Retirement Income Replacement: How Do I Know if I’m Ready to Retire?

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We get this question about retirement all the time here at Savology: “When should I retire?”.

There are so many answers and opinions on this topic that it becomes really confusing for just about anyone. Everyone’s situation is unique, which makes it hard to give a blanket answer. 

Truthfully, most people have no idea exactly how much they need to save to be able to retire. And if they do, their projections are usually way off, forcing them into later retirement.

In fact, only 1 in 10 Americans understands the level of savings needed to retire and live a similar lifestyle as the one they are currently living. That means 90% of the population has no idea.

On top of that, only 14 percent (14%) of Americans are confident they’ll have enough money (in retirement savings) to live on when they retire.

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Two methods of calculating your retirement income

Without getting deep into the nitty-gritty with the numbers or hiring a financial professional to take a look at your current situation, there are generally two ways of measuring your retirement outlook: 

  1. Multiple of your income 
  2. Percentage of your income

1. Multiple of your income

The first retirement measurement is based on a multiple of your income. This can serve as a quick reference and a general rule of thumb.

As an example of the income multiple, if you make $100,000 and the recommendation you want to follow is to have 15 times your income then you would need $1.5 million in savings to be able to retire at age 65. 

2. Percentage of your income

The second is through a retirement income replacement percentage. This calculation is more complicated but it is generally more accurate because it accounts for investment return, inflation, and social security in addition to your income.

This approach is much easier for many people to digest, because knowing how much money you need 20 to 30 years from now can be really complicated. This method boils it all down to one number that can help you, as well as others, to know how you are doing. 

This is what it would look like: If you currently have a 78% projected income replacement percentage, that means that you would be able to live on approximately 78% of your current income.

One of the best things is that this includes social security, inflation, and investment return all baked into the number. So if you currently make $100,000 per year then 78% income replacement would mean you are on track for the equivalent buying power of $78,000 per year in retirement.

Not to over-complicate things, but for the purpose of those wondering about the impact of inflation, this would really mean that you would be living off 78% of a higher income, such as $150,000 and $117,000 per year, but that only represents the same standard of living as $78,000 today.

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Rule of thumb when calculating

Multiple of Salary

Some financial experts say that having 10 times your income in retirement savings by age 65 should be sufficient. Others. like Tony Robbins, say you need much more. In his book Unshakeable: Your Financial Freedom Playbook – this is what he says: 

“The next step of the retirement planning calculator is to multiply this number by twenty. This simple calculation will give you a rough idea of how much you will need to maintain your lifestyle through retirement.

Many other financial planners will tell you to multiply your annual income by 10 or even 15. But today, with such low returns on safe investments and with most people looking for financial certainty in uncertain times, that’s not realistic.”

There are many opinions on exactly how much you should multiply your income during retirement. Whether you need 10 or 20 times your income, it depends on your assumptions. The more conservative your assumptions are, the more you will need—like Tony says, 20 times your income.

Even more recent, the 25X rule of retirement has become very popular. The rule is quite simple. You should aim to have 25x your income in order to live comfortably during your retirement years.

Income Replacement Percentage

As an income replacement percentage, the rule of thumb is to replace 80 percent of your current income to maintain your current lifestyle and a similar standard of living. This is because you will likely be paying fewer taxes during your retired years. This will eliminate FICA tax which includes social security and medicare tax. 

This eliminates 7.65 percent of taxes that you no longer are obligated to pay in retirement. It’s likely that you will no longer need to be saving money during retirement. Additionally, many people have paid off their mortgage and other debts by retirement which accounts for the other 12+ percent that is no longer needed. 

When you eliminate those, it works out to a general rule of thumb of aiming for 80% as your income replacement percentage.

You might be asking, “What if I plan to increase my travel budget?”. While many retirees do increase the amount spent on travel in retirement, this is typically only during their first 10 to 15 years of retirement. Not to mention that if you are able to payoff your mortgage and other debts, and are no longer needing to save, this often accounts for 20 to 40 percent of your spending. This is why 80 percent is often used as a benchmark or a recommended target percentage by most financial experts.  

Other benefits to using the income replacement percentage is that anyone can look at your percentage and see if you are in a good situation or not. This is why many financial professionals prefer this method because it allows for an accurate snapshot of your situation without getting into the complicated details of future inflated dollars and trying to explain all that goes into it. 

Income replacement percentage is helpful because it is universal—everyone knows what the percentage means. For people (and Savology users) who just want to know how they are doing without going into detail, it allows for a basic understanding of how they are currently doing. For more financially advanced people who want to get into the numbers, this percentage can be broken down providing more information and detail.

Savology’s Assumptions Behind Your Income Replacement Percentage

Savology uses a fairly conservative approach in calculating your retirement, balancing simplicity with sophistication. The goal is to produce accurate and understandable projections of your retirement income replacement percentage without having you create your own assumptions. 

The calculations begin with a few key assumptions. Some of the key assumptions that we use are: 

  • Retirement Assets: 6% annual rate of return 
  • Other Assets: 3% annual rate of return (1)
  • Inflation: 2% annually (2)  
  • Retirement Assets After Retirement: 4% annual rate of return 

(1) This includes cash and other investment assets, which have varying degrees of returns. We can drill down more into your situation in a module where we are able to assign cash at a lower rate of return and other investment assets at a higher rate—similar to retirement assets. But, for a quick overview, we have found that 3% is a good weighted average based off our current user base. 

(2) Inflation is always critical to keep in mind. Inflation is the rate at which prices rise over time. The higher inflation rises, the less your dollar stretches. Inflation is at a historical low—under 2% per year over the last 10 years. In today’s economy we are assuming that this trend of low inflation will continue. Inflation has continued to decrease each decade since 1970 and we don’t see this trend changing any time soon.

Retirement Income Replacement Percentage

When you go through Savology’s financial planning survey, you will select one of these three expected lifestyles in retirement:  

  • A simple minimal lifestyle: 70%
  • About the same as now: 80% 
  • A more expensive lifestyle: 100% 

You might be asking why is a more expensive lifestyle 100% of my current income. As previously mentioned, this is because a percentage of your income is currently going towards saving, and you don’t save in retirement, you spend less. You won’t have the 7.65% FICA tax, and you will hopefully have all of your debts paid off when you retire. This is why 80% is about the same as now. 

It is important to consider what kind of lifestyle you plan to have in retirement. How often do you plan to travel? Do you plan to pay for children or grandchildren’s education? What other goals do you have in retirement? How much will they cost? You need to consider all of these in determining your income replacement percentage.  

If you are under age 45 and believe you have significant income earning potential growth then we would suggest that you select an income replacement of 100% or a more expensive lifestyle. This will likely account for your increased earnings. Whereas, for most, 80% is a reasonable target.

Calculation Year by Year

Our calculation of retirement withdrawal rate is based on your income multiplied by the percentage of income replacement anticipated. This is then adjusted for inflation to a future dollar amount in the year of withdrawal. Then, we subtract your estimated social security, and pensions, annuities, or life insurance. We can then calculate your projected income based on how much you currently have saved, and how much you will save according to your savings rate. From there, it is easy to turn the projected income amount into the estimated income replacement percentage. 

We also estimate your life span based off of an actuarial life table and determined by your desired retirement age. This helps us determine how long we need to plan to have the money last, assuming you make it to retirement age.

Social Security Calculation

Social Security is a hot topic. There are many opinions out there about how much millennials can expect to get when they reach retirement. We anticipate that social security will still be in place to some degree because it is a social program and social programs are extremely hard to eliminate. With this being said, many experts say that it will be reduced by 20 to 30 percent for millennials based on projected population demographics. 

In our calculations we reduce social security for everyone under the age of 50 by 25 percent to be more in line with expert forecasts. That way our social security calculation will likely be more accurate for millennials that will likely receive less than currently projected. We use the Social Security formulas provided directly from the Social Security website, though there will be some differences in actual Social Security numbers based on your actual earnings each year. 


One limitation to retirement income replacement percentage is when you consider a minimum standard of living. If you currently have a low standard of living due to schooling or other unfortunate circumstances, or if a lot of your expenses are currently paid for or financed, this comes into play. 

If you expect to be making a higher annual income in the near future then you should consider using a different metric, like a flat dollar amount, to consider your savings rate and retirement needs against. Savology does this by giving everyone a minimum income replacement need of at least 1.5 times the poverty line in retirement. This comes out to be roughly $25,000 of annual income needed in today’s dollars. This number will increase with inflation. If you are making less than this, the retirement section of your financial plan in Savology will be based off of this minimum standard of living amount, and will eventually translate to flat dollar amounts to help you better understand your retirement outlook. 

If you are currently in a similar circumstance, it is important to be patient with your savings rate and understand that you will likely not be on track to meet your retirement goal, but that is okay. You will be able to get on track when you are making more money if you stick to your financial plan. 

Retirement Income Replacement Percentage is Key

Income replacement percentage is the most important single indicator of determining retirement readiness for the vast majority of households. It can help you to break down your situation into one number. It is incredibly powerful to know if you are on track for retirement. If you’re not on track, it can also help you identify what you need to do to get on track. If you would like to know more about how you are doing and if you are on track, put your mind at ease by using our free financial planning software to determine your income replacement percentage. 

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Article Author:
Sam Jones, AFC

Sam Jones, AFC

Sam is an Accredited Financial Counselor® and has more than 5 years of experience in the financial services industry. Sam works as a financial planner at Vitality Capital Management. He recently graduated from Utah Valley University's Personal Financial Planning program. Sam is a CERTIFIED FINANCIAL PLANNER™, and is passionate about personal finances and helping individuals to reach their goals. Sam loves spending time with his family, boating, snowmobiling, and volunteering in the community.
Article Author:
Sam Jones, AFC

Sam Jones, AFC

Sam is an Accredited Financial Counselor® and has more than 5 years of experience in the financial services industry. Sam works as a financial planner at Vitality Capital Management. He recently graduated from Utah Valley University's Personal Financial Planning program. Sam is a CERTIFIED FINANCIAL PLANNER™, and is passionate about personal finances and helping individuals to reach their goals. Sam loves spending time with his family, boating, snowmobiling, and volunteering in the community.

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