying on these monthly payments. Since workers can apply for Social Security as early as age 62, the most popular claiming age, it’s important to understand the effect that claiming early has on the amount of monthly benefit received. Generally speaking, people think of retirement age as 65. But, with Social Security the full retirement age varies depending on when you were born. Full retirement age is important since it is the age at which a person may first become entitled to unreduced retirement benefits.

What Happens if You Claim Early?

Let’s take Joe Worker who was born in 1954. His full retirement age for Social Security benefits is age 66. If Joe started to take his benefit at age 62, his monthly benefit would be reduced by 25% for his lifetime. If Joe waited until he was age 66, he would receive his full benefit, 25% more, over his lifetime.

Additionally, if Joe deferred his benefit start date until age 70, he could earn “delayed credits” of about six to eight percent per year in addition to his cost of living adjustments. At age 70, Joe’s monthly benefit would be 66 percent higher than it would be at 62! Truly, when it comes to Social Security, timing is everything.

Social Security strategies and claiming choices can be extremely complicated, especially when you add in the strategies available to married couples. There are several calculators and available software services to help with this important analysis such as and

In 2018, the maximum Social Security benefit an individual can receive is $2,788 per month, or $33,456 per year. These benefits were never intended to fully replace one’s prior earnings. In fact, according to the Social Security Administration, this benefit only compensates for about 40 percent of an average wage earner’s income after retiring. Unless employees plan to reduce their lifestyle expenses, Social Security retirement benefits probably won’t cover all, or possibly even a majority, of future living costs. Let’s try to close the gap a bit further.

 Retirement Accounts

If your employees are relying on their 401(k) plan to close the retirement income gap, then committing to contributing early and consistently is key. While 401(k) plans are one of the best available retirement savings options for many, only 32 percent of American workers are participating in one. That is a surprisingly small number given that 59 percent of workers have access to these types of plans.

Saving early, consistently, and aggressively really helps. But, what’s the reality?  A recent study by Vanguard entitled “How America Saves” showed the average 401(k) account balance by age group. Even at age 65 the average account balance was just under $197,000. If we use an average life expectancy in retirement of 20 years, these funds could provide an additional $9,850 per year (without investment growth). Add this to the maximum Social Security benefit of $33,456 and the resulting annual income is $43,306, not a particularly robust retirement income.

The income gap is markedly larger for female employees. A recent Student Loan Hero study found that women had about one-half the amount in retirement savings as their male counterparts. The low savings level is even further compounded by the fact that, on average, women live longer than men. The reasons for this short fall can stem from time away from the workforce for family reasons, but the women surveyed also cited a lack of knowledge about investing as a deterrent to joining their employer retirement plans or investing in an IRA account.

What can employees do to boost their savings?

It’s great if you started young, deferred 20% of your pay, and invested well. However, that may not be the case for many employees. Here are a few useful tips to get that retirement savings number up:

  • Start Saving Now – Reengage with those employees that are not participating in your retirement plan. Encourage them to get their benefit information from the Social Security Administration so they understand the baseline amount that will be forthcoming. All employees who are eligible for Social Security benefits can access their information by creating a secure account at
  • Increase Contribution Levels – American culture has not taught us to be great savers. Though Americans aren’t the worst around the globe, countries like Japan have average savings rates of nearly 50% of their income! If you have employees deferring 1 to 3 percent of their pay, encourage them to bump up their rate.

Catch-up Contributions – Catch-up contributions are appropriately named! They were created to help employees who are age 50 or older “catch-up” for retirement. Not only can an individual defer $18,500 into a 401(k) plan in 2018, they can also contribute an additional $6,000 per year as a catch-up contribution.

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