Jon Vogler
This first of a two-part series about retirement readiness looks at the rule-of-thumb numbers cited as guidelines for income replacement in retirement. Part 2 will discuss how adequately 401(k)s and Social Security will meet those target numbers.
The oft-cited figure of 70% likely sounds familiar as the default guideline for preretirement income replacement. But how helpful is it for retirement planning purposes? Let’s look at different approaches to evaluating retirement income needs to find out.
The Origin and Adequacy of 70%
The 70% figure apparently derives from ongoing studies of retiree spending habits conducted by global consulting firm Aon. The 30% reduction from preretirement income level reflects elimination of many expenditures workers incur during their careers — for example, saving for retirement or childrearing expenses. In addition, FICA taxes don’t apply to retirement income, and federal and state (if applicable) taxes are typically reduced in retirement.
While a few estimates are lower than 70%, more often they’re higher — a few equaling or exceeding 100% of income. Several studies urge raising the target percentage beyond 70%, if affordable, for three basic reasons.
Continue reading to learn those three reasons and much more.
Jon Vogler is a Senior Analyst, Retirement Research, at Invesco.
Invesco is not affiliated with Aon.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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