Make sure the chip breaker is less than 1/8" from the cutting edge of the iron/blade. This should allow it to retract all of the way. If not, the chip breaker's bend might need to be increased, but you can skip this until finishing the following steps. Make sure the frog is not too far back. This can cause a gap like shown. You can straighten the iron/blade by gently securing it in a vice and applying gently pressure to straighten it. If it won't retract properly, at this point you can secure the bottom of the chip breaker gently in a vice and apply pressure to increase the bend to where it should be and reattach it to the iron/chip breaker to within 1/8" of the cutting edge.
"The kind of man who wants the government to adopt and enforce his ideas is always the kind of man whose ideas are idiotic." -H.L. Mencken