What Do You Need to Know to Estimate Retirement Income?



The U.S. Department of Labor will add some options to its retirement income calculator to allow workers to factor more variables into their retirement income estimates, the Government Accountability Office said in a new report.

The changes slated for June 2017 are in response to the report’s conclusions that DOL’s retirement planning materials as currently constructed may be leading workers to over- or under-estimate how much of their preretirement income they will need to replace in order to have a comfortable retirement.

Two changes that DOL committed to are adding an example about income replacement rates specifically for married couples and allowing workers “to adjust their income replacement rate and their Social Security replacement rate within an accepted range,” the report said.

The GAO report studied the usefulness of the information on retirement income replacement rates provided by DOL as part of a broader inquiry into “what consumption looks like in retirement and how replacement rates are defined, calculated, and used to assess retirement preparedness.”

The March 1 report, RETIREMENT SECURITY: Better Information on Income Replacement Rates Needed to Help Workers Plan for Retirement, was issued at the request of Sen. Patty Murray (D-Wash.), ranking member of the Senate Committee on Health, Education, Labor and Pensions and Rep. Robert C. “Bobby” Scott (D-Va.), ranking member of the House Committee on Education and the Workforce.

Section 516 of the Employee Retirement Income Security Act directs the Labor Secretary to establish a website that includes a “means for individuals to calculate their estimated retirement savings needs, based on their retirement income goal as a percentage of their preretirement income.”

Target Replacement Rate

Researchers and financial industry professionals refer to this number as the “target replacement rate,” or the percentage of pre-retirement income that a worker will need to maintain a certain standard of living in retirement.

The typical target replacement rate used by researchers and financial industry professionals is between 70 percent and 85 percent, with some of these professionals developing customized targets taking into account workers’ assets and expected spending and others questioning the usefulness of replacement rates, the report said.

Key factors used by researchers and financial professionals to develop target replacement rates include changes in spending; household characteristics, particularly household size; and pre-retirement earnings levels, it said.

The report examined print and online guidance provided by the DOL’s Employee Benefits Security Administration on retirement income savings, including an online publication titled Savings Fitness: A Guide to Your Money and Your Financial Future.

In that publication, EBSA assumes an 80 percent target replacement rate, with 40 percent coming from Social Security benefits and the remaining 40 percent from savings, the report said.

The publication acknowledges that there is no rule of thumb appropriate for all individuals and that some expenses may change in retirement depending on a retiree’s lifestyle choices, it said.

The print version of the publication worksheet has a replacement rate of “x.40” preprinted on it, and in the online version “the fixed target replacement rate is coded into the calculation and cannot be changed,” the report said.

In addition, the explanations on replacement rates in the guide “do not include specific information on demographic groups that studies suggest generally need higher or lower replacement rates, such as low-income and single workers,” the report said.

The materials also don’t discuss “how much the replacement rate provided might need to be adjusted for the examples of circumstances that might affect an individual’s desired replacement rate,” such as if the person wants to travel extensively in retirement, it said.

"Without the ability to adjust the replacement rates used in the tools, workers may over- or under-estimate how much they need to save for retirement,” the report said.

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