The pension gap refers to the difference between the income you will need to maintain your desired standard of living in retirement and what you are actually projected to receive from your pension (or superannuation, social security, and other retirement savings).
This shortfall can be caused by several factors, such as:
- Inadequate contributions during working years
- Longer life expectancy (meaning your retirement savings must last longer)
- Inflation reducing purchasing power
- Career breaks (for example, due to caregiving or unemployment)
- Lower earnings, which result in lower retirement contributions
The pension gap is a major concern globally. Many people underestimate how much they will need in retirement or overestimate how much their current savings will provide.
How Can You Overcome the Pension Gap?
1. Start Saving Early and Consistently
The earlier you begin putting money into retirement accounts, the more you benefit from compound growth. Even small regular contributions can grow significantly over time.
2. Increase Your Contributions
If possible, contribute more than the minimum required by your employer or government scheme. For example, you might salary sacrifice extra into superannuation in Australia, or increase your 401(k) contributions in the US.
3. Diversify Your Investments
Don’t rely solely on your pension or super. Consider building other investments such as shares, ETFs, bonds, or property. Diversification spreads risk and may provide higher growth over the long term.
4. Delay Retirement if Needed
Working a few extra years can significantly boost retirement savings and reduce the years you’ll need to fund purely from your investments. It also allows more time for your investments to grow.
5. Review Your Retirement Plan Regularly
Check your pension statements, investment growth, and projected retirement income every year or two. Adjust contributions or investment strategies as needed, especially after major life events.
6. Consider Professional Advice
A financial adviser can help you assess your pension gap, run projections, and create a tailored plan to close it. This can help ensure your strategy fits your goals, risk tolerance, and time horizon.
Final Thought
The pension gap is a serious issue that can impact your quality of life in retirement. By taking proactive steps now — such as saving more, investing wisely, and planning with realistic assumptions — you can help close the gap and secure a more comfortable future.
