What Is Your Retirement Income Replacement Ratio?

How much retirement income will you need to live as you do now? That's what the 'retirement income replacement ratio' is about.

*What is it?

It assumes you're getting by alright on your working income - paying your bills and doing the usual things you've done during your working life. So, to keep living and doing things as you have been for your retirement, you probably need something close to your working income for your retirement income.

The 'something close' generally refers to the various 'rules of thumb' that specifies a ratio of the working income you'll need for retirement income. Seventy five percent of your working income - give or take 10% - is a typical 'retirement income replacement ratio (RIRR)'.

It's reduced from 100% because presumably you won't be paying as much income tax and spending for all those work clothes, new cars, business lunches or whatever expenses are more or less related to 'working'.

It's this 75% of working income as your retirement income that you can use to figure out how you'll achieve this retirement income without working. To do so, you'll add up income from your

1. Projected pension income,

2. Projected Social Security income, and

3. Current earnings of your savings.

The first two require you to pick an age to retire since they increase the longer you wait to retire. Any total that is short of your retirement ratio income means you've got to grow those savings you have to make up the difference. And it is the annual income for savings that is ultimately the issue for the amount of savings you should have at retirement.

*Is your ratio realistic? Yes or maybe not at all:

That depends on what your retirement living expenses will be. If you're staying right where you are for retirement and doing what you usually do, you need only add up those living expenses. Add to them the income tax on your projected pension income and your savings income assuming your Social Security won't be taxed.

That total will give you a realistic retirement income for staying where you are and doing what you've been doing. It may give you a much lower RIRR than 75%.

But if you choose a whole different venue and activities for your retirement, you may find you can get buy on much less living expense than 'staying in place'. Moving to lower expense locations - on-shore or off-shore - can offer you more of what you want for much less.

You can earn money from the equity in your house for either buying-down or renting it out while you buy cheaply in your new retirement location. Some places off-shore offer very low everyday expenses. You may lower your RIRR so much that any saving you do over these final few years may help you enhance your new life style in ways you hadn't imagined before.

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