How Much of Your Retirement Income Is Actually Guaranteed

The three sources of guaranteed income

For most people, there are only three places guaranteed lifetime income can come from. The first is Social Security. It pays for life, and it gets a cost of living adjustment most years. The second is a pension, if you're lucky enough to have one, though fewer people do every year. The third is an income annuity, a contract with an insurance company that turns a lump sum into a paycheck for life.

Everything else — your 401(k), your IRA, your brokerage account, your rental property — can be very valuable, but none of it is guaranteed income. It's savings you draw on, and savings can run out.

What "guaranteed" actually means

Guaranteed is a strong word, so it's worth knowing who stands behind each one. Social Security is backed by the federal government. Private pensions are insured by a federal agency called the PBGC, up to certain limits. An annuity's guarantees are backed by the claims-paying ability of the insurance company that issues it, which is why insurer financial strength ratings matter, and why every state also has a guarantee association that provides a backstop up to its own limits. None of these is a magic promise, but each one is very different from hoping your investments behave.

The gap test

The test itself is one line of math. Take what you expect to spend each month in retirement. Subtract the income that's guaranteed for life. Whatever's left over is your gap — the paycheck your savings have to produce every month for as long as you live, through good markets and bad ones.

If the gap is zero, your savings are a reserve. If the gap is large, your savings are doing a job, and it's worth knowing how hard that job is.

A worked example

Consider a couple who expect to spend about $7,000 a month. Her Social Security is $2,800. His is $1,500. Together that's $4,300 a month guaranteed for life — about 61% of their spending. The other $2,700 a month has to come from savings. That's their gap, and it's $32,400 a year. Nothing about this is unusual. Plenty of couples who did everything right land right around here.

Say this couple has $600,000 saved and plans to retire in about three years. If it grows 5% a year until then, it reaches roughly $694,500. Pulling $32,400 a year from that is close to 4.7% a year. The traditional comfort line is about 4%. To hit that line, they'd need closer to $810,000. They're not in trouble, but they're asking their savings to work harder than the usual rule of thumb — and that's before anything goes wrong.

The average return over your retirement matters less than the order the returns show up in.

Here's what can go wrong. If markets fall 25% in the couple's first year of retirement, their roughly $694,500 drops to about $520,900. They still need the same $2,700 a month. That withdrawal is now about 6.2% of what's left. Bad years early, while you're withdrawing, do far more damage than the same bad years later. It's called sequence of returns risk, and guaranteed income is one of the few things that isn't exposed to it.

The gap a spouse's death creates

When one spouse dies, the household keeps the larger of the two Social Security checks, and the smaller one stops. For this couple, the $1,500 check goes away. Spending usually drops, but not by half — a common rule of thumb is about 80%, or $5,600 a month. The survivor now has $2,800 in guaranteed income against $5,600 in spending. The gap is $2,800 a month — actually larger than the $2,700 gap the two of them had together. A plan that works for two can quietly fall short for one.

The gap inflation creates

There's another gap that doesn't show up on day one. Social Security gets a cost of living adjustment most years, which is one of its most valuable features. Most private pensions don't, or only partly. Most income annuities pay a fixed amount unless you pay for an increasing option. Meanwhile, spending keeps rising. At just 3% inflation, prices roughly double in about 24 years. A fixed check that covers your bills at 65 may cover a lot less at 85. When you run the gap test, it's worth asking which parts of your guaranteed income will keep up and which parts will slowly shrink.

Three ways people close the gap

There are three main levers. The first is filing age. For every year you delay Social Security past full retirement age, up to 70, your benefit grows, and that bigger check lasts for life. For a married couple, the higher earner's filing age also sets the survivor's benefit, so that one decision protects both spouses. The second lever is flexibility — a little part-time work, or a spending plan that can bend in the first few years. The third is turning part of your savings into lifetime income, so more of your essential bills are covered no matter what the market does. Most good plans use some mix of all three.

Is Social Security itself safe?

The program's trustees do project that the trust fund could run short sometime in the 2030s, but that doesn't mean checks stop. Payroll taxes keep coming in, and on current projections they'd still cover most scheduled benefits. Congress has fixed funding gaps before. The sensible approach is to plan on Social Security and then ask what your plan looks like if the check were somewhat smaller. If a modest cut would break your plan, that's worth knowing now.

Running this test on your own numbers takes three figures: a Social Security estimate (available in minutes through an account at ssa.gov/myaccount, which shows your benefit at 62, at full retirement age, and at 70), your real monthly spending averaged from a few months of statements plus annual expenses like insurance and property taxes, and your total retirement savings across every account. With those three numbers, the same math shown here takes about a minute to run.