Income Replacement Ratio

What Does Income Replacement Ratio Mean?

The income replacement ratio is the percentage of a person’s pre-retirement income that they need to maintain their standard of living during retirement. Typically, this ratio ranges from 60% to 90%.

Pensions and other retirement-focused entities use the income replacement ratio to help determine how much income retirees will need to sustain their lifestyle after they stop working.

Insuranceopedia Explains Income Replacement Ratio

Many employers offer their employees a pension that provides ongoing income during retirement to help ensure financial security. The amount of money provided by pensions is often based on the income replacement ratio.

To calculate an individual’s income replacement ratio, divide their gross post-retirement income by their pre-retirement income. While most people require less income after retirement, if they receive only a small portion of their pre-retirement income, they may have to lower their lifestyle expectations. A low-income replacement ratio typically signals a less comfortable retirement.