How Much Income Do You Need To Replace In Retirement?

A common rule of thumb is that retirees will spend on average 80% of their pre-retirement income. In practice, however, I have seen the “replacement rate” vary greatly from person to person. For some, their work keeps them very busy, so the first few years of retirement are filled with long-awaited travel plans that lead them to spend more. For others, the simplicity of life allows them to eat more at home and travel less, which leads to a decrease in spending.

In general, I typically see higher-income households have a larger drop in income compared to lower-income households. This would make sense because we all have fixed non-discretionary expenses like food, gas, and utilities, which make up a larger portion of the budget for lower-income households.

The chart below shows the average replacement rate based on income, which is a great starting point for planning purposes.

The replacement rate varies from 98% on the high-end when household income is $30,000 all the way to 72% on the low-end for household income of $300,000.

For higher-income households, the percent of income that is dependent on investments (or employer pensions) is significant at roughly 75%. This data suggests that having a solid investment plan is critical in order to maintain the same lifestyle in retirement since very little income is coming from guaranteed sources.

Thank you for reading,

Alex

This blog post is not advice. Please read disclaimers.