Gap analysis for retirement planning

Overcoming retirement gaps becomes more manageable after listing projected expenses and income. If expenses are clearly and accurately specified, then income requirements can be calculated with confidence.

As mentioned in the previous step, a good gap analysis will list income sources conservatively. This means lowering expectations from each source, especially when income fluxuates over time. The tendency might be to target higher income and thereby creating a false perception that you are comfortably ready for retirement. If expenses are greater than income, then you may have money problems and financial risk. A different course of action is in order.

The difference between expenses and income is the net income needed to meet living costs. In the table below, the row entitled "Gross Salary needed" shows what income level is required to match expenses. It is adjusted for taxes.

The table shows that pension, 401k, and rental income will cover about 70% of the need. The remaining difference will have to be accounted for in other ways. Identifying deficiencies early will help soften retirement gaps.

A key income component is retirement savings. In this case, 401k. At the bottom of the table, it shows how the 401k balance will be impacted from year to year. The $20,000 withdrawal will be about an 8% reduction.

The assumption is that the balance will grow at about 6% through the normal investment process. This may be conservative, but it is safer to project lower in case earnings don't meet expectations.

At this rate, 401k will go to zero in 2019 after about 12 years. The withdrawal amount will probably need to be reduced to make the balance last longer. This will increase income needs.

Below is the table showing these differences and the 401k calculations:

Retirement Gap Analysis
Age/Years---------------------------------------->

(59) (60) (61) (62) ... Catagory

Catagory Month (2007) (2008) (2009) (2010) ... Totals

Expenses

........

........

........

Expense Subtotal 7,480 75,360 98,521 116,216 111,246 401,343

Income

Salary

Pension

401k

Rentals

Expected Income 6,731 80,768 78,200 78,200 78,200 315,368

Net Salary needed 749 -5,408 20,321 38,016 33,046 85,975

Gross Salary needed 27,094 50,687 44,062 114,633

401k Balance 150,000 159,000 148,540 137,452

Deduct withdrawal 0 20,000 20,000 20,000 60,000

Add increase (6%) 9,000 9,540 8,912 8,247 24,213

A Gap analysis gives you a good idea of what the overall need is. The next step is to build a plan of action to overcome the differences.

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