3433-vol. 6 issue 2-3.pmd - iarfc

84
Journal of Personal Finance
Working 35 years rather than 30 years makes a big difference in the
sustainability of one’s standard of living after retirement. High real return on
investments during the working years will significantly increase the income
replacement ratios. To obtain at least a 50% income replacement ratio, workers
with no increase or about 1% increase in real incomes need to save about 10%
to 12% of their incomes. Workers provided with a 3% increase in real income
need to save about 15% to 20% of their incomes in addition to the 30% to 40%
savings on their real increase in incomes. Average savings rates rise over time
for those who save additional amounts from real income increases. For these
workers, income replacement ratios may overstate the necessary savings rates
because no additional savings is needed during retirement. Of course, income
replacement ratios can be redefined as consumption ratios by reducing the
pre-retirement income by the savings rate.
References
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