Three steps to size it
1. Add up the essentials
Monthly costs you would pay in any market: mortgage or rent, property tax, food, utilities, insurance premiums, Medicare and supplemental coverage, car costs and the minimum you need to give or help family. Leave out travel and other spending you could trim in a bad year.
2. Subtract the income you already have
Social Security for both spouses, any pensions, and rental income you trust. What is left is the gap.
3. Decide how to fill the gap
Either cover it with another source of dependable income, or hold enough in safer assets to pay it for many years.
An example
| Monthly budget, retired couple | |
|---|---|
| Essential expenses | $7,500 |
| Social Security, both spouses | $4,800 |
| Pension | $0 |
| Monthly gap | $2,700 |
| Yearly gap | $32,400 |
Hypothetical household for illustration.
Withdrawing 4 percent a year is a common starting rule of thumb. At that rate, covering a $32,400 gap from investments alone takes about $810,000 that has to keep working through every market. Covering part of the gap with guaranteed income lowers how much of the portfolio has to carry the essentials.
Options for filling the gap
Delay Social Security
Often the least expensive way to buy more lifetime income that rises with inflation. Each year past full retirement age adds 8 percent, up to 70. See when to claim Social Security.
Choose the pension payout carefully
A joint-and-survivor option pays less each month but keeps paying the surviving spouse. A single-life option pays more and stops at death. The choice is usually permanent.
Income annuities
You give an insurance company a lump sum and it pays you a set income for life, or for a set period. Some start right away and some start years later. In exchange, you give up access to that lump sum.
Fixed and fixed index annuities with an income rider
The principal is not exposed to market losses, and an optional rider can provide lifetime withdrawals. Riders carry a fee, and these contracts have surrender charges if you need the money early.
A Treasury or TIPS ladder
Bonds that mature in each year you need the money. If you hold them to maturity, the payments are backed by the U.S. government. A ladder runs for a set number of years and then stops.
The trade-offs to weigh
Every guarantee costs something: liquidity, growth or fees. Annuity guarantees depend on the claims-paying ability of the insurance company, and state guaranty associations cover only up to set limits, so the strength of the insurer matters. Most plans end up with part of the essentials guaranteed and the rest covered by a reserve.
What I look at with clients
I start with your essential budget, because it is the number that has to be true in every market. Then we decide how much of it you want guaranteed and what that guarantee should cost you.
Questions people ask
Is an annuity a good idea for retirement income?
It can be for part of the money, usually to cover essential expenses that Social Security and pensions do not. It is a poor fit for money you may need in an emergency. Compare surrender periods, fees, rider costs and the insurer’s financial strength before buying.
What happens to an annuity if the insurance company fails?
State life and health insurance guaranty associations cover annuity owners up to limits set by each state. Coverage has caps, so spreading larger amounts across insurers and choosing financially strong companies both matter.
What is the 4 percent rule?
A rule of thumb that says withdrawing 4 percent of your portfolio in the first year of retirement, then adjusting for inflation, has historically lasted about 30 years. Treat it as a starting point for planning. It promises nothing.
Sources
Pete Alexander plans retirement income, asset protection and insurance for families in Fremont and the East Bay, and co-wrote Crash Proof Wealth with Brett Kitchen. More about Pete.
This guide is general information. It is not tax, legal or investment advice or a recommendation to buy any product. Figures and rules were checked on October 25, 2026 and can change. Talk with a qualified professional about your own situation.