How to Calculate Your Retirement Income Gap, Step by Step

Start with what you actually spend now, then adjust for retirement. Some costs often fall, such as commuting or retirement plan contributions. Others can rise, such as health insurance premiums, out-of-pocket medical costs and travel. Use after-tax spending if you think in take-home terms, or before-tax income if you want taxes included in the target. Be consistent on both sides of the calculation.

Leave out savings withdrawals at this step. The point is to see what your savings will need to cover.

• Social Security: use your own estimate from your my Social Security account at the age you expect to claim.
• A spouse's Social Security benefit, if you are planning as a couple.
• Pension payments, using the payout option you expect to choose, such as single life or joint and survivor.
• Other dependable recurring income, such as existing annuity payments or steady part-time work you truly expect to continue.

• Claiming ages: claiming Social Security earlier or later changes the benefit for life.
• Inflation: Social Security has annual cost-of-living adjustments, but many pensions and fixed payments do not, so a gap can widen over time.
• Taxes: part of Social Security, pensions and retirement account withdrawals can be taxable.
• Survivor income: when one spouse dies, one Social Security benefit stops and some pensions reduce, while many expenses stay.
• Health costs and one-time expenses, which a flat monthly number does not capture.

A gap is not a verdict. It tells you how much your savings, a change in claiming strategy, part-time work, lower spending or an insurance-based income source would need to cover. Some people compare the yearly gap to their savings to see how hard their money would have to work, and test the effect of a bad early market with the Sequence of Returns Risk Calculator. If you would like to talk through your numbers, a free Retirement Income Review is available, with no obligation.