What Replacement Rates Should Households Use?

38 Pages Posted: 27 Nov 2009 Last revised: 3 Dec 2009

John Karl Scholz

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Ananth Seshadri

University of Wisconsin - Madison - Department of Economics

Date Written: September 1, 2009

Abstract

Common financial planning advice calls for households to ensure that retirement income exceeds 70 percent of average pre-retirement income. We use an augmented life-cycle model of household behavior to examine optimal replacement rates for a representative set of retired American households. We relate optimal replacement rates to observable household characteristics and in doing so, make progress in developing a set of theory-based, but readily understandable financial guidelines. Our work should be a useful building block for efforts to assess the adequacy of retirement wealth preparation and efforts to promote financial literacy and well-being.

Suggested Citation

Scholz, John Karl and Seshadri, Ananth, What Replacement Rates Should Households Use? (September 1, 2009). Michigan Retirement Research Center Research Paper No. 2009-214. Available at SSRN: https://ssrn.com/abstract=1513387 or http://dx.doi.org/10.2139/ssrn.1513387

John Karl Scholz (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-262-5380 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ananth Seshadri

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-262-6196 (Phone)
608-263-3876 (Fax)

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