No one is quite sure how much of their current salary employees should aim to replace in retirement. Recent estimates have ranged from 65 to 85 percent of preretirement income (Government Accountability Office) to an astonishing 126 percent of final pay (Hewitt Associates).
The latest study entering the fray calculates that most people should aim to replace 77 to 94 percent of their preretirement income, according to Georgia State University and Aon Consulting Worldwide, an arm of the insurance giant Aon. The numbers are less than 100 percent of income because expenses often drop in retirement. "This is primarily due to the following factors: Income taxes go down after retirement; Social Security taxes end completely; Social Security benefits are partially or fully tax free; and saving for retirement is no longer needed," says Cecil Hemingway, U.S. retirement practice leader with Aon Consulting.
A worker earning $50,000 will need to replace 81 percent of that amount annually to continue the same standard of living, Aon calculated. But you don't have to get to that number on your own. That worker will likely replace 51 percent ($25,500) of their former salary with Social Security. The remaining 30 percent ($15,000) needs to come from an employer retirement plan or the worker's own savings.
These numbers also vary by income. Aon calculated that an employee earning $150,000 just before retirement will need to replace 84 percent of that salary. But in this case, Social Security will provide only 23 percent ($34,500) of income, and the remaining 61 percent ($91,500) each year must come from other sources or the worker must somehow cut expenses.
Here's a look at how much of your current salary Georgia State and Aon say you should aim to replace in retirement and how much Social Security will help you get there.
How much you will need to replace in retirement
Total percent that should be replaced
Social Security will replace (percent)
Private and employer sources will need to replace (percent)
Amount you need annually in private and employer sources
Note: This assumes a family situation with one wage earner who retires at age 65 and a spouse at age 62, who both collect Social Security. The calculations are based on the laws in effect on Jan. 1, 2008.
Sources: Aon Consulting and Georgia State University, 2008