There's a number most people carry around in their heads when they think about retirement — an estimate of what they'll spend each month. It usually comes from a rough mental accounting of current bills, adjusted down a little because they assume they'll spend less once they stop working.
That number is almost always wrong. And it tends to be wrong in the same direction: too low.
The gap between what people estimate they'll need in retirement and what they actually spend is one of the most consistent and costly planning errors in personal finance. It doesn't come from recklessness. It comes from a set of predictable blind spots — expenses that get forgotten, costs that increase, and income sources that don't materialize the way people expected. Understanding the gap before you retire is the only way to close it before it closes in on you.
Why the 70–80 Percent Rule Breaks Down
The conventional wisdom says retirees need to replace 70 to 80 percent of their pre-retirement income. It's a reasonable starting point, but it hides enough variation that using it as a firm target is risky.
Spending in retirement is not flat. Research consistently shows that retirement spending follows a "retirement spending smile." In early retirement — the "go-go years" — spending is often higher than anticipated because people are active and traveling. Spending moderates in the middle years. Then in later retirement, healthcare and long-term care costs can drive spending back up sharply.
Healthcare costs are not fixed. Beyond premiums — which rise faster than general inflation — out-of-pocket costs, dental expenses not covered by Medicare, and the possibility of long-term care all represent open-ended financial exposure that a fixed percentage rule doesn't capture.
Inflation compounds invisibly. Expenses that cost $5,000 a year at 65 cost roughly $8,000 at 85, assuming 2.5 percent annual inflation. Income sources that are fixed — like a pension without a cost-of-living adjustment — quietly lose ground every year.
The Expenses Most Retirement Plans Miss
Home maintenance and repair. The standard heuristic is to budget 1 to 2 percent of your home's value annually. On a $500,000 home, that's $5,000 to $10,000 per year — an expense many retirees don't explicitly account for.
Travel and experiences. Early retirement spending on travel and leisure tends to exceed projections. Many retirement income plans underestimate this phase because they model spending based on what a working person currently spends on leisure, not what a newly retired person with full availability actually spends.
Support for adult children and grandchildren. Financial support flowing from retired parents to adult children is common and consistently underplanned for. It rarely appears in retirement projections. It almost always appears in retirement spending.
Taxes. Distributions from traditional IRAs and 401(k)s are taxable as ordinary income. RMDs beginning at age 73 can push retirees into higher brackets. Social Security may be partially taxable. Medicare IRMAA surcharges add costs for higher earners. The after-tax income picture is consistently more complex — and more expensive — than the pre-tax balance suggests.
Long-term care. The U.S. Department of Health and Human Services estimates that more than half of Americans turning 65 today will need some form of long-term care. The costs are significant and rarely included in baseline retirement income projections.
How to Calculate Your Actual Retirement Income Gap
Step 1: Build a realistic spending estimate. Start with your actual spending — not your budget — and adjust for retirement. Remove expenses that will genuinely disappear (commuting, retirement contributions, payroll taxes). Add expenses that will increase (healthcare, travel, home maintenance).
Step 2: Stress-test for inflation. Run your spending estimate at flat and at 2.5–3 percent annual inflation over 20–25 years. The gap between these two scenarios is your inflation exposure.
Step 3: Map your guaranteed income. What will you receive from Social Security, pensions, or annuities? If guaranteed income covers baseline non-discretionary spending, your portfolio only needs to fund discretionary expenses.
Step 4: Calculate the shortfall. The difference between realistic spending and guaranteed income is what your portfolio must produce annually. Divided by a sustainable withdrawal rate — typically 3.5–4.5 percent — this gives you a rough portfolio target.
If you're within ten years of your target retirement date, running this calculation with a financial advisor using your real numbers is one of the most valuable planning sessions you can have.
The Income Sources That Get Overestimated
Social Security. Many people estimate their benefit from memory or an old statement. The difference between claiming at 62, at full retirement age, and at 70 can be up to 77 percent in total benefit amount. Plans built on the wrong assumption create a gap from day one.
Portfolio returns. Projections that assume 7–8 percent annual returns without modeling for variance can produce a false sense of security. Sequence of returns risk means a significant decline in early retirement has a disproportionate impact on a portfolio being drawn down simultaneously.
Part-time income. Many plans include part-time consulting or freelance income. What gets overestimated is its reliability and duration. Health changes or the simple desire to actually retire can eliminate this income source faster than projected.
Strategies to Close the Gap Before You Retire
Delay retirement by one to three years. More contributions, less portfolio drawdown time, and a potentially larger Social Security benefit. Even one additional year of work can meaningfully reduce the gap.
Optimize Social Security timing. Delaying past full retirement age earns 8 percent annually in increased benefits up to age 70 — a guaranteed return that reduces the burden on the portfolio over a long retirement.
Reduce the portfolio's income requirement. Paying off a mortgage before retiring, downsizing housing, or relocating to a lower cost-of-living area all change the income math materially.
Build a bridge strategy. For retirees who retire before Social Security claiming age, using portfolio assets to fund living expenses during the gap period allows Social Security to grow. The larger benefit for life can more than offset the bridge cost.
Address long-term care exposure. Long-term care insurance, hybrid life/LTC policies, or a designated self-insured reserve fund are all mechanisms for containing this open-ended risk. Addressing it before retirement, when coverage is more accessible and affordable, is consistently better than addressing it after.
Closing the Gap Takes a Plan, Not a Guess
The retirement income gap is not a sign of bad planning — it's a sign that retirement planning is more complex than a single number or percentage rule. The people who navigate it well share one common characteristic: they built their plan around their actual numbers, with an honest accounting of what they expect to spend and what they can reliably count on to fund it.
That kind of analysis — specific, scenario-based, and built around your real financial picture — is exactly what the advisors at Inventa Wealth do with clients in the years approaching retirement. If you'd like to run these numbers for your own situation, a complimentary initial consultation is the right place to start.
Our office is located at 7440 South Creek Road, Suite 250, Sandy, UT 84093. We serve clients nationally through our Telewealth virtual meeting options, so location is never a barrier. Visit inventawealth.com to schedule.
The information in this article is for educational purposes only and does not constitute legal, tax, or financial advice. Consult a qualified attorney, financial advisor, and tax professional regarding your specific circumstances.