7 Ways to Close the Retirement Income Gap in 2025

Why the Retirement Income Gap Is Widening—and What You Can Do About It

The latest projections from the Social Security Administration suggest the 2026 cost-of-living adjustment (COLA) could land around 2.2%, translating to roughly $73 per month for the average retiree. After years of elevated grocery prices, rising Medicare premiums, and stubborn housing costs, that figure barely moves the needle for most seniors living on fixed incomes.

In my 15 years analyzing consumer finance policy—including my time at the CFPB—I’ve watched the retirement income gap quietly become the defining financial challenge for Americans over 50. It’s the difference between what Social Security and any pension provide and what you actually need to cover your monthly expenses, healthcare, and the occasional surprise. When that gap grows even modestly each year, the cumulative effect over a 25-year retirement can be devastating.

The good news: closing the retirement income gap doesn’t require a Wall Street-sized portfolio or a radical lifestyle overhaul. It requires strategy, specificity, and starting now. Here are seven concrete ways to do exactly that.

1. Rethink Your Social Security Claiming Strategy

Every year, roughly 30% of Americans claim Social Security at 62—the earliest possible age—according to SSA data. That decision permanently reduces benefits by up to 30% compared to waiting until full retirement age (currently 66 or 67 for most readers). Waiting until 70 adds another 24% on top of your full benefit through delayed retirement credits.

I often tell readers that claiming Social Security is the single most consequential financial decision most retirees will ever make. An individual whose full retirement age benefit is $2,000 per month would receive roughly $1,400 at 62 but $2,480 at 70. Over a 20-year payout period, that difference exceeds $250,000.

When Early Claiming Makes Sense

Not everyone should wait. If you have a serious health condition that limits life expectancy, or if you have zero other income sources and face immediate hardship, claiming early may be the right call. But if you can bridge even a year or two with savings or part-time work, the math almost always favors delay.

Use the SSA’s online calculators or consult a fee-only financial planner to model your specific break-even point. For most healthy 62-year-olds, that break-even falls somewhere between age 78 and 80—well within average life expectancy.

2. Build a “Retirement Paycheck” With Structured Withdrawals

One pattern I see repeatedly is retirees treating their savings like a single lump sum to dip into whenever bills pile up. This approach almost guarantees overspending in good market years and panic in bad ones. Instead, build what I call a “retirement paycheck”—a systematic monthly withdrawal designed to replicate the predictability of your old salary.

The widely cited 4% rule (withdraw 4% of your portfolio in year one, then adjust for inflation) has come under scrutiny given today’s interest rate environment. Investopedia and several retirement researchers now suggest a more dynamic approach: withdrawing 3.5-4.5% depending on market conditions, with built-in guardrails that reduce withdrawals by 10% after a market downturn and allow modest increases after strong years.

The Bucket Strategy

• Bucket 1 (Cash): 1-2 years of living expenses in a high-yield savings account or money market fund. This is your buffer against selling investments in a downturn.
• Bucket 2 (Income): 3-7 years of expenses in bonds, CDs, and Treasury securities generating predictable interest.
• Bucket 3 (Growth): Remaining assets in diversified stock index funds or balanced funds to outpace inflation over the long term.

This structure lets you ride out a two-year bear market without touching your growth investments—and that patience is what prevents the “sequence of returns” risk that has derailed so many retirement plans. For a deeper dive into this risk, see The Silent Killer for Retirement Portfolios: A CFP’s Guide.

3. Maximize Tax-Efficient Income Streams

A dollar of retirement income isn’t always worth a dollar after taxes—and too many retirees learn this the hard way. Social Security benefits can be taxed at the federal level if your “combined income” exceeds $25,000 (individual) or $32,000 (married filing jointly). Up to 85% of your benefits may be taxable, which effectively shrinks your COLA adjustment even further.

Strategic Roth conversions in your 60s—before Required Minimum Distributions kick in at age 73 under current IRS rules—can dramatically reduce your lifetime tax burden. By converting portions of traditional IRA funds to a Roth during lower-income years, you pay taxes at today’s rates and then enjoy tax-free withdrawals later.

Practical Tax Moves for 2025-2026

• Convert just enough traditional IRA funds to stay within your current tax bracket—your CPA or tax software can model this precisely.
• Harvest capital losses in taxable brokerage accounts to offset gains.
• If you’re 70½ or older, use Qualified Charitable Distributions (QCDs) from your IRA to satisfy RMDs without increasing your taxable income.
• Time large Roth conversions to years when you have deductible medical expenses or other itemizable deductions.

The difference between a tax-aware and tax-ignorant withdrawal strategy can add 1-2 extra years of portfolio longevity, according to Vanguard research published in 2024.

4. Generate Income Outside Your Portfolio

A recent EBRI survey found that 57% of current retirees said they stopped working earlier than planned—due to health issues, layoffs, or caregiving responsibilities. But among those who do work part-time in retirement, the financial and psychological benefits are substantial.

Even modest earned income of $1,000 to $2,000 per month can eliminate the need to draw down investments during a market correction. What I see most often is that retirees who earn just enough to cover discretionary spending—travel, dining, hobbies—report both greater financial confidence and higher life satisfaction.

Income Ideas That Fit Retirement Life

• Consulting or freelancing in your former professional field (even 10 hours per week)
• Teaching, tutoring, or adjunct instruction at community colleges
• Selling crafts, produce, or expertise at local markets or through online platforms
• Renting a spare room or ADU through short-term rental platforms (check local regulations)
• Serving on nonprofit boards, which sometimes offer stipends

Be mindful of the Social Security earnings test if you’re collecting benefits before full retirement age. In 2025, earning above $22,320 triggers a temporary reduction of $1 for every $2 earned above the limit. After full retirement age, there’s no penalty regardless of how much you earn.

5. Address Healthcare Costs Head-On

Healthcare is the single largest wildcard in any retirement budget. Fidelity’s 2024 Retiree Health Care Cost Estimate puts the average 65-year-old couple’s lifetime healthcare spending at $315,000—a figure that excludes long-term care. If that number doesn’t get your attention, it should.

Medicare covers a lot, but it doesn’t cover everything. Dental, vision, hearing, and most long-term care are either excluded or limited under Original Medicare. If you’re evaluating your options, Medicare.gov remains the most reliable starting point for comparing plans during Open Enrollment each fall.

Strategies to Control Healthcare Spending

• Compare Medigap vs. Medicare Advantage annually. A plan that saved you money at 65 may not be optimal at 72 when your healthcare needs have changed.
• Max out your HSA before retirement if you’re still working and enrolled in a high-deductible health plan. HSA funds roll over indefinitely and withdrawals for qualified medical expenses are tax-free at any age.
• Explore state pharmaceutical assistance programs if your drug costs are high but you don’t qualify for Medicare Extra Help.
• Invest in preventive care. Medicare covers annual wellness visits, many screenings, and vaccines at no cost—use them.

For many retirees, proactively managing health—and by extension, healthcare costs—is inseparable from managing their retirement income gap. This is also why understanding how inflation depletes retirement savings matters so much: medical inflation has historically outpaced general CPI by 1-2 percentage points.

6. Protect What You Have From Fraud and Fees

Americans over 60 lost $3.4 billion to financial fraud in 2023, according to the FBI’s Internet Crime Complaint Center. That figure is almost certainly understated because many victims never report. Meanwhile, hidden fees in certain annuities, loaded mutual funds, and advisory arrangements can silently drain tens of thousands from a retirement portfolio over a decade.

During my years at the Consumer Financial Protection Bureau, I saw firsthand how financial exploitation targets seniors with the most to lose. The best defense combines vigilance with structural safeguards.

Defensive Moves Worth Making

• Freeze your credit at all three bureaus—it’s free and takes minutes.
• Designate a trusted contact on your brokerage and bank accounts. This person can be alerted if the institution suspects exploitation, without having access to your money.
• Audit your investment fees annually. If you’re paying more than 0.5% in total expense ratios on index-based investments, you’re likely overpaying.
• Work only with fiduciary financial advisors who are legally obligated to act in your interest—not broker-dealers who operate under a weaker “suitability” standard.

For a comprehensive breakdown of current scam tactics and how to avoid them, I recommend reading How to Protect Yourself From Financial Scams in 2025.

7. Conduct an Annual “Retirement Stress Test”

What I see most often among retirees who run into trouble isn’t a single catastrophic event—it’s a slow drift. Expenses creep up 2% a year, portfolio returns disappoint for a stretch, a COLA adjustment falls short, and suddenly the retirement income gap has widened from manageable to alarming. The antidote is an annual stress test: a structured review of your financial plan against realistic worst-case scenarios.

What Your Annual Review Should Cover

• Withdrawal rate check: Are you still within a sustainable range (3.5-4.5%), or have market declines pushed your effective rate higher?
• Expense audit: Compare your actual spending over the past 12 months against your budget. Identify categories that have grown faster than inflation.
• Longevity projection: If you’re healthier than average, plan for a 30-year retirement. Running out of money at 92 is a real risk, not a theoretical one.
• Insurance review: Evaluate whether your Medicare plan, auto insurance, homeowners policy, and any umbrella coverage still match your needs and offer competitive rates.
• Estate and beneficiary update: Confirm that IRA beneficiaries, power of attorney designations, and your will reflect your current wishes.

Many fee-only financial planners offer one-time retirement plan reviews for $500-$1,500—a fraction of what a single year of poor decisions might cost. If you’re the DIY type, tools like Boldin (formerly NewRetirement) or the free calculator at SSA.gov let you run your own scenarios.

The Bottom Line: Small Moves, Compounded Over Time

Closing the retirement income gap isn’t about making one perfect decision. It’s about making seven or eight good ones—each of which adds $50, $200, or $500 per month to your effective income or shaves a comparable amount from unnecessary expenses. Over a 20-year retirement, those small moves compound into hundreds of thousands of dollars in preserved wealth.

The 2026 COLA may add only $73 a month, but you don’t have to let a formula in Washington dictate your standard of living. Revisit your claiming strategy, structure your withdrawals, minimize taxes, earn a little on the side, manage healthcare proactively, guard against fraud, and stress-test your plan every year. These aren’t abstract financial theories—they’re the specific, proven strategies I’ve watched thousands of retirees use to build real security.

Start with whichever step feels most urgent. Then tackle the next one. Your future self will thank you.