Many of us are familiar with the “three-legged stool” of retirement income: Social Security, a pension from your employer, and your own personal savings. For decades, this model offered a strong foundation for an enjoyable retirement with minimum financial stress.

But today, that stool is looking wobblier than ever. Here’s why:

• Employer pensions have largely disappeared, replaced by options like 401(k)s.
• Personal retirement savings vary greatly. Many working adults, especially those with lower income, cannot afford to save substantial sums of money when raising children and supporting a household.
• Social Security, once seen as a dependable source of guaranteed income in retirement, is under increasing financial pressure.

With fewer safety nets available, it’s more important than ever to know how much of your income Social Security will replace, and what you can do to fill the gaps.

The truth about Social Security’s future

You’ve probably heard rumblings that Social Security is “running out of money.” If that sets off alarm bells for you, you’re not alone. According to the Nationwide Retirement Institute’s annual Social Security survey, 72% of American adults worry about Social Security emptying its coffers in their lifetime, with 34% strongly agreeing with this sentiment.¹

The truth is a bit more complicated.

The Old-Age and Survivors Insurance (OASI) Trust Fund is the part of Social Security that pays retirement benefits to retired workers and their families. This fund is projected to be depleted by 2033, according to the latest estimates.² That doesn’t mean benefits will disappear entirely—but it could lead to a benefit reduction of 9% to 25% (increasing with each retiring generation) unless Congress takes action.²

Why is Social Security on shaky ground? It comes down to simple math: Americans are living longer and retiring in greater numbers, while the number of younger workers paying into the system isn’t keeping pace. This growing imbalance puts strain on the program.

In short, Social Security will still be there, but it may not play as big a role in your retirement as it did for your parents (and their parents).

How much of my income will Social Security replace?

You may be surprised to know Social Security is only designed to replace about 40% of your pre-retirement income—not all of it.³ Your monthly payment is based on your highest 35 years of earnings, adjusted for inflation. The Social Security Administration (SSA) uses a formula to calculate your benefit amount, which also depends on the age you start claiming benefits.

Research shows retirees need 70% to 80% of their pre-retirement income to maintain their standard of living. So if Social Security provides just 40%, where will the rest come from?

This shortfall is known as the retirement income gap.

What is the retirement income gap?

The retirement income gap is the difference between what you’ll need to live comfortably in retirement and what you’ll receive from predictable income sources like Social Security.

Let’s say you earned $75,000 a year before retirement. Based on Social Security’s average replacement rate, you might receive $30,000 per year in benefits. But if you need $55,000 a year to maintain your lifestyle, you’re left with a $25,000 deficit each year.

So how do retirees fill that gap? Below are a few common ways:

• Personal retirement savings, such as IRAs or 401(k)s
• Employer pensions, if you’re one of the lucky few who still has one
• Other sources, like part-time work or rental income

Unfortunately, many people do not have the resources to fully make up the difference. This is concerning, since Americans are living longer than ever and need more years of income. According to research from the American College of Financial Services, a healthy man has a 49.6% chance of living to age 90. For women, that likelihood rises to 59.3%.⁴

“If you’re a relatively healthy adult by the time you’re 60 or 65, you should be prepared to spend up to 30 years of retirement,” Kristi Martin Rodriguez, senior vice president of Nationwide Financial Marketing, told USA Today.

Rethinking what retirement income looks like

It’s time to reevaluate conventional sources of retirement income and how well they’re serving our needs after we leave the workforce. Yes, Social Security is still important, but it’s not enough on its own. That’s why some older adults are looking at alternative options—like lifetime income funds in employer-sponsored retirement plans.

Lifetime income funds provide:

• Lifetime income payments, similar to having a steady paycheck
• Retirement income that is protected from market volatility
• Longevity risk protection, meaning you won’t outlive your income if you happen to live longer

What is a lifetime income fund?

A lifetime income fund is a type of fund found within some employer-sponsored retirement plans, such as a 401(k) or 457(b). It’s designed to grow your money over time and provide income once you retire.

Most lifetime income funds are set up like target-date funds to simplify their management. They automatically adjust your investment mix based on your expected retirement year, starting out with growth-focused investments and then shifting to more conservative options over time.

What makes a lifetime income fund different? It builds in additional protection for your future by incorporating an annuity component—which provides a steady, lifetime income stream when you retire. As your assets grow, the fund periodically “locks in” your future retirement income based on the fund’s highest value (not the current amount at the point of retirement).

When you reach retirement, this highest-captured value is used to generate retirement income every year for the rest of your life. Even if the market dips or you live to 100 years old, you can’t outlive that paycheck.

Lifetime income funds offer some key benefits compared to traditional standalone annuities:

• Greater flexibility—you can still access your money if needed, or change your mind, with no surrender charges
• Potentially lower fees, since they’re offered at institutional pricing through your employer

Why guaranteed income matters

Guaranteed and/or lifetime income can mean the difference between a comfortable retirement and one riddled with financial anxiety. It provides:

• Peace of mind: You know you’ll get a steady “paycheck” after leaving the workforce, no matter what happens in the financial markets.
• Coverage for basic needs: You can rest easy knowing you’ll have reliable income to pay for everyday expenses like housing, groceries, and out-of-pocket health care costs.
• Protection from unfortunate timing: Since your retirement  income is protected, you won’t be tempted to pull money from the stock market during a downturn.

In a nutshell, guaranteed income can serve as the stable financial “floor” that helps you weather whatever the economy, markets, and life throw your way in retirement.

Take charge of your retirement future

Relying on the three-legged stool of retirement is no longer viable for most working adults. It may be wise to consider enhancing the third leg with guaranteed income through a lifetime income fund.

It’s never too late to improve your retirement outlook. Here are steps you can take right now:

1. Estimate your Social Security benefit at SSA.gov.
2. Calculate your income gap—how much you’ll need in retirement versus how much you’ll have from Social Security, any pensions, and savings.
3. Explore any protected retirement income options that are available to you, such as lifetime income funds or other products offered through your employer retirement plan.
4. Talk to a financial adviser or retirement planner who can help you evaluate your options and create a strategy that works for you. You can also contact your retirement plan provider directly. They may be able to offer valuable retirement planning tools as well as access to a qualified financial professional.

Get more retirement planning tips in our Work & Retirement Resources information library for older adults.

Sources

1. Nationwide Retirement Institute. 2024 Social Security Survey. July 2024. Found on the internet at https://nationwidefinancial.com/media/pdf/NFM-24093AO.pdf

2. Social Security Administration. Status of the Social Security and Medicare Programs: A Summary of the 2024 Annual Reports. Found on the internet at https://www.ssa.gov/oact/trsum

3. Social Security Administration. What young workers should know about Social Security and saving. Found on the internet at https://www.ssa.gov/newsletter/Statement%20Insert%2025+.pdf

4. Nationwide Retirement Institute and The American College of Financial Services. Century Club - Findings from The American College of Financial Services. Found on the internet at https://www.nationwide.com/financial-professionals/topics/health-care-cost-longevity/pages/planning-for-a-century-of-living