Mind the Gap: How to Confidently Plan Your Retirement Income
One of the most important—and often most overlooked—parts of retirement planning is making sure you have enough income to support your lifestyle once the paychecks stop.
When we meet with clients, three goals come up over and over again:
- Retire on time
- Maintain the lifestyle they've worked hard to build
- Never have to return to work
While investments, savings, and tax strategies all matter, ultimately, retirement success hinges on cash flow. You need to know how much income is coming in, how much is going out, and whether there is a gap between the two. That's why we walk clients through something called an Income Gap Assessment.
This process helps you answer a simple but critical question:
How much income will I need in retirement—and where will it come from?
Step 1: Estimate the Income You'll Lose
First, we start by determining what you're currently living off of. But instead of focusing on your gross income (your total salary), we look at your net income—the actual amount that lands in your checking account each pay period. That's what fuels your lifestyle.
Why net income? Because retirement is full of financial changes. For example:
- You'll stop contributing to retirement accounts, such as 401(k)s or IRAs.
- You'll no longer have payroll taxes, such as Social Security and Medicare withholding.
- Health insurance may be structured differently.
- Your tax situation could change entirely.
By using your net income, we get a more accurate picture of what you'll truly need to maintain your lifestyle in retirement, not just a guess based on gross income or broad rules of thumb, such as "80% of your salary."
Step 2: Factor in the Income You'll Gain
Once we understand what income is going away, we shift gears and look at what income will replace it in retirement. These sources typically include:
- Social Security – Based on your earnings history and claiming age. We help clients run Social Security optimization strategies to weigh the trade-off between collecting earlier and waiting for higher benefits.
- Pension Income – If you're a government employee (federal, state, or county) or one of the few remaining workers with a private pension, this is included here.
- Other income – This might include rental income, annuity payments, or part-time work if you plan to stay active.
We typically calculate these numbers using gross income and then account for taxes and healthcare costs later, ensuring a fair comparison.
Step 3: Add in Retirement-Specific Expenses
This is where planning gets customized. Retirement isn't just about replacing your current lifestyle—it's also about preparing for the new costs that come with it. Here are some of the key expenses we factor in:
- Taxes – Even if you're no longer earning a paycheck, you'll likely still pay taxes on things like traditional IRA or 401(k) withdrawals, pension income, and possibly even a portion of your Social Security benefits. We project your tax bracket based on your expected retirement income, taking into account both federal and state levels.
- Health Insurance – This is often one of the most significant changes. If you're retiring before age 65, we estimate premiums for private coverage or COBRA. Once you turn 65, we factor in the cost of Medicare, supplemental plans, and out-of-pocket medical expenses.
- Lifestyle Goals – Retirement isn't just about cutting costs; it's also about enjoying your time. Want to travel more? Play more golf? Spend time with grandkids? We can allocate funds in our annual budgets for things like travel, hobbies, or bucket-list experiences.
Step 4: Subtract Expenses That Will Decrease
Fortunately, many clients also see certain expenses drop in retirement. This can help close the gap and make retirement more affordable than it initially appears.
Some common expenses that go down include:
- Mortgage payments, especially if your home will be paid off before or early in retirement
- Work-related costs, like commuting, professional clothing, or lunches out
- Child-related costs, if you were supporting kids through school or early adulthood
- High health premiums if your employer didn't provide good coverage pre-retirement
We subtract these savings from the total to get a more realistic sense of your new monthly needs.
Step 5: Identify and Plan for the Income Gap
Now that we've put all the pieces together, we compare your expected expenses with your guaranteed income sources. If your expenses are higher than your income, that's your income gap—the portion you'll need to cover from your retirement portfolio.
That gap might be filled by:
- Regular withdrawals from investment accounts
- Required minimum distributions (RMDs) from IRAs
- Annuities that provide lifetime income
- Rental income or other passive sources
Knowing how much you need to withdraw each year enables us to stress-test your portfolio, consider tax-efficient withdrawal strategies, and evaluate the sustainability of your plan over a 20–30+ year retirement.