The Retirement Shortfall Calculator: Why Most People Get the Wrong Number (And What to Do About It)

By Steven Rosenberg | Founder & Chief Wealth Strategist, Everence Wealth

Independent Broker | 75+ Carrier Partnerships | Serving Families Across All 50 States

Americans contribute billions to Roth IRAs each year, drawn by the promise of tax-free retirement income. Yet while Roth accounts deliver powerful tax advantages, they expose savers to market volatility without protection and impose strict contribution limits that prevent high earners from maximizing tax-free wealth accumulation. When the S&P 500 drops thirty percent, your Roth IRA drops thirty percent—and you need a forty-three percent gain just to break even while hoping you don't need to access funds during the downturn.

The retirement landscape has fundamentally shifted. With national debt exceeding thirty-four trillion dollars, future tax rates remain uncertain. Social Security faces funding challenges that may force benefit reductions or taxation changes. Traditional retirement vehicles that seemed secure now carry hidden risks—contribution limits, income restrictions, market exposure, and potential legislative changes that could alter tax treatment. Families who rely exclusively on qualified retirement accounts may discover their tax-free income sources are insufficient to sustain their lifestyle without triggering additional tax exposure through required minimum distributions or capital gains from taxable accounts.

Index Strategies offer an alternative approach that complements Roth IRAs by providing S&P 500-linked growth potential with a guaranteed zero-loss floor, unlimited contribution capacity beyond IRS limits, tax-free income access through policy loans, and living benefits protection for chronic, critical, or terminal illness events. We work with families across all fifty states to structure comprehensive retirement plans using both Roth accounts and Index Strategies—building multiple tax-free income streams that reduce dependency on any single vehicle while protecting against market downturns, legislative changes, and longevity risk.

How Does a Roth IRA Provide Tax-Free Retirement Income?

A Roth IRA allows you to contribute after-tax dollars that grow tax-free and can be withdrawn tax-free in retirement after age fifty-nine and a half, provided the account has been open for at least five years. Unlike traditional IRAs or 401(k) accounts that defer taxes until withdrawal, Roth contributions receive no upfront deduction—but qualified distributions avoid federal income tax entirely. For families in lower tax brackets today who expect higher rates in retirement, this represents a powerful wealth-building tool that converts current tax certainty into future tax exemption.

The Roth IRA contribution limit for tax year 2024 is seven thousand dollars for individuals under fifty, with an additional one thousand dollar catch-up contribution for those fifty and older. However, eligibility phases out for single filers with modified adjusted gross income between one hundred forty-six thousand and one hundred sixty-one thousand dollars, and for married couples filing jointly between two hundred thirty thousand and two hundred forty thousand dollars. High-earning professionals, business owners, and dual-income families frequently exceed these thresholds—making them ineligible for direct Roth contributions despite having the greatest need for tax-free retirement income diversification.

Roth IRAs require no required minimum distributions during the owner's lifetime, allowing wealth to compound indefinitely without forced withdrawals that trigger tax events. This feature makes Roth accounts exceptional estate planning vehicles—beneficiaries inherit tax-free growth potential and can stretch distributions over their own lifetimes. Yet the account remains fully exposed to market volatility. During the 2008 financial crisis, Roth IRA balances dropped forty to fifty percent alongside the broader market. Savers who needed income during that period either sold at losses or depleted their accounts faster than planned—neither outcome aligns with sustainable retirement income strategy.

What Is an Index Strategy and How Does It Generate Tax-Free Income?

An Index Strategy, often structured through Indexed Universal Life insurance, tracks S&P 500 performance up to an annual cap rate while guaranteeing you never lose principal when markets decline. If the S&P 500 gains twelve percent and your cap is ten percent, you receive ten percent credited to your cash value. If the S&P 500 drops thirty percent, you receive zero percent—but your account value never decreases from market losses. This zero-floor protection creates what we call the Annual Reset mechanism: each year's gains lock in as your new protected base, preventing future downturns from eroding accumulated growth.

The S&P 500 has historically delivered strong long-term returns—but with full exposure to market losses. Index Strategies track S&P 500 performance up to a cap rate, while a guaranteed floor ensures you never lose principal when the market drops. You participate in the growth. You are protected from the loss. If the S&P 500 drops thirty percent, a traditional investor loses thirty percent and needs a forty-three percent gain just to break even. An Index Strategy investor loses zero percent and captures the next market recovery from their full principal—compounding from a protected base. This is what we call Zero is Your Hero.

Tax-free income access occurs through policy loans against your cash value—not taxable withdrawals. The IRS does not classify properly structured policy loans as income, allowing you to access funds without triggering tax consequences, without affecting Social Security taxation, and without increasing Medicare premiums. Unlike Roth withdrawals that deplete your account balance, policy loans leave your full cash value intact and continuing to grow—the insurance carrier loans you money using your policy as collateral. This creates a sustainable income stream that can last throughout retirement while preserving wealth for legacy transfer through the tax-free death benefit.

Roth IRA vs Index Strategy: Direct Comparison of Tax Treatment

Both Roth IRAs and Index Strategies offer tax-free income in retirement, but they achieve this outcome through fundamentally different mechanisms with distinct advantages and limitations. Roth accounts require after-tax contributions that grow tax-free—you pay taxes on the seed and harvest tax-free on the crop. Index Strategies use after-tax premium payments that build cash value accessed through tax-free loans—you pay taxes on contributions but never on properly structured policy loans or death benefits. The question isn't which approach is superior—it's which combination provides the most comprehensive tax diversification for your specific situation.

Roth IRAs impose strict contribution limits that cap annual tax-free wealth accumulation at seven thousand dollars for most savers, eight thousand for those fifty and older. High earners face income restrictions that eliminate direct contribution eligibility entirely—though backdoor Roth conversions remain available for now. Index Strategies have no IRS contribution limits beyond insurability requirements and premium-to-death-benefit ratios that prevent them from being classified as modified endowment contracts. Business owners who maximize qualified plan contributions can continue building tax-free wealth through Index Strategies without restriction—often contributing fifty thousand, one hundred thousand, or more annually depending on income, age, and coverage design.

Roth distributions are tax-free but deplete your account balance permanently—every dollar withdrawn reduces future compounding potential. Index Strategy policy loans are tax-free and non-depleting—your full cash value remains in the policy earning interest credits while you access funds. If your cash value is five hundred thousand dollars and you take a fifty-thousand-dollar policy loan, your full five hundred thousand continues participating in index growth. The loan accrues interest, but that rate is often offset by the interest your cash value continues earning—creating neutral or near-neutral cost of funds while maintaining liquidity and growth potential simultaneously.

How Market Volatility Affects Roth IRAs Differently Than Index Strategies

Roth IRAs invested in stock mutual funds, ETFs, or individual equities experience full market volatility—both gains and losses transfer directly to your account balance. When the S&P 500 gained twenty-eight percent in 2021, Roth investors captured that growth. When the index dropped eighteen percent in 2022, Roth balances declined proportionally. This symmetrical exposure works well during sustained bull markets but creates sequence-of-returns risk for retirees who begin withdrawals just as markets decline. A thirty-percent portfolio loss early in retirement can permanently impair your ability to sustain income—even if markets eventually recover.

The mathematics of loss recovery work against traditional investors. A fifty-percent market decline requires a one-hundred-percent gain to break even—your remaining capital must double. A thirty-percent loss requires a forty-three-percent gain. A twenty-percent loss requires a twenty-five-percent gain. Each decline resets your compounding base lower, forcing larger percentage gains to restore previous balances. If you're withdrawing funds for retirement income during this recovery period, you're simultaneously depleting principal while waiting for growth—a combination that can exhaust portfolios decades before life expectancy if timing proves unfavorable.

Index Strategies eliminate downside participation through the zero-floor mechanism while capturing S&P 500 gains up to the annual cap. Your worst year is zero percent, not negative. During 2008 when the S&P 500 dropped thirty-seven percent, Index Strategy holders received zero-percent crediting—no growth, but no loss. When the market rebounded twenty-six percent in 2009, Index Strategy cash values participated in that recovery from their full protected base while traditional investors were still recovering losses. This asymmetrical return profile—capturing upside while avoiding downside—compounds dramatically over thirty to forty-year accumulation periods, often producing similar or superior outcomes to pure market exposure while eliminating the anxiety and sequence risk that accompany volatility.

Contribution Limits, Income Restrictions, and Wealth Accumulation Capacity

Roth IRA contribution limits create a ceiling on tax-free wealth accumulation that prevents high earners from building sufficient tax-exempt retirement income. At seven thousand dollars annually for thirty years with seven-percent average growth, you accumulate approximately seven hundred thousand dollars—a meaningful sum, but insufficient to generate fifty thousand or more in annual tax-free income for a thirty-year retirement without depleting principal. Couples can double this by each contributing to separate Roth IRAs, reaching approximately one point four million—better, but still limited compared to the retirement income needs of successful professionals and business owners.

Income phase-out ranges eliminate direct Roth contributions for single filers earning above one hundred sixty-one thousand dollars and married couples above two hundred forty thousand dollars—precisely the households with the greatest capacity to fund tax-free retirement vehicles and the highest future tax exposure. Backdoor Roth conversions through traditional IRA contributions and immediate conversions remain available, but require careful coordination to avoid pro-rata taxation issues if you maintain existing traditional IRA balances. This workaround adds complexity and depends on legislative rules that could change—Congress has proposed eliminating backdoor Roth strategies multiple times in recent budget negotiations.

Index Strategies impose no IRS contribution limits beyond the requirement that premium payments maintain appropriate ratios to death benefit coverage to avoid modified endowment contract classification. A forty-five-year-old business owner in excellent health might structure a policy with a two-million-dollar death benefit and fund it with one hundred thousand dollars annually—building substantial tax-free cash value while providing family protection. Over twenty-five years, this approach could accumulate three to four million in accessible cash value depending on index performance and policy design—dramatically exceeding what Roth IRA limits permit while delivering equivalent tax-free income access through policy loans.

Required Minimum Distributions, Social Security Taxation, and Medicare Surcharges

Roth IRAs require no minimum distributions during the owner's lifetime—a significant advantage over traditional IRAs and 401(k)s that force withdrawals beginning at age seventy-three. This feature allows wealth to compound indefinitely and provides complete control over distribution timing based on actual income needs rather than IRS mandates. However, most retirees cannot fund retirement entirely through Roth accounts due to contribution limits—meaning they also maintain traditional IRA or 401(k) balances that will eventually trigger required minimum distributions regardless of whether that income is needed.

Those required distributions from tax-deferred accounts can create cascading tax consequences beyond the immediate income tax liability. Up to eighty-five percent of Social Security benefits become taxable once provisional income—which includes required minimum distributions—exceeds certain thresholds. For married couples filing jointly, provisional income between thirty-two thousand and forty-four thousand dollars causes up to fifty percent of Social Security to be taxed; amounts above forty-four thousand cause up to eighty-five percent taxation. A large required minimum distribution from a traditional 401(k) can push you into these ranges, effectively increasing your marginal tax rate by taxing benefits that would otherwise be excluded.

Medicare Income-Related Monthly Adjustment Amount surcharges add additional costs for retirees whose modified adjusted gross income exceeds specific brackets—and required minimum distributions count toward these calculations. In 2024, married couples with income above two hundred six thousand dollars pay higher Medicare Part B and Part D premiums, with surcharges increasing in tiers up to income levels above seven hundred fifty thousand dollars. Index Strategy policy loans do not count as income for Social Security taxation calculations, Medicare surcharge determinations, or required minimum distribution computations—creating a genuinely tax-invisible income stream that preserves benefit eligibility and avoids penalty thresholds while funding retirement lifestyle.

Living Benefits Protection That Roth IRAs Cannot Provide

Index Strategies include living benefits riders that provide access to a portion of the death benefit if you experience a qualifying chronic, critical, or terminal illness event—protection that has no equivalent in Roth IRAs or any other retirement account. Chronic illness riders accelerate benefits if you cannot perform two of six activities of daily living—eating, bathing, dressing, toileting, transferring, or continence—or require substantial supervision due to cognitive impairment. These benefits can cover long-term care costs without depleting your retirement savings or forcing liquidation of investments during market downturns.

Critical illness riders provide lump-sum benefits upon diagnosis of covered conditions—typically heart attack, stroke, cancer, organ transplant, or end-stage renal failure. Rather than draining your Roth IRA or taxable accounts to cover medical costs, treatment expenses, or income replacement during recovery, you access insurance benefits that preserve your retirement assets. This separation of health risk from wealth accumulation prevents medical events from derailing retirement plans—a protection that becomes increasingly valuable as healthcare costs continue rising faster than general inflation.

Terminal illness riders accelerate the full death benefit if you receive a diagnosis with life expectancy of twenty-four months or less, providing funds to cover final medical expenses, eliminate debts, take meaningful trips, or support family members during your remaining time. These living benefits transform life insurance from a death-only product into comprehensive financial protection that serves you during life's most challenging moments. Roth IRAs offer none of these protections—they remain purely accumulation vehicles without insurance features, leaving you to self-insure against health risks that could devastate retirement security.

How Independent Brokers Structure Roth and Index Strategy Combinations

We don't position Index Strategies as Roth IRA replacements—we structure them as complementary vehicles that together create more comprehensive tax-free retirement income than either could provide alone. A forty-year-old professional might maximize Roth IRA contributions at seven thousand dollars annually while funding an Index Strategy with an additional thirty thousand dollars—building parallel tax-exempt wealth streams with different liquidity characteristics, protection features, and legacy benefits. This layered approach provides flexibility to adapt income strategies based on market conditions, tax law changes, and personal circumstances throughout retirement.

Young families often prioritize Index Strategies early in their careers when life insurance needs are highest and insurability is easiest to obtain, then shift focus toward maximizing Roth contributions as incomes rise and children become financially independent. Business owners frequently use Index Strategies as supplemental retirement vehicles after maxing out qualified plan contributions—treating premium payments as forced savings that build tax-free wealth while providing business succession planning through the death benefit. High earners excluded from Roth contributions by income limits use Index Strategies as their primary tax-exempt accumulation vehicle, often funding policies with substantial annual premiums that dwarf what IRA contributions could achieve.

As an independent broker partnered with seventy-five-plus carriers, we design Index Strategy illustrations across multiple insurance companies—comparing cap rates, participation rates, floor guarantees, fee structures, and rider options to identify the optimal combination for your specific age, health profile, and premium capacity. This carrier-agnostic approach ensures you receive the most competitive policy design rather than being limited to whichever company a captive agent represents. We then coordinate Index Strategy funding with your existing Roth contributions, 401(k) deferrals, and taxable investments—creating an integrated plan that diversifies across all Three Tax Buckets while maximizing tax-free income potential and downside protection.