What Replacement Rates Do Households Actually Experience in Retirement?

Abstract

This paper estimates how much people actually receive in retirement relative to earnings before retirement when all sources of income, including income generated by homeownership, are combined. Previous studies find that middle class people need between 70 and 75 percent of their pre-retirement earnings to maintain their life style once they stop working. The objective of this study is to determine what people are actually receiving in retirement.

Regardless of how retirement income and pre-retirement income are defined, households with pensions appear to meet the threshold of adequacy. Those without pensions do not fare as well, and some must be really struggling. Taking into account a comprehensive measure of income both before and after retirement - including housing - produces replacement rates for those with pensions of 79 percent for couples and 89 percent for single person households. Those without pensions have replacement rates of 62 percent for couples and 63 percent for singles. These replacement rates drop about 15 percentage points, however, when recent earnings (the highest five years of the last ten) are used as the benchmark. The overall picture is good...