Now that you’ve developed estimates of your desired income in retirement and the pre-pensionized income you can expect to receive in retirement, you are ready to calculate your “pension income gap," as you can see in Exhibit 15.1. This is the gap between the income you can expect in retirement and the income you would like in retirement—and you don’t need anything more complicated than basic math skills to calculate it.
But before we get to that basic arithmetic, we need to take a moment to consider the impact of taxes on our calculations here. So far, we’ve only asked you to estimate your desired after-tax income in retirement.
Let’s say you want a certain amount of income each year. You will almost certainly need total income in excess of that amount—because of the income taxes that will be due. Everything you pull out of your tax-sheltered accounts, for example, will be subject to tax because you’ve never actually paid income tax on that money (for the most part).
Let’s start with a very simple example for a hypothetical retiree who has no public pension income and whose entire nest egg is in tax-sheltered accounts. If he has an average income tax rate of 20 percent, then he will have to withdraw $50,000 from his nest egg to end up with ...