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Replacement Rate​

The replacement rate is the percentage of your pre-retirement income that is paid out upon your retirement. For example, if your annual salary was $40,000 before retirement and you have $30,000 in annual retirement income, your replacement rate is 75% ($30,000/$40,000). Often, the annual income you need in retirement is less than what you need while employed because in retirement:

  • You are generally not setting aside any, or as much, income for savings.
  • Your work-related expenditures decline.
  • You are paying less income tax.

So how do you calculate an adequate replacement rate that will provide you with enough income to meet your needs? Many studies attempt to do this, but they are only rough estimates because circumstances vary from person to person. We have used the consulting firm Aon’s replacement rates in some of our studies and generally agree with their calculations.

The following two tables show replacement rates for various income levels. These tables break down replacement rates into the components of Social Security (SS) income and other income, including employer-sponsored retirement plans and personal savings. Table 1 is based on a household in which one spouse is employed and receives family SS benefits. Table 2 is based on a single person household receiving individual SS benefits.
 
​Example

 George is single and has been living on an annual  income of $50,000 before retirement. He will need to replace approximately 79% of his income ($39,500) in retirement. Social Security will replace 36.7% of his income; therefore, he will need to replace 42.3% of his income from other sources.


Aon Consulting’s Replacement Ratio Study: A Measurement Tool for Retirement Planning (2008)

Table 1: Retirement Rate Baseline Model - 65-year-old retiree and spouse

​Annual Income ​Social Security ​Other
(pension, 401(k), savings)
​Total Required
(Aon Calculation)
$20,000​ 69.0%​ 20.0%​ 89%​
$30,000​ 58.7%​ 27.3%​ 86%​
$40,000​ 53.6%​ 28.4%​ 82%​
$50,000​ 50.5%​ 28.5%​ 79%​
$60,000​ 46.3%​ 29.7%​ 76%​
$70,000​ 52.3%​ 33.7%​ 76%​
$80,000​ 39.2%​ 36.8%​ 76%​
$90,000​ 36.8%​ 40.2%​ 77%​

 

 Table 2: Retirement Rate Baseline Model - 65-year-old retiree single

Annual Income ​Social Security ​Other
(pension, 401(k), savings)
​Total Required
(Aon Calculation)
$20,000​ 50.2%​ 38.8%​ 89%​
$30,000​ 42.7%​ 43.3%​ 86%​
$40,000​ 39.0%​ 43.0%​ 82%​
$50,000​ 36.7%​ 42.3%​ 79%​
$60,000​ 33.7%​ 42.3%​ 76%​
$70,000​ 30.7%​ 45.3%​ 76%​
$80,000​ 28.5%​ 47.5%​ 76%​
$90,000​ 26.8%​ 50.2%​ 77%