Moving Beyond the Limitations Of Traditional Retirement Replacement Rates

Preprint
Publisher Website
Google Scholar
Abstract
Replacement rates have historically been a tool to determine the adequacy of retirement income to maintain an individual’s standard of living. The concept of a replacement rate is intuitively appealing; numerous conceptual and methodological issues lie, however, beneath its simple exterior. By reviewing past literature and performing original analysis, this paper examines these underlying conceptual and measurement issues and provides guidance on building replacement rate measures. We find that conventional gross replacement rate targets perform poorly in their traditional role as a tool for retirement planning or evaluating the retirement preparedness of a population. We also find that empirical evidence strongly opposes the longstanding belief that people in general can maintain their standard of living in retirement with around 70-80% of their previous gross earnings.