Income Replacement Ratio

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Definition - What does Income Replacement Ratio mean?

The income replacement ratio is the percentage of a person's working income that they need to receive during their retirement years in order to retain a steady standard of living. This ratio is usually 60-90 percent.

The income replacement ratio is used by pensions and other entities who deal with retirement.

Insuranceopedia explains Income Replacement Ratio

Many employers will offer their employees a pension that will provide a certain amount of money to the employee on an ongoing basis so they can be taken care of during retirement. The amount of money that pensions give out 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. Most people require less income after retirement, but unless they still receive a substantial portion of their pre-retirement income, they are likely to have to go down in lifestyle. A low income replacement ratio, then, often signals a less comfortable retirement.

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