Replacing Income in Retirement
No one is quite sure how much of their current salary employees should aim to replace in retirement. Recent estimates have ranged from 65 to 85 percent of preretirement income (Government Accountability Office) to an astonishing 126 percent of final pay (Hewitt Associates).
The latest study entering the fray calculates that most people should aim to replace 77 to 94 percent of their preretirement income, according to Georgia State University and Aon Consulting Worldwide, an arm of the insurance giant Aon. The numbers are less than 100 percent of income because expenses often drop in retirement. "This is primarily due to the following factors: Income taxes go down after retirement; Social Security taxes end completely; Social Security benefits are partially or fully tax free; and saving for retirement is no longer needed," says Cecil Hemingway, U.S. retirement practice leader with Aon Consulting.
A worker earning $50,000 will need to replace 81 percent of that amount annually to continue the same standard of living, Aon calculated. But you don't have to get to that number on your own. That worker will likely replace 51 percent ($25,500) of their former salary with Social Security. The remaining 30 percent ($15,000) needs to come from an employer retirement plan or the worker's own savings.
These numbers also vary by income. Aon calculated that an employee earning $150,000 just before retirement will need to replace 84 percent of that salary. But in this case, Social Security will provide only 23 percent ($34,500) of income, and the remaining 61 percent ($91,500) each year must come from other sources or the worker must somehow cut expenses.
Here's a look at how much of your current salary Georgia State and Aon say you should aim to replace in retirement and how much Social Security will help you get there.
How much you will need to replace in retirement
Preretirement income
Total percent that should be replaced
Social Security will replace (percent)
Private and employer sources will need to replace (percent)
Amount you need annually in private and employer sources
$50,000
81
51
30
$15,000
$60,000
78
46
32
$19,200
$70,000
77
42
35
$24,500
$80,000
77
39
38
$30,400
$90,000
78
36
42
$37,800
$150,000
84
23
61
$91,500
$200,000
86
17
69
$138,000
$250,000
88
14
74
$185,000
Note: This assumes a family situation with one wage earner who retires at age 65 and a spouse at age 62, who both collect Social Security. The calculations are based on the laws in effect on Jan. 1, 2008.
Sources: Aon Consulting and Georgia State University, 2008
Tags: income | retirement | social security
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Reader Comments
On automatic
I don't have to worry about that. My income is being replace quite nicely for me by taxes, fuel costs, heating & cooling costs, food costs, prescription costs -- well, you get the picture?
Social Security
I find the likelihood of their being any sort of social security left when I retire very very slim. For anyone under the age of about 40 I wouldn't bank on their being social security when you retire. Then again when you think about it, the system was never meant to support people for 20+ years. When social security was established people worked basically until they died. I obviously do not plan on working until I die (unless you define work as playing golf and drinking coronas on a beach, in which case, Im in) but I don't expect there will be government assistance there when I do retire.
As far as that Hewitt estimate: scarily enough I wouldn't put that too far off...
That much?
The AON study saying one needs 77-94 percent of your final salary to retire comfortably leaves a few things out. In my case, I save 15% in my 401(k), my mortgage consumes a modest 14%, my daughter's school expenses amount to around 4%, and I contribute (along with just about everybody else) 7.65% of my pay to Social Security and Medi-Care. When I retire, I will no longer pay for my daughter's upkeep, my mortgage will be paid off, I won't contribute to SS because I won't be working and I will have no need to save 15% toward my retirement because, duh, I'll be retired. That means I can live the lifestyle I live now while working on (drum roll please) 60% of my income! That's a long ways from 94%!! Oh yeah, and I'll be in a lower tax bracket so that shaves another few percentage points off the total. When I take Social Security at age 70, it will replace some 40% of my income leaving me to cough up just 20% out of savings and pensions. I say the future is so bright, I gotta wear shades!
Morale of the story: Don't let the financial companies tell you you need a fortune to retire.
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