A CFP named Joe Tomlinson was cited for what he calls the Gap Method which simply compares income from ‘guaranteed’ sources like Social Security to expected expenses and if there is gap, then the gap needs to be filled by investments/savings, working in some capacity or downsizing. The concept is not new of course but the term Gap Method succinctly describes it.
The benefits of thinking about how to solve the financial aspects of the retirement dilemma is that it helps reduce it into more digestible parts. You need $5000 a month in today’s dollars (just an example) for retirement so the 4% rule says you need $1.5 million. A $5000 need seems like a middle class lifestyle but $1.5 million may not seem so middle class. Combined Social Security might be in the range of $3000 so investments/savings, working in some capacity only needs to cover $2000 or in portfolio terms is $500,000 which may not be easy but is reasonably attainable.
This all circles back to a lot of the things we’ve been writing about for many years. Anecdotally I’ve known plenty of people who had little to nothing accumulated yet made it work and obviously you’ve known people who’ve made it work too. The $2000 gap above (again it’s just an example) can at least be partially made up through some sort of monetized hobby or other part time, low (stress) impact job.
Five years of filling the gap with your monetized hobby before tapping into your portfolio could let the equity portion of the portfolio double. You’d have to be very lucky to hit a five year window where the market doubles but this is far from unprecedented and in a more realistic scenario the equity portion could grow by 20-25% untapped, so the $500,000 above becomes $560,000-$575,000 (assumes a 60/40 mix and negligible growth in the fixed income portion) and will need to generate income for five years less than originally planned for.
The articles linked above tie in with these concepts and they will become increasingly more relevant as the issues Munnell cites come to impact more people.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.