What is the wage replacement rate?

What is the Wage Replacement Ratio?

The wage replacement ratio is an annual estimate of the amount of money you will need during retirement years and the amount you will need to save to achieve this goal. Individual circumstances vary, but this approach can help determine if you’re on the right track.

How to Calculate the Wage Replacement Ratio?

If an investor’s pre-retirement income is $100,000 and the investor assumes a standard wage replacement ratio of 80%, the investor should plan for a need of $80,000 in income in the first year of retirement.

How Does the Wage Replacement Ratio Work?

Suppose you are 20 years away from retirement now and can live on a current gross income of $50,000. Using the Rule of 72, which states that you can divide 72 by the expected rate of return to find the number of years to double your savings, you can also calculate the retirement income you will need.

Limitations of the Wage Replacement Ratio

The further away you are from your retirement date, the less accurate your wage replacement estimate will be. However, the earlier you start calculating and investing, the lower the interest rate you may need to achieve your wage replacement goal.

Source: https://www.thebalancemoney.com/wage-replacement-ratio-2466500