The Retirement Wealth Gap: Why Market Risk Hurts More the Closer You Get

Most pre-retirees can tell you their account balance. Far fewer can tell you two more useful numbers: how much of their essential monthly spending is covered by income that never stops, and how much of their savings is still exposed to a market decline. Those two numbers, more than any rate of return, decide whether retirement feels secure.

We start every retirement conversation with one question: what does retirement look like for you? Then we measure the gap between that picture and reality.

What is the Wealth Gap?

One of our founding trainers put it simply: the Wealth Gap equals fantasy minus reality. The “fantasy” is the net worth and income it would take to live the retirement you actually want. The “reality” is what your savings, Social Security, and pensions are on track to deliver. The difference is the gap, and the goal of planning is to shrink it deliberately rather than hope the market closes it for you.

For business owners and larger estates, the same idea shows up on the estate side: assets that would have to be sold quickly to pay taxes. If that is you, read our post on the 2026 estate tax and the ILIT. This post focuses on the retirement-income side.

Why do losses cost more than they look?

A loss and the gain needed to recover from it are not the same percentage, because the recovery is earned on a smaller balance.

Sequence risk: when withdrawals meet a down market

Near or in retirement, you are usually withdrawing money, and selling during a decline locks in the loss. A hypothetical example: a $500,000 portfolio falls 25% to $375,000 in the same year you withdraw $30,000 for living expenses. The balance is now $345,000, and it needs roughly a 45% gain just to return to $500,000, while you keep withdrawing. Someone thirty years from retirement can wait that out. Someone three years from retirement may not be able to.

How do you cover fixed costs with guaranteed income?

The cleanest way to reduce sequence risk is one subtraction: essential expenses minus guaranteed income equals the income gap. Guaranteed income is what arrives for life no matter what markets do: Social Security, pensions, and any lifetime income already contracted. Essentials are the bills that do not stop in a bad year. Travel, gifts, and dining out are discretionary and can ride on invested assets.

This hypothetical retiree does not need $310,000 of anything. He needs about $6,720 a year of dependable income. Sizing a solution to the gap, not to the account balance, keeps the rest of his money flexible. If an annuity is used to fill that gap with IRA money, it stays in the tax-deferred bucket; only the certainty of the income changes, and required minimum distributions still apply.

What is a retirement risk review?

Before any recommendation, we run a short retirement risk analysis with you: eleven questions that produce a score from 0 to 100. The score is your own answer about how much of your money you want exposed to growth and how much you want safe. A score of 42, for example, suggests someone who wants most of their savings protected.

The useful part is comparing that score to what you actually hold. It is common for people who say they want safety to still have most of their retirement money positioned for growth, often because nobody revisited the allocation as retirement approached. We do it together, not by emailing a link, and we read your answers for three things: what you are most worried about, what income cannot stop, and any answers that contradict each other.

A quick self-check

• Do you know what share of your retirement savings could drop in a market decline?
• Are your essential bills covered by guaranteed income, or by selling investments?
• Have you ever left a job where you had a retirement plan, and is that money still there?
• Are you facing a pension election between single-life and survivor payouts?
• Do you have six months of expenses liquid, separate from long-term money?

What about old 401(k)s?

Old plans left at former employers are one of the most common things we find. Some guidelines we follow:

• Keep your current employer match. We only discuss money above it.
• Many plans allow in-service rollovers after age 59½. Check your plan’s rules.
• Use a direct rollover so the money stays tax-deferred and avoids withholding surprises.
• We do not tell you which securities to sell. That belongs with a licensed securities advisor, and if you already have an advisor, we work alongside them.

What you should know about annuities

Fixed and fixed indexed annuities can protect principal from market losses and can provide lifetime income. They are also long-term contracts with real trade-offs:

1. Surrender periods. Withdrawals above the free amount (often around 10% a year) during the surrender period generally incur charges, so liquidity is limited.
2. Caps and participation rates can change and may be lower in the future. Index credits are not guaranteed.
3. Income riders carry a yearly charge, which you may first notice on a statement in a year with no index credit.
4. Premium bonuses are not returns. Bonus products often carry longer surrender periods or lower caps, and an income-base roll-up is a calculation figure, not money you can withdraw.
5. Guarantees are backed by the claims-paying ability of the issuing insurer.

Every recommendation we make is shown two ways, guaranteed and current, and goes through a suitability review. We are not affiliated with or endorsed by the Social Security Administration or any government agency, and we do not provide tax or securities advice.

If you are leaving an IRA to children, the rules changed in ways that matter; see why the stretch IRA is gone. And because care costs are the expense most retirement plans forget, read long-term care planning in 2026. To measure your own gap, start on the retirement planning page.