If you’re getting close to retirement, you may be wondering exactly how much money you’ll need for this stage of your life. Regardless of how you’ve made your living, determining this figure can help bring significant peace of mind. One highly effective way to do this is by utilizing the income replacement ratio of your life insurance policy, which typically includes death benefits for your beneficiaries. Here is a detailed resource guide on this percentage.
Basic Income Replacement Ratio Assumptions
The income replacement ratio (IRR) allows you to determine the total sum of money you need to keep the lifestyle you had pre-retirement. Ideally, you should aim for an IRR between 70 and 85 percent of your pre-retirement income. This range is based on the assumption that you need fewer funds when you retire because:
- You’ll no longer have job-related expenses
- You won’t have to save for retirement anymore
- All your debt will be paid off
- You won’t have to support any dependents anymore
- Your taxes will be lowered because part of your income (e.g. Social Security) isn’t taxable or carries a lower tax rate
Pros And Cons Of The Replacement Ratio
There are several notable benefits and disadvantages of utilizing the replacement ratio to calculate your post-retirement income. The primary advantages of the IRR include the fact that it’s
- Relatively easy to compute and understand.
- Can adapt to fluctuating lifestyles and incomes.
- Offers a concrete objective you can work toward.
The main disadvantages of the replacement ratio are:
- It’s not a “one-size-fits-all” estimate.
- Certain assumptions about a lack of debt and low expenses may be incorrect. Additionally, tax policies can always vary.
- May be an overly broad metric to live by if you’re just a few years away from retirement.
- Average monthly expenses for retirees (e.g. medical costs) have increased substantially in recent years. Thus, future benefits could potentially decrease and retirees could consequently end up with fewer savings.
Key IRR Considerations
It’s also important to remember that there are different types of life insurance. Therefore, it may make more or less sense to use the replacement ratio when calculating post-retirement income depending on the policy you have.
The two main types of life insurance are:
Term Life
This type of policy lasts a specified number of years (10, 20, 30 years, etc.). Term life insurance can be decreasing, convertible, or renewable.
Whole Life
This is a form of permanent life insurance that allows you to build cash value. You can use whole life insurance to pay off debt or policy premiums.
As always, be sure to speak with a knowledgeable insurance agent to determine which type of life insurance policy is the best fit given your needs, retirement goals, and overall financial situation. Once you have established this, you can evaluate whether calculating your income replacement ratio can be beneficial to you.
Speak With The Financial Consultants At Matador
Contact the professionals at Matador Insurance to learn more about the income replacement ratio and how this figure can help you plan for retirement. We offer a wide range of life insurance policies. Our experienced agents understand exactly what type of situation you’re in and can help guide you through every step of the retirement planning process, clarify any unclear information, and provide any missing details. Contact Matador Insurance online today for more information about income replacement or to get started with life insurance.