Although there are several commonly cited "replacement rates" to be used as a judge of adequacy of income in retirement, the proper number varies by an individual’s situation, in particular by level of income, according to a report by the Center for Retirement Research at Boston College.
One commonly cited figure is that a retiree should have 80 percent of pre-retirement income in order to maintain pre-retirement living standards, a figure that commonly drives decisions regarding how much and how to invest for retirement, when to retire, and when to begin drawing on investments, and by how much.
Part of the reason that retirees may be able to live on that amount involves taxation—retirement income is not taxed for payroll tax or Medicare tax purposes, and for those drawing Social Security, only part of that benefit is taxable for federal income tax purposes. Further, retirees are no longer saving for retirement, and work-related expenses including transportation, clothing and food are eliminated, or at least reduced.
However, many living costs are fixed, with the result that lower-income individuals typically need to replace a higher percentage of their pre-retirement income in order to maintain the same standard of living. It cited data showing that a two-earner couple making $50,000, for example, would need 81 percent, while a couple earning $90,000 would need only 78 percent.
Another complication is the growing use of phased retirement, or "bridge jobs," which make it "often impossible to define precisely the work/retirement divide," the report said. Also, the income and expenses of single individuals can vary from that of married couples.
