Replacement Rate

AAA

DEFINITION of 'Replacement Rate'

The percentage of a worker's pre-retirement income that is paid out by a pension program upon retirement. In pension systems where workers get substantially different payouts due to their differing incomes, replacement rate is a common measurement which can be used to determine the effectiveness of the pension system. In some cases, workers can use replacement rates to help estimate what their retirement income might be from the plan.

INVESTOPEDIA EXPLAINS 'Replacement Rate'

Replacement rates are commonly mentioned in the debate over the U.S. Social Security system. Under the current Social Security law (as of 2010), replacement rates are at about 45% for the average worker. The replacement rate can allow for individuals to plan for retirement. For example, a worker with pre-retirement income of $100,000 their can estimate their pension at around $45,000 at the current 45% replacement rate.

RELATED TERMS
  1. Social Security Act

    A law enacted by President Franklin D. Roosevelt in 1935 to create ...
  2. Phases Of Retirement

    A six-stage process described by researcher Robert Atchley that ...
  3. Retirement Planning

    The process of determining retirement income goals and the actions ...
  4. Individual Retirement Annuity

    A retirement investment vehicle that is structured similarly ...
  5. Retirement Readiness

    The state and/or degree of being ready for retirement. Retirement ...
  6. Post-Retirement Risk

    The potential risks to financial security that a retired individual ...
RELATED FAQS
  1. How does the always be closing (ABC) strategy benefit a salesperson's sales funnel?

    It is good practice in sales to always be closing, because it's common for a salesperson's sales funnel to be leaky. When ... Read Full Answer >>
  2. How does Jeff Weiner make money from LinkedIn?

    LinkedIn CEO Jeff Weiner creates revenue for his company from user subscription fees, advertising and marketing operations, ... Read Full Answer >>
  3. Why did Larry Page pay himself a salary of only $1 a year at Google?

    Co-founder and current chief executive officer (CEO) of Google Larry Page has been paid an annual salary of only $1 every ... Read Full Answer >>
  4. What moral hazards are present with salaried employees?

    A moral hazard occurs when a party acts differently knowing that he or she is protected from any kind of risk. This is a ... Read Full Answer >>
  5. What is Warren Buffett's annual salary at Berkshire Hathaway?

    Berkshire Hathaway pays Warren Buffett a $100,000 annual salary, technically speaking. His total compensation was around ... Read Full Answer >>
  6. How much money can Uber drivers make?

    According to the company’s own data released in May 2014, more than half of the Uber drivers operating in New York City earn ... Read Full Answer >>
Related Articles
  1. Retirement

    Combining Your Plan Assets? Not So Fast!

    You might reduce the costs of maintaining more than one account, but you could also be forfeiting tax benefits.
  2. Retirement

    Tough Times: Should You Dip Into Your Qualified Plan?

    401(k)s, pensions and profit-sharing plans can be a source of cash, but there are consequences to this option.
  3. Entrepreneurship

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
  4. Personal Finance

    Is University Prestige Really That Important?

    Getting into a top school doesn't hurt, but it's not the real driver of who goes on to do well in life, as some provocative research demonstrates.
  5. Personal Finance

    The Most Competitive Industries For New Graduates

    Graduating from college is an exciting yet uncertain time for many students, as the overall job market is becoming more complex as time goes on.
  6. Personal Finance

    Careers to Avoid: Lowest Paying Professional Jobs

    Bad pay, high stress, poor chance of advancement — and in these professions a bachelor's degree is expected, a master's preferred. Here's the Fab Four.
  7. Retirement

    Equity Vs. Salary: What You Need To Know

    Equity payments are common at startup companies. Equity offers potential for a big payout but is also much riskier than a salary payment.
  8. Personal Finance

    What Is A Business Analyst And How Much Do They Make?

    Business Analysis has been a buzzword as a career option. Here is what business analysts do and how much they earn in salary and compensation.
  9. Personal Finance

    How Much is a Graduate Degree Worth?

    Whether or not a graduate degree will increase your earnings depends on a number of factors.
  10. Economics

    What Is The Labor Market Conundrum?

    We are facing a conundrum with investment implications: Why are wages still stagnant, when jobs are being created at the fastest pace since the late 90's?

You May Also Like

Hot Definitions
  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  2. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  3. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  4. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  5. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  6. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
Trading Center