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 Readiness

    The state and/or degree of being ready for retirement. Retirement ...
  4. Individual Retirement Annuity

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

    The process of determining retirement income goals and the actions ...
  6. Post-Retirement Risk

    The potential risks to financial security that a retired individual ...
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

    Mergers and Acquisitions Analysts: What They Do, How Much They Make

    Mergers and acquisitions analysts perform the the analysis and modeling to support buying, selling, restructuring, and combining companies.
  5. Personal Finance

    How You Can Become A Venture Capital Associate

    Venture capital analysts are the junior members of the venture capital firm. They receive compensation that is typically higher than other finance analyst positions.
  6. Personal Finance

    Why You Should Consider A Career In Supply Chain Management

    Supply chain managers ensure that increasingly global companies can coordinate distant sources of materials, labor, and manufacturing to successfully bring products to market.
  7. Personal Finance

    How Minimum Wage Impacts Unemployment

    We explain how the minimum wage affects unemployment, public assistance, and the economy overall.
  8. Personal Finance

    What Exactly Does A Portfolio Analyst Do?

    Portfolio analysts have the exciting role of working between the investment team layers and they touch various aspects of an investment organization.
  9. Personal Finance

    Credit Risk Analyst: Boring Title, Great Job

    Credit analysts make critical decisions about loans, are required to have a certain level of education, and receive commensurate compensation.
  10. Entrepreneurship

    What Drives Investment Banker Salaries

    Do investment bankers make too much money? Are their salaries completely arbitrary or is there some logic behind it?

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center