The formula
How to calculate income replacement ratio
The income replacement ratio measures retirement income against what you earned before. It is the standard benchmark pension schemes and advisers use, precisely because most households need less than 100% to maintain their standard of living.
The reason the target sits below 100% is that a chunk of pre-retirement income never reached your standard of living: pension contributions, National Insurance, commuting and often a mortgage all stop.
The calculator asks for:
- Pre-retirement income
- Expected retirement income
- Target ratio (%)
The result updates on every keystroke. The URL updates too, which makes the filled-in version easy to bookmark or send to someone else.
Worked example
Take the figures the calculator starts with:
- Pre-retirement income: 58,000
- Expected retirement income: 36,000
- Target ratio: 70 %
That gives:
- Replacement ratio: 62.07 %
- Annual income gap to target: 4,600
- Capital needed to close it at 4%: 115,000
Reading the result
Between 60% and 80% is the usual planning range. Lower earners typically need a higher ratio, because a larger share of their income goes on essentials that do not fall in retirement; higher earners often manage on less.
Where this goes wrong. Comparing gross with net. If pre-retirement income is gross salary and retirement income is what lands after tax, the ratio is understated by a wide margin. Use the same basis on both sides.
Around 70% for most households. Push it towards 80% if you plan to travel extensively or will still be paying a mortgage; 60% can be enough if the house is paid for and your current income includes heavy pension saving.
It should. The state pension is retirement income like any other, and for households on average earnings it can supply a third or more of the target on its own.
The headline figure is replacement ratio. With 58,000 pre-retirement income, 36,000 expected retirement income and 70 % target ratio, that comes to 62.07 %. Change any field and the figure moves with it.