A retirement savings gap is the difference between the amount of money someone is projected to have available at retirement and the amount they would need to fund the retirement they are planning for, at their intended spending level and life expectancy.
Retirement Savings Gap
A retirement savings gap is the shortfall between what someone has actually saved for retirement and what they would need to fund the retirement they're planning for.
Last reviewed by Steven Fox, CFP®, EA
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Quick Summary
- The gap is found by comparing your projected resources at retirement to the amount you'd actually need, at your own spending target and time horizon.
- Sometimes described as a "retirement crisis" in the media, but the gap itself is a personal calculation, not a fixed number that applies to any one person.
- It's affected by how much you've saved, how much longer you'll work, how you invest what you have, and how much you plan to spend.
- Closing a gap generally means some combination of saving more, working longer, spending less in retirement, or accepting more investment risk.
- A gap calculated once isn't permanent; it should be recalculated periodically, since market returns, income changes, and updated spending plans all move the number.
Definition
Advanced Explanation
The gap is a comparison between two numbers a household can estimate for itself: a target, how much would need to be saved, or how much guaranteed and portfolio income would need to produce, to support a chosen retirement lifestyle, and a projection, what current savings, ongoing contributions, and expected investment growth are actually on track to produce by the target retirement date. When the projection falls short of the target, the difference is the gap.
Media coverage sometimes describes the broader pattern as a "retirement crisis" or "retirement savings crisis," language that describes a widespread pattern rather than any individual's specific number. Aggregate figures about how prepared American households are for retirement, in general, are published periodically by sources such as the Federal Reserve's Survey of Consumer Finances, the Government Accountability Office, and the Employee Benefit Research Institute's Retirement Confidence Survey. A reader interested in the national picture should look directly at one of those named, dated sources rather than trust a secondhand summary, since figures on this topic are quoted inconsistently and go stale quickly. What matters for planning is not the national figure but the individual's own gap, which no aggregate statistic can substitute for.
A personal gap has four moving parts, each of which can widen or narrow it: how much is currently saved and how much more will be contributed before retirement; how that money is invested, which drives the range of plausible growth; how many more years remain until the target retirement date, since more time means more compounding but also, for someone approaching retirement soon, less room to recover from a shortfall; and how much the household plans to spend in retirement, which sets the target in the first place. A method for turning a spending target into a savings target is the 25x rule and the related financial independence number; a gap is simply the distance between that target and where projected savings will actually land. Closing an identified gap comes down to some combination of contributing more before retirement, working and saving longer than originally planned, adjusting the retirement spending target downward, taking on somewhat more investment risk in exchange for higher expected growth, or some blend of all four.
Used in a Sentence
“When Diego ran the numbers at 50, he found a real gap between what his 401(k) was on track to produce and what he'd need to retire at 62 on his target budget, so he increased his contribution rate and pushed his target retirement date back a few years to close most of it.”
How It Works
A hypothetical example: suppose a household determines, using the 25x rule, that it needs $1,000,000 saved to support its planned retirement spending. Current retirement account balances and projected future contributions and growth put the household on track to have $780,000 by the target retirement date. The retirement savings gap is $1,000,000 − $780,000 = $220,000.
Pros and Cons
Pros
- Turns a vague worry about not having enough into a specific number that can actually be planned around.
- Recalculating the gap periodically shows whether a savings plan is working, rather than waiting until retirement to find out.
Cons
- The "need" side of the calculation depends on assumptions about spending, longevity, and investment returns that are genuinely uncertain and can be wrong in either direction.
- Discovering a large gap late in a working career leaves fewer realistic ways to close it than discovering the same gap decades earlier.
People Also Asked
Answers to the most frequently asked questions.
Is the "retirement crisis" the same thing as my personal retirement savings gap?
No. The retirement crisis is shorthand for a widespread pattern across many households, described in periodic national surveys. Your own gap is a specific comparison between your own projected savings and your own retirement spending target, and it can be much smaller, much larger, or nonexistent regardless of what national data shows.
How do I calculate my own retirement savings gap?
Estimate how much you'll need using a method such as the 25x rule or a financial independence number calculation, then compare that target to a realistic projection of what your current savings, ongoing contributions, and expected investment growth will actually produce by your target date. The difference is your gap.
What are the main ways to close a retirement savings gap?
Saving more before retirement, working and saving longer than originally planned, lowering the retirement spending target, or accepting somewhat more investment risk for higher expected growth. Most plans use some combination rather than relying on just one lever.
Does a retirement savings gap ever go away on its own?
It can shrink or close through strong investment returns, continued contributions, or an updated, more modest spending plan, but it can also widen if returns disappoint, spending assumptions turn out too low, or retirement arrives sooner than planned. It's worth recalculating periodically rather than assuming an early estimate still holds.
Sources
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