The Retirement Income Gap: How to Calculate Yours and Close It

The Number That Determines Your Retirement

There's one number that matters more than your net worth, more than your portfolio balance, more than your Social Security statement. It's the number most people approaching retirement have never actually calculated.

It's your income gap.

Your income gap is the difference between what you'll need to spend each month in retirement and what you're guaranteed to receive. It's the distance between your expenses and your floor. It's the hole that, if left unfilled, forces you to rely entirely on market performance, hope, and luck.

And hope is not a retirement strategy.

The good news? Calculating your gap is straightforward. Closing it is very doable — if you start early enough and use the right tools. Let's walk through both.

Step 1: Figure Out What You'll Actually Spend

Forget the generic rules of thumb for a minute. The "you'll need 70–80% of your pre-retirement income" guideline is a blunt instrument. Some people spend more in retirement than they did while working. Others spend less. Your number depends entirely on your life.

Here's how to build a real estimate:

Essential Expenses (Non-Negotiable)

These are the bills that arrive whether you're on a beach or on your couch:

• Housing: Mortgage or rent, property taxes, homeowner's insurance, maintenance, HOA fees. Even if your house is paid off, property taxes, insurance, and upkeep can easily run $800–$2,000/month.
• Healthcare: Medicare premiums (Part B is roughly $185/month per person in 2026), Medigap or Medicare Advantage premiums, Part D drug coverage, dental, vision, copays, prescriptions. Budget $600–$1,200/month for a couple.
• Food: Groceries and basic dining. $400–$800/month for a couple.
• Transportation: Car payments, insurance, gas, maintenance — or public transit costs. $300–$700/month.
• Utilities: Electric, gas, water, internet, phone. $200–$400/month.
• Insurance: Life insurance, umbrella policy, long-term care premiums if applicable.
• Taxes: Yes, you still pay taxes in retirement. Income taxes on IRA withdrawals, Social Security, annuity income. Property taxes. Possibly state income taxes.

Discretionary Expenses (The Fun Stuff)

• Travel: This is often the biggest discretionary line item in early retirement. $200–$1,000/month depending on how adventurous you are.
• Dining and entertainment: Restaurants, movies, concerts, hobbies.
• Gifts: Grandkids, holidays, charitable giving.
• Hobbies: Golf memberships, craft supplies, club dues, equipment.
• Home improvement: Retirees often spend on their homes — new kitchen, landscaping, that workshop they always wanted.

The Expenses People Forget

Here's where the planning falls apart for a lot of people:

• Long-term care: The median cost of a semi-private nursing home room is over $8,000/month. Even home health aides can run $5,000+/month. Not everyone needs long-term care, but roughly 70% of people over 65 will at some point.
• Dental work: Medicare doesn't cover most dental care. Implants, crowns, and dentures can cost thousands out of pocket.
• Home repairs: Roofs, HVAC systems, appliances — they all have lifespans. A major repair can easily be $10,000–$30,000.
• Helping family: Adult children or aging parents who need financial support. It happens more often than people plan for.
• Inflation: Everything gets more expensive over time. We cover this in detail in our inflation and retirement guide, but the short version is: $5,000/month today will buy significantly less in 15 years.

Step 2: Add Up Your Guaranteed Income

Now for the other side of the equation. What income is guaranteed to show up every month, regardless of what the stock market does?

Social Security

Visit ssa.gov and pull your personalized benefit estimate. It shows your projected monthly benefit at three ages:

• Age 62 (earliest claiming age) — reduced benefit
• Full retirement age (66–67) — full benefit
• Age 70 — maximum benefit (roughly 24–32% more than full retirement age)

If you're married, check both spouses' estimates. Remember that the lower-earning spouse may be eligible for a spousal benefit (up to 50% of the higher earner's full retirement age benefit).

Pension Income

If you have a pension, get the exact monthly amount from your employer. Know whether it includes cost-of-living adjustments (most private pensions don't). Understand the survivor benefit options — taking a reduced pension that continues for your spouse is usually worth it.

Existing Annuity Income

If you already own an annuity with an income rider or have annuitized a contract, include those payments.

Rental Income (With a Caveat)

Rental income can be part of the picture, but it's not truly "guaranteed" the way Social Security or annuity payments are. Vacancies, repairs, problem tenants, and market changes can all disrupt the income stream. If you include it, discount it by 15–20% to be conservative.

Step 3: Do the Math

Here's the moment of truth. Let's use an example:

Monthly Essential Expenses:

Monthly Discretionary Expenses:

Total Monthly Need: $5,600

Monthly Guaranteed Income:

Monthly Income Gap: $5,600 - $3,600 = $2,000

That's $24,000 per year that needs to come from somewhere. Over a 25-year retirement, that's $600,000 (before inflation) that your savings must produce. Over 30 years, it's $720,000.

And that's the minimum — it assumes no emergencies, no healthcare surprises, and no inflation.

Step 4: Choose How to Fill the Gap

You have four basic options, and the best plans usually combine several of them:

Option A: Portfolio Withdrawals

Draw from your 401(k), IRA, or investment accounts. This is what most people default to.

The upside: Flexibility. You can adjust withdrawals year to year. Your money stays invested with growth potential.

The downside: Market risk. If the market drops early in retirement, your withdrawals accelerate the damage. (This is sequence of returns risk, and it's real.) You also have to manage the portfolio, make ongoing investment decisions, and live with the uncertainty of not knowing if the money will last.

A common guideline is withdrawing 3.5–4% of your portfolio per year. To generate $24,000/year at a 4% withdrawal rate, you'd need $600,000 in investable assets. At a more conservative 3.5%, you'd need roughly $685,000.

Option B: Annuity Income

Purchase an annuity that pays a guaranteed monthly income for life. This is the personal pension approach.

The upside: Certainty. The income arrives every month regardless of market conditions. You can't outlive it. It eliminates the stress of managing withdrawals.

The downside: Less flexibility. Once you annuitize, you typically can't access the lump sum. The purchasing power of fixed payments erodes over time without an inflation adjustment rider.

To generate $2,000/month in guaranteed income, a 65-year-old might need approximately $300,000–$400,000 in premium, depending on interest rates and the specific product. Rates fluctuate, so this is a rough range.

Option C: Part-Time Work

Working part-time in early retirement — even 10–20 hours per week — can dramatically reduce the income gap.

The upside: Earning even $1,500/month in the first five years of retirement reduces the strain on your portfolio during the most vulnerable period. It also provides social engagement and structure.

The downside: It depends on your health, opportunities, and willingness. And it's not a long-term solution for a gap that needs to be filled for 25+ years.

Option D: Reduce Expenses

Sometimes the most effective strategy is closing the gap from the other direction.

The upside: Every dollar you reduce in monthly expenses is a dollar less you need to generate. Downsizing your home, moving to a lower cost-of-living state, or cutting discretionary spending can close or narrow the gap significantly.

The downside: There's a floor to how much you can cut without sacrificing quality of life. And some expenses (healthcare) are likely to increase regardless of your lifestyle choices.

The Combination Approach (What We Usually Recommend)

For most of our clients, the best answer isn't A, B, C, or D — it's a combination:

1. Use an annuity to cover the essential portion of the gap. If your essential expenses exceed your guaranteed income by $1,500/month, an annuity that pays $1,500/month creates a fully funded income floor. Your essentials are covered no matter what.

2. Use portfolio withdrawals for discretionary spending. The remaining $500/month (in our example) comes from your investment portfolio. In good years, you might take more. In bad years, you pull back — but your essentials are still secure.

3. Consider part-time work in the first few years to reduce early-retirement withdrawals and give your portfolio time to grow.

4. Build in flexibility for expenses to change over time — the "go-go, slow-go, no-go" phases of retirement spending.

This approach gives you the security of guaranteed income, the growth potential of a market portfolio, and the flexibility to adapt as circumstances change.

What If the Gap Is Bigger Than You Expected?

Don't panic. Here are your levers:

Delay retirement by 1–3 years. Each additional working year does triple duty: you save more, your portfolio grows, and your Social Security benefit increases. Delaying retirement from 63 to 66 can reduce the income gap by 30–40%.

Delay Social Security to 70. The guaranteed 8% per year increase between full retirement age and 70 is one of the most powerful tools available. A $2,400/month benefit at 67 becomes roughly $2,976 at 70. (Read our detailed guide on Social Security and annuities.)

Downsize your home. If your house is worth $400,000 and you move to a $250,000 home, the $150,000 freed up could generate significant annuity income or extend your portfolio by years.

Relocate strategically. Moving from a high-tax, high cost-of-living state to a more affordable one can reduce your monthly expenses by $1,000–$2,000 or more. Several states have no income tax and lower overall costs.

Optimize your portfolio. Are you paying 1% or more in investment management fees? Switching to low-cost index funds can save thousands per year — money that stays in your account and compounds.

The Psychological Side of the Gap

We've worked with hundreds of people on this exercise, and here's what we've noticed: most people feel worse before they calculate the gap than after.

The vague anxiety of "do I have enough?" is almost always more stressful than seeing the actual number. Even if the gap is larger than you'd like, knowing the number gives you something to work with. It transforms an amorphous worry into a concrete problem with concrete solutions.

And concrete problems are solvable.

The Bottom Line

Your retirement income gap is the most important number you'll ever calculate for your financial future. It tells you exactly how much work your savings need to do, and it reveals whether you're on track or need to make changes.

The math is simple: expenses minus guaranteed income equals the gap. The strategy is about choosing the right combination of tools — annuities, portfolio withdrawals, Social Security timing, and spending adjustments — to close that gap reliably and permanently.

Start with the number. Then build the plan around it.