SURVEY SAYS: An Appropriate Income Replacement Rate at Retirement

November 21, 2011 ( - On the industry standard 80% income replacement rate in retirement, the biggest percentage of NewsDash readers responding to the survey said it is not appropriate because it depends on an individual’s circumstance (46.7%).

Nearly an even number chose “yes, it is appropriate” (23.3%) and “no, it’s too low” (22.2%). Only 7.8% indicated the rate is too high.     

Those who chose “other” said: 

  • 80% income replacement? Many folks will be lucky to achieve 50! 
  • The question and the answer are totally irrelevant. 
  • It depends on the person’s lifestyle and how much they are already contributing to Retirment. If they have been saving 20% for a long time then 80% should be ok. 
  • If the mortgage is paid off, it is too high. If not, then don’t stop working as you will still need 100%. 
  • Don’t know 
  • Should consider inflation and life expectancy. 
  • While there aren’t work related expenses in retirement, it costs quite a bit to keep entertained. I find that I spend more when I’m off from work then when I’m working. 
  • I assume the 80% includes SS benefts. If so, it’s a reasonable figure, unless your activities in retirement are much more expensive then pre-retirement hobbies & travel. 
  • Since I’m never going to be able to retire, I have no idea whether its to low or high! 
  • It depends on family medical history, will one’s home be mortgage free, where one’s retires and if one plan on traveling extensively. 
  • At poverty level its 100%, at higher income levels with no debt, it can be 40%. 
  • If you are saving 20% it is right but how many are? 


The comments were varied, and a few very detailed, but my favorite was: “There are far too many variables. If you want to spend retirement traveling the world, you’ll need lots more than 80%. If you intend to just sit on the porch swing with your grandkids on your lap, you won’t even need 80%.”


80% Income replacement is a good "rule of thumb" but getting there will be harder due to reductions in SS benefits, lower investment returns and generally poor savings rates. It will also be difficult for retirees to downsize because everyone will be downsizing. 


Every worker needs to set a lifestyle goal for retirement and place an cost on that goal. Ttranslating the cost into an asset base times a realistic return on investment will yield the correct replacement ratio for that individual, Working in reverse from a ratio to projected retirement security will always yield a distorted result. The whole conversation on replacement ratios reflects "wrong headed thinking". Just a personal opinion. 


Individual circumstances can vary tremendously, so this cannot be a one-size-fits-all rule. 


Inflation will erode the buying power over time. 


Save as much as you can. Make sacrifices in other areas of spending to save more for retirement 


I suppose it does to some extent depend on an individual's circumstances, but my idea of a fulfilling retirement does not involve a reduction in my standard of living, or rolling the dice on my health or tax law. Therefore, I'm aiming for at least 100%. 

Verbatims (cont.)    

Considering how many people are going into their retirement years with high debt levels, the income replacement rate needs to be reconsidered. 


Depending on your amount of discretionary spending I believe 65% is more reasonable. 


generally tend to think it's too high. Suspect the 80% replacement rate is a subjective rate from the standpoint of the investment community, as a matter of self-interest. Assuming one has education expenses completed, mortgage paid off, and do not have to help support children (hopefully adult by that time), I believe 80% is too high. 


no one knows what the inflation rate or supplemental health costs will be especially if you're looking at 15-20 years out from retirement. 


60-70% is more realisitic if you have been diligently saving during your working years. if not, you may need 100%! 


According to my needs assessment, mine is 95% income replacement rate. 


Unless healthcare costs are brought under control retirees will need more money because they are living longer. Also as defined contribution plans provide more retirement income with no COLAs more than 80% of your original final pay will be needed. 


What troubles me is that we have a number of retired government employees getting 100% or more of their pre-retirement income. Also, I think the 80% rule applies more to lower income people; it may be no coincidence that recommending 80% serves the interests of the retirement industry. 


There are far too many variables. If you want to spend retirement traveling the world, you'll need lots more than 80%. If you intend to just sit on the porch swing with your grandkids on your lap, you won't even need 80%. 


Everyone should AIM for 80%. 


The initial replacement rate needs to be greater than 100% to account for inflation during retirement. By the time a retiree reaches 90, their effective income will be 40% of what they started with. 


I expect most people will time their payoff of debts and end contributions to retirement when they retire - thus your incoming cash needs reduce more significantly than 20% - perhaps up to 30+%, even when considering increased health & living needs at later life. 


Hopefully by the time I retire my biggest expense, mortgage, will be paid off. That leaves a nice sum to spend or save. 


Certainly those earning extremely high incomes in the years before retirement won't need to replace anywhere near 80% to live comfortably. And many other lower earners may not, either. After all, no more SS taxes, no need to save for retirement - and hopefully a simpler lifestyle. It really depends on the individual's circumstances. 


I think it depends upon your lifestyle and also how much you make. 


80% is a good benchmark for someone who is younger, but is no match for a realistic budget when you're close to retirement.

Verbatims (cont.)    

I always wondered why the claculators don't take into account spendable income instead of gross. If I made $100K and contributed 15% to my 401(K), and had another 5% in Social Security taken out (that I won't pay in retirement), my spendable income comes down to $80K. 80% of $80K is $64,000. To me, in this scenario, I would need to replace 64% of my gross salary to replace 80% of my spendable income. That is why I belive 80% is too high based on each individuals circummstance. 


Personally, I can't imagine how I'd be happy with less income in retirement, especially since I imagine that time to be full of travel, taking classes, and devoting more time (and money!) to my hobbies. I'm thinking a 150% replacement ratio would do it for me! 


80% is too low considering inflation, and the fact that most people will still spend in manners similar to what they do as active employees. Also, with the reported rates of rising amount of personal debt, it would be imprudent to think that retirees will have sufficient savings to cover their lifestyle and their debt. 


If we cannot get someone to save an additional 1% of pay while they are working, what makes us think they are willing to live on 20% less when they are not??? 


Most models contain too many or too aggressive assumptions about costs that will decline or be eliminated and underestimate costs that will increase (health care, long term care, etc.) 


Seeing as how I'll likely be functioning at about 80% I think that sounds about right. 


You certainly are without some of the previous expenses, but with health care out of control, getting older likely means more health issues and higher costs for those issues. 


At the poing of retirement, one would hope the biggest expesnes have been taken care of (mortgage, college, etc.). I would think 50% would be sufficient. 


It's the drawdown of assets that is the key, not the replacement ratio. 


it's important to have a rough approximation to help participants focus on goals - but the faux "science" on some of these projections is laughable... and occasionally pathetic. 


it is the biggest struggle that we have as a plan sponsor. everyone's situation is different. 80% at retirement may not be enough to hedge inflation for some. 


Assumptions underlying the 80% replacement rate ignore inflation and rising housing costs and potential increases in medical expenses, even if healthy. 


It doesn't (or it shouldn't) cost 80% of your take home pay to go to work to make the money! Therefore you need MORE than 80%. How much? A lot more! Why? Because you will have more time to do more of the things (like travel & hobbies) that you didn't have when you were not retired. The fallacy in the 80% thinking is that you don't retire until after your kids are no longer your responsibility and you have no Mortgage to pay. Retirement isn't an age, it is an income level that once you reach it you can change your lifestyle. For some that's in their late 40's; for others, its never...