How Much Is Enough? The Challenge of Helping Workers Determine Their Retirement Income Needs

By Ivy Deng, Laura Kim, and Angela Antonelli

Angela M. Antonelli

How much is enough? That’s the difficult question policymakers and individuals have to answer when it comes to retirement security and determining retirement income adequacy. With today’s defined contribution (DC) plans, all the responsibility has shifted to the worker to make the right savings and investment decisions — decisions that will significantly affect the amount of money available for retirement.

In the most-recent report on Economic Well-Being of U.S. Households in 2017, the Federal Reserve found that less than 40% of non-retired adults believe their retirement savings are “on track” and 60% of non-retirees with self-directed retirement savings state they have “little or no comfort” in managing their savings.

Laura Kim

Adding to this concern, a recently released report by the National Institute on Retirement Security finds that more than 100 million working-age Americans do not have retirement accounts or defined benefit pensions, too many have $0 in DC retirement savings accounts, and the majority of those who do have retirement savings accounts have less than one year’s income in those accounts.

In 2017, the Congressional Budget Office (CBO) issued a report explaining the various approaches to measuring the adequacy of retirement income. According to the CBO, adequacy is most commonly defined in one of two ways: whether retirement income 1) “satisfies basic needs” or 2) “allows retirees to maintain the standard of living” they had before retiring.

As the Government Accountability Office (GAO) explains, economists and financial advisors broadly agree that a benchmark measure of retirement income adequacy is the amount of income that will “allow a household to maintain its pre-retirement” consumption and avoid a large decline or shock in retirement.

What is a Target Income Replacement Rate?

Retirement income adequacy is often measured by an income replacement rate. The replacement rate is defined as the ratio of a worker’s pre-retirement income to the income the worker is projected to have in retirement.

Although there is no consensus about how much pre-retirement income has to be replaced to ensure a retiree could maintain a pre-retirement standard of living, experts generally believe that replacing at least 70 percent of gross pre-retirement income would allow people to do this.

However, such a threshold assumes that every individual or household has the same resources and needs pre- and post-retirement. While it is possible that spending in retirement could decrease, it is also possible that it could remain the same or even increase over time.

Not surprisingly, household income matters a lot. In general, lower-income households have higher target replacement rates because they are likely to spend a relatively higher proportion of their income on necessities and basic expenses, so they cannot as easily reduce or change their spending needs in retirement. According to the GAO, low-income young retiree households (those ages 65–69) on average spent 58% of their incomes on housing and food, while high-income households on average spent 43% on such expenses.

In addition, certain costs that are assumed to drop for all households may also depend on income levels. Because lower-income households are taxed at lower rates, their relative reduction in taxes in retirement is smaller than it would be for a higher-income household. In addition, lower-income households may need a higher target replacement rate relative to higher-income households that have been able to save more for retirement. Finally, income levels also affect the amount of Social Security benefits in retirement. According to a report by the Center for Budget and Policy Priorities, the “benefits for a low earner (with 45 percent of the average wage) retiring at age 65 in 2018 replace about half of his or her prior earnings. But benefits for a high earner (with 160 percent of the average wage) replace about one-third of prior earnings.”

How Do Spending Patterns Shape the Determination of a Target Income Replacement Rate?

Determining how spending patterns may change in retirement is important for determining an appropriate replacement rate. The GAO found that household spending patterns varied by age, with those households between the ages of 40 and 49 spending the most, while those between the ages of 65 and 69 spend about 20 percent less, which declines even more as they move through retirement.

Once an individual or household enters retirement, spending levels can also change over time. Some examples of expenses that could jeopardize retirement readiness if not anticipated include:

  • Life Events Before Retirement. Negative shocks like unemployment, health problems, and divorce or separation often affect families and income. Without adequate preparation to absorb these financial shocks, it is not surprising that saving for retirement will fall to the wayside, and some of these burdens can follow individuals into retirement.
  • Healthcare. Healthcare costs can increase significantly, not decrease, as someone ages in retirement. For example, a retiree can suddenly need expensive care to treat a new medical condition, or even worse, require costly long-term care.
  • Housing. A retired household may spend less on housing if it pays off its home mortgage, while another retired household’s spending on housing may increase if they have to or would like to move into more-expensive senior housing or plan for the cost of hiring professionals for home maintenance if they choose to stay in their house.
  • Debt. Similar to the mortgage discussion above, whether households carry student loans, credit card, or other consumer debt will affect their available income. A 2018 survey by the Transamerica Center for Retirement Studies found that 45 percent of retiree households have non-mortgage debt and 4 in 10 reported paying off some form of debt as a financial priority.
  • Household Size. Retired parents may find that they have to help their grown children financially — for example, to pay for college tuition or provide support for their grandchildren. Single or married couples without children may find that their spending patterns would not change as significantly as those who raised children and then did not have to carry such costs into retirement.
  • Lifestyle. Entertainment, travel, and hobby expenses can also vary. Some retirees may have a more-expensive desire for travel or have more-costly hobbies they would like to pay for in retirement.

What are Some Ways to Determine Retirement Income Adequacy?

How much should you save for retirement to make sure you will have sufficient income? The real answer is “it depends,” and it will vary among individuals and households. The best approach is to try to plan ahead and think about how you would like to live and spend your money in retirement, and then try to factor in a cushion for unexpected expenses or emergencies.

Experts today are providing plan sponsors, financial planners, policymakers, and others with different, more-flexible methods to consider using instead of the fixed 70% replacement ratio previously noted. The Society of Actuaries suggests two methods — one wealth-based and one more individualized — for determining retirement income adequacy.

  • A wealth-based method measures the level of expected future expenses the retiree’s current wealth or savings can meet, not taking into account guaranteed lifetime income sources such as Social Security or pensions. If net worth at retirement is projected to be less than the present value of expected future spending, the retiree will fail to make it through retirement. Among the downsides to this method is the challenge of collecting all of a household’s finances and spending patterns needed to produce the estimate.
  • An individualized measure allows households to specify their retirement financial needs, investment preferences, and pre-retirement economic conditions. Based on individual circumstances, financial planners, for example, can provide clients with customized financial advice.

Another innovative way of thinking about calculating a target income replacement rate is the Living Standards Replacement Rate (LSRR) developed by Canadian researcher Bonnie-Jeanne MacDonald of Ryerson University with others. The LSRR measures how well a worker’s living standards would be maintained after retirement by comparing how much money the worker spends on goods and services before and after retirement. In its most-simplified form, it is the estimated annual level of income available for spending in retirement as a percentage of annual income available for spending while working. This exercise is done at the family level and calculated over a representative number of years to find an average living standard figure, as opposed to using information from a single year’s employment. This amount becomes the target that the family would want to match in retirement to maintain their current living standards.


The challenges and needs of individuals and families can vary significantly in retirement because the conditions faced by every family and household are unique. Consequently, how they save for retirement during working years and what their needs are post-retirement will differ. Researchers, retirement plan sponsors, and policymakers must begin to recognize that helping workers and families prepare for retirement can be improved by considering methods and tools that will allow for a more-tailored, individualized assessment of retirement income needs.

While the conventional 70% target income replacement rate omits important parameters from its calculation, the process of considering about a target replacement rate is beneficial because it provides an avenue for households to think concretely about what their needs and resources will be in retirement. Enabling savers by providing as many tools as possible to help them determine their individualized outlooks in retirement will increase their ability to be sufficiently prepared, even for unforeseen life events, in retirement.

Ivy Deng and Laura Kim are Research Assistants and Angela M. Antonelli is the Executive Director of the Georgetown University Center for Retirement Initiatives.

April 2019, 19-03

Additional Resources

Bonnie-Jeanne MacDonald, Lars Osberg, and Kevin D. Moore, “How Accurately Does 70% Final Employment Earnings Replacement Measure Retirement Income (In)Adequacy? Introducing The Living Standards Replacement Rate (LSRR),” ASTIN Bulletin: The Journal of the IAA, 46(3), 627–676, 2016.

Congressional Budget Office, “Measuring the Adequacy of Retirement Income: A Primer,” October 2017.

Society of Actuaries, “Retirement Adequacy in the United States: Should We Be Concerned?,” March 2018.

U.S. Government Accountability Office, “Retirement Security: Better Information on Income Replacement Rates Needed to Help Workers Plan for Retirement” (GAO 16-242), March 2016.