Working Americans say they need to replace two-thirds of their current income for retirement, but there are two problems with this theory.
The first: Only about a third of them are on track to achieve that level of retirement income, according to a study by Transamerica Center for Retirement Studies and Aegon Center for Longevity and Retirement released Monday. Another third said they weren’t sure if they were on track.
The second: Two-thirds of one’s current income may not be enough to fund retirement.
The estimated 67% of income Americans think they need replaced isn’t entirely off. The average net replacement rate is 63% in countries within the Organization for Economic Cooperation and Development (including Canada, Australia, Belgium and Austria). Poland citizens expected to need the highest income replacement percentage — at 79%. Countries like the Netherlands, Germany, Hungary and China expected to need 70% or more of their income.
Financial advisers and institutions typically counsel someone aim to have 70% to 80% of their preretirement paycheck. Another estimate is roughly 75%, according to T. Rowe Price, because living expenses go down, taxes will likely be reduced and there won’t be a need to put so much toward retirement savings anymore.
But the replacement ratio also depends on a few key factors, including how much someone was earning in preretirement. A 75% replacement ratio may make sense for a household income of $100,000 to $150,000, but a household making $250,000 probably won’t need $187,500 a year in retirement. Instead of calculating a percentage of preretirement income, workers should estimate how much of their current spending will stay the same, said Dana Anspach, founder and chief executive officer of Phoenix-based financial services firm Sensible Money. What expenses are you paying for, and which may disappear in retirement? Do you have enough income replaced to continue to spend the way you are, and have extra reserved for emergencies?
Social Security will also play a role in replacing income in retirement, though its current fate is uncertain. The trust funds that support Social Security are slowly depleting, and are expected to be exhausted by 2035. If nothing is done, retirees and the disabled will still get a benefit, but it will be about 80% of what they’re owed. Congress has never let that happen, but the government has yet to decide how it intends to fix the problem before it’s too late.