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What You Need to Know About Retirement Income Replacement Rate


Ensuring you have enough money socked away for retirement is a difficult task. Calculating exactly how much you’ll need in the future — with the moving target of unexpected healthcare costs and the uncertainty of your life expectancy — can be tricky. It can all quickly devolve into a game of guestimation.

A more streamlined approach, though, is using a retirement income replacement rate. From here you can see what you’ll need to support your lifestyle after you retire. Below we’ll discuss the details.

Don’t leave any stone unturned in your retirement planning. Contact a vetted financial advisor for free to scope out your retirement plan and fill any gaps you may have currently.

What Is Retirement Income Replacement Rate?

A retirement income replacement rate is the percentage of your pre-tax income that you will need to save in order to afford retirement at your current rate of lifestyle spending.

What Is The Standard Income Replacement Rate?

Experts advise replacing between 70% to 90% of your pre-retirement income to support your retirement. However, this depends on a number of factors, which we’ll discuss later.

The reason the suggested rate is between 70% and 90% and not a full 100% is due to the fact that most individuals end up spending less in retirement than they did during their working years. These saving categories are made up of:

  • Elimination of retirement savings: Once you’re retired, it’s less necessary to continue saving for retirement.
  • Reduction of taxes: After retirement, your taxes will likely decrease
  • Reduction in everyday spending: It’s common for everyday expenses to decrease like the cost of commuting to work or clothing.

5 Factors to Determine Your Income Replacement Rate

To determine your own retirement savings percentage, we suggest starting by looking at five factors that will have the greatest impact on your retirement needs. Once you have these established as a baseline, it’s easier to account for those special cases like your child’s college education or charitable contributions.

1. How Much You Earn

The first determining metric is how much you earn. Those that have higher salaries are more likely to need a higher proportion of retirement income. This is especially true if they lived proportionally to their income and increased their cost of living with every salary raise.

2. How Much You Save

Those that saved suitably during their working years may be able to afford a less stringent retirement. This is when living within or below your means during your working years comes into play.

3. When You Will Retire

The age at which you retire will greatly impact the amount of pre-employment income you will need to replace. Those that have their eyes set on early retirement will need to keep in mind that the bulk of their retirement income will come strictly from their savings. This is because the earlier you enter retirement, the less you will receive in Social Security benefits. Delaying retirement until your late 60s or early 70s will allow you to rely less on the funds in your other retirement accounts.

4. Your Tax Rates

Some taxes will be eliminated once you retire such as FICA taxes. FICA or “payroll” taxes, for example, account for 7.65% to 15.3% of your paycheck depending on your employment situation. However, there are taxes that will not only stick around but can fluctuate over time. These include:

Federal taxes: The government will continue to tax your retirement income based on where the earnings are coming from. For instance, earnings from an IRA, 401(k) and rental income are all taxed differently.

State taxes: Where you live is also a factor. Some states inflict taxes on their residents while others don’t. Find out from a tax perspective what states are the best to retire in.

Filing status: There are five filing statuses all with varying degrees of tax rates and deduction eligibilities.

5. What Social Security Covers

Social Security will only cover a percentage of your pre-retirement income based on your highest 35 years of earnings. After that, the rate you receive in payouts will be determined by how much you earned during those 35 years and what age you chose to start receiving your benefits.

It’s also important to note that relying solely on Social Security benefits to get you through your “golden years” isn’t the best course of action. The state of the social security program is always volatile, so being diligent with your personal savings and investments will allow you to properly relax come time to hang up your suit and tie.

The Bottom Line

What retirement planning boils down to is knowing what you will have at your disposal to supplement your lifestyle during retirement. That’s why it’s so important to figure out your ideal retirement income replacement rate. A well-thought-out retirement plan should ideally start early in your career and be consistently adjusted to economic conditions and salary increases. Government programs like Social Security are a great way to pad your retirement salary, however, they shouldn’t be used as your only source of income.

For beginners looking for a great place to start, or experienced savers wanting to check if they’re on the right path, use a retirement calculator in conjunction with your retirement income replacement rate.

Retirement Planning Tips

  • There’s a lot to consider when planning for retirement. A financial advisor can help you sort through the myriad of decisions you’ll need to make as you wind down your career, including when to claim Social Security and how to reduce your tax liability in retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Are you on track to hit your savings goals for retirement? Use SmartAsset’s retirement calculator to find out. This free tool can help estimate how much your savings will be worth in the future and assess whether you’re on pace to meet your financial goals.
  • Our no-cost Social Security calculator will give you a quick estimate of what you can expect in monthly payments from the federal government.

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