Quick answer
Estimate retirement income needs from your expected spending—not a fixed percentage of your salary. Build an annual budget, include taxes and irregular expenses, then subtract income expected during that same year. The remaining gap is what savings or other resources must cover. Repeat the calculation for different retirement phases and less favorable assumptions.
U.S.-focused educational guidance. This worksheet estimates spending and income gaps; it does not establish that you can afford to retire.
1. Start with actual spending, then identify what will change
A salary replacement rate compares retirement income with earnings before retirement. It does not tell you which bills that income must pay. Instead, start with two lists: what your household spends now and what you expect to spend after leaving work. CFPB retirement guidance recommends comparing actual pre-retirement income and expenses with expected retirement income and expenses. (files.consumerfinance.gov)
Gather bank statements, credit-card records, insurance bills and debt statements. Review several months, and preferably a full year for your first estimate. CFPB’s spending guidance emphasizes looking beyond regular monthly bills to less frequent expenses and checking whether your budget matches your statements. (consumerfinance.gov)
For each expense, mark:
- Continues: groceries, utilities or an ongoing loan payment.
- Ends: a commuting expense or debt payment with a confirmed end date.
- Changes: health coverage, travel or housing.
- Begins: a planned hobby, relocation or paid household assistance.
Keep transfers between your own accounts separate from spending. Avoid counting both credit-card purchases and the later payment of that card.
Do not remove an expense merely because you hope it will disappear. Write down the condition: “Mortgage payment ends after the scheduled payoff,” rather than “Housing becomes free.”
2. Separate essentials, flexible spending and irregular purchases
Use three categories:
Essential spending covers the household’s basic commitments: housing, food, utilities, necessary transportation, insurance and required debt payments.
Discretionary spending covers choices you could reduce or postpone: vacations, entertainment, optional upgrades and some gifts.
Irregular spending needs its own schedule. Assign each item to essential or discretionary spending, but record when it is likely to occur.
The distinction is personal. A car may be necessary where you live; a second car may not be. Label expenses according to what your household could realistically change.
For housing, check rent or mortgage payments, property taxes, insurance, association fees, maintenance and planned repairs. If you are considering moving, create a separate estimate including transaction and moving costs. Do not assume downsizing produces a particular saving before pricing the alternative.
For a hypothetical $18,000 vehicle replacement planned in six years:
Annual planning allowance = $18,000 ÷ 6 = $3,000
That calculation spreads the assumed purchase cost over six years, before inflation or investment earnings. It does not eliminate the need to have the money available when the purchase occurs.
Choose either an annual allowance or a year-specific purchase in your model. Including both would double-count the expense. CFPB similarly advises including less frequent costs such as insurance, medical expenses, gifts and vacations when assessing spending. (consumerfinance.gov)
3. Build health costs from coverage, not a single average
Make separate health-cost estimates for the years before Medicare eligibility and the years afterward.
For each phase, investigate:
- Coverage premiums.
- Deductibles, copayments and coinsurance.
- Prescription costs under the coverage being considered.
- Dental, vision, hearing and other services, checking whether each is covered.
- A higher-use scenario based on the plan’s actual cost-sharing rules.
Medicare is not a zero-cost health budget. In 2026, the standard Part B premium is $202.90 per month, with higher premiums for some people depending on income. Deductibles and other cost sharing also apply. Original Medicare has no annual out-of-pocket limit unless you have supplemental coverage or join Medicare Advantage. These figures and plan terms can change. (medicare.gov)
Keep long-term support separate from ordinary medical spending. Medicare generally does not pay for non-medical long-term care, such as ongoing help with bathing or dressing. (medicare.gov)
If you do not yet know those costs, label them unpriced, not zero. Obtain coverage information and local care quotes before treating the estimate as complete.
4. Map income sources and use a consistent tax method
Create an income schedule showing each source’s amount, start date, end date, inflation adjustment and documentation.
For Social Security, use an estimate based on your earnings record rather than another person’s benefit. SSA’s calculators let you compare claiming ages and change future earnings assumptions. Review those assumptions if you expect to stop working before claiming. (ssa.gov)
For a pension, obtain estimates for the payment options you are considering. Record whether the quoted amount changes under a survivor option and whether it has an inflation adjustment. For employment or rental income, document the costs and conditions behind the estimate rather than assuming the full receipt is available to spend.
Keep account balances separate from annual income. A retirement account balance is a resource from which withdrawals may be made—not a recurring payment with an assured amount. Investor.gov notes that defined-contribution account balances are not guaranteed to be adequate for retirement. (investor.gov)
Choose one tax convention:
- Gross method: Include income taxes in annual cash needs and subtract gross income sources.
- Net method: Exclude income taxes from spending and subtract income after estimated taxes.
Do not mix them. Pension payments may be fully or partly taxable, and Social Security benefits may also be taxable depending on your circumstances. (irs.gov)
Under the gross method, count Medicare premiums in health spending if you use Social Security benefits before premium deductions. Otherwise, you could count those premiums twice.
5. Work through a hypothetical annual worksheet
Assume a two-person household is estimating a full retirement year in today’s dollars. These amounts are invented solely to demonstrate the calculation; they are not typical costs or recommended spending levels.
| Expense | Essential | Discretionary |
|---|---|---|
| Housing, utilities and housing insurance | $18,000 | — |
| Groceries and household basics | $7,200 | — |
| Necessary transportation | $4,800 | — |
| Health premiums and out-of-pocket allowance | $8,400 | — |
| Necessary repair and replacement allowance | $3,600 | — |
| Travel | — | $6,000 |
| Dining and entertainment | — | $3,600 |
| Gifts and charitable giving | — | $2,400 |
| Optional purchases and upgrades | — | $1,800 |
| Spending subtotal | $42,000 | $13,800 |
Add a hypothetical $4,200 income-tax allowance:
Annual cash needs = $42,000 + $13,800 + $4,200 = $60,000
Suppose the household assumes gross Social Security income of $36,000 and a gross pension of $6,000:
Annual income gap = $60,000 − $42,000 = $18,000
That is $1,500 per month on average. Actual cash needs may vary throughout the year.
Now change one assumption at a time:
| Scenario | Annual cash needs | Other gross income | Annual gap |
|---|---|---|---|
| Base estimate | $60,000 | $42,000 | $18,000 |
| Health spending rises by $3,600 | $63,600 | $42,000 | $21,600 |
| Travel spending falls by $3,000 | $57,000 | $42,000 | $15,000 |
| Temporary gross employment income adds $6,000 | $60,000 | $48,000 | $12,000 |
For illustration, the tax allowance stays unchanged. In a real projection, recalculate taxes when income, withdrawals or relevant deductions change.
Also create a separate estimate for any period before Social Security or pension payments begin. Income that starts later cannot pay earlier bills.
The $18,000 gap is not a retirement savings target. Whether savings can cover it requires a separate analysis of withdrawals, investment outcomes, fees, taxes and retirement length.
6. Keep today’s dollars and future dollars separate
Today’s dollars express the purchasing power of an amount now. Future dollars express the amount payable or spendable in a later year. Inflation matters because it affects what money can buy. (investor.gov)
Use one basis throughout each comparison. SSA’s online and quick calculators offer estimates in today’s dollars or future dollars; check the setting before copying a figure. (ssa.gov)
To illustrate the effect of an assumed constant inflation rate:
Future annual cost = Current annual cost × (1 + inflation rate)^years
For the hypothetical $60,000 budget, ten years away:
- At 2.5% assumed annual inflation: approximately $76,805.
- At 3.5% assumed annual inflation: approximately $84,636.
These are mathematical scenarios, not inflation forecasts.
Project income on the same basis. Check each pension’s adjustment terms rather than assuming all income grows with prices. For more detailed planning, model expenses separately: a scheduled debt payoff and an inflation-sensitive grocery budget should not automatically follow the same path.
7. Test retirement phases and longer lives
Avoid treating retirement as one identical year repeated indefinitely. Build estimates around your own expected changes:
- Leaving work and replacing employer health coverage.
- Starting Social Security or pension payments.
- Paying off debt or moving.
- Reducing travel.
- Needing additional household or personal support.
SSA’s life expectancy calculator estimates average additional years using sex and date of birth. It is not a personalized prediction or a deadline for your plan. (ssa.gov)
For a hypothetical retirement beginning at 65, compare planning horizons ending at 85, 90 and 95: 20, 25 and 30 years. These are test assumptions, not prescribed ages.
At an unchanged $18,000 annual gap in today’s dollars, the arithmetic totals are $360,000, $450,000 and $540,000. Those totals are not required starting portfolio balances. They ignore investment returns, withdrawal timing and changing circumstances.
For a couple, also prepare a survivor scenario. Obtain applicable benefit and pension estimates, then rebuild expenses rather than automatically halving them. The purpose is to test a different household budget and income schedule.
.jpg){kind=link}
8. Check the estimate before acting on it
Use this final checklist:
- Evidence: Is each figure based on a statement, quote, benefit estimate or clearly labeled assumption?
- Completeness: Have you included debt, health coverage, taxes and irregular purchases?
- Timing: Are income and expenses assigned to the years when they occur?
- Consistency: Are you comparing gross with gross, or net with net?
- Inflation: Are spending and income expressed in the same dollar basis?
- Flexibility: Which expenses could actually be reduced?
- Uncertainty: Have you tested higher costs, less income and a longer retirement?
- No duplication: Are premiums, card payments and replacement purchases counted only once?
Revise the worksheet when circumstances change, and review it annually as a practical habit.
If the gap appears difficult to fund, compare specific alternatives: spending changes, a different retirement date, temporary work or different benefit timing. Do not make the worksheet balance merely by assuming better investment returns.
For a decision about retiring or drawing from savings, consider qualified financial and tax help. Ask for analysis that uses your documented budget and shows its assumptions.
Your useful starting point is not a universal replacement percentage. It is a spending estimate you can explain, an income schedule you can verify, and a gap you have tested under more than one scenario.