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.

BREAKING DOWN '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. Retirement Planning

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

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

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
  5. Stock Analysis

    Why Walmart Raised Its Minimum Wage

    Read about the potential pros and cons of Walmart's promise to increase its minimum starting salary to $10 an hour.
  6. Entrepreneurship

    Millennials Guide: Freelancer vs. Employee

    How to decide if joining the gig economy is right for you.
  7. Savings

    All About Income

    Income is the money you or a business earns by providing goods or services, or through investments.
  8. Insurance

    Healthcare Premiums Keep Rising, But Salaries Aren’t

    Learn how college and health insurance costs have skyrocketed while wages have stagnated, and how, given the necessity of these services, consumers are stuck.
  9. Professionals

    Career Advice: Management Consulting Vs. Law

    Compare the career opportunities between management and law using such criteria as skills needed, starting salary and work-life balance.
  10. Taxes

    Top Tips for Minimizing Taxes on Severance Pay

    A look at the top ways to lessen the tax burden on severance pay.
RELATED FAQS
  1. What is the difference between AGI (adjusted gross income) and gross income?

    In the United States, individuals pay taxes based on their adjusted gross income, or AGI, rather than their gross income. ... Read Full Answer >>
  2. How is marginal propensity to save calculated?

    Marginal propensity to save is used in Keynesian macroeconomics to quantify the relationship between changes in income and ... Read Full Answer >>
  3. How can minimum wages contribute to a market failure?

    The minimum wage acts like a price floor on labor, reducing the supply of jobs available to a level below the market-clearing ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

You May Also Like

Hot Definitions
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  2. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  3. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  4. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  5. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  6. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!