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Income Replacement Rate

  • Plan for your retirement savings to generate about 48% of your pre-tax, pre-retirement income.
  • The proportion of your pre-retirement expenses you’ll need to cover in retirement, and how much of that will need to come from savings, may vary based on a variety of factors, including your retirement age, anticipated lifestyle in retirement, and current income.
  • The higher your income, the lower the proportion of pre-retirement income you’ll need to replace from retirement savings.
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Retirement Savings Guidelines

Learn more about Fidelity’s 4 key retirement metrics - a yearly savings rate, savings milestones (savings factors), an income replacement rate, and a probable sustainable withdrawal rate - and how they work together.

Have you ever found yourself lost when visiting a new place? Then you know how hard it can be to find something when you don’t know where you are going. The same applies to saving for retirement—until you know the goal, it is hard to figure out if you are on the right path.

To simplify matters, Fidelity analyzed extensive spending data and found that most people needed to replace between 45% and 55% of their pre-tax, pre-retirement income after they stopped working to maintain their lifestyle in retirement, see point 1 in below disclosure.
Why the drop? Well, you likely won’t be making contributions to retirement savings plans.  And not working means potentially lower taxes, less need for certain forms of life insurance, and lower day-to-day expenses. After all, you don’t need to pay for work clothes or commuting costs. You may also decide to pay off your mortgage.

After that, Fidelity research finds that those with between HK$25,000 and HK$150,000 in monthly income before retirement should plan for their savings (including any defined benefit pensions or other lifetime income sources like annuities) to replace about 48% of their pre-tax, pre-retirement income. The exact amount, of course, may vary depending on your income, retirement age, and other factors.

How much you earn matters
Your income plays a big role in determining what percentage of your income you will need to replace in retirement. People with higher incomes tend to spend a small portion of their income during their working years, and that means a lower income replacement goal in percentage terms to maintain your lifestyle in retirement.

As you can see in the Illustration 1 below, someone who makes HK$30,000/month might expect to need to replace around 59% of their pre-tax, pre-retirement income in retirement to maintain their standard of living, while someone who earns HK$60,000/month might aim to replace closer to 48%. 

Illustration 1

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Disclosure: The above illustrations are based on assumption and our research on people within the pre-retirement income range of HK$25,000-HK$150,000. Please see more details in below disclosure.

The age at which you stop working is another big factor in how much of your pre-retirement income you will need your savings to replace in retirement. MPF assets can be accessed at age 65 and Old Age Allowance benefits start at age 70. The earlier you retire, the more you will have to rely on savings to meet your income needs. That is because you will have a shorter period of potential pre-retirement investment growth and a longer retirement horizon over which retirement expenses must be funded. Let’s consider Bill, who will need to replace 48% of his income from savings if he retires at age 65. If he stops working at 62, that number would go up to 50%. But it drops to 45% if he stays in the workforce until age 70.

Planning for retirement income
Once you know where you are going, it becomes a lot easier to make a plan to get there, and to measure your progress along the way. When it comes to saving for retirement, set a course for maintaining your current lifestyle in retirement—and plan for your savings to provide to close to 48% of your preretirement income.

Just remember that the amount of pre-retirement income you will need to replace from retirement savings will depend on a variety of factors, including your retirement age and anticipated retirement lifestyle. As always, it can make sense to work through you plan with a financial advisor.

Disclosure

This information is intended to be educational and is not tailored to the investment needs of any specific investor. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. 

The Income Replacement Rate is calculated based on certain assumption and it is for reference only.

Investment involves risks. Past performance is no guarantee of future results. The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. 

1. Fidelity analyzed the household consumption data for working individuals age 50 to 65 from Census and Statistics Department (Censtatd) Quarterly Report on General Household Survey 2016, Household Expenditure Survey 2014-15 , and data on Social Security Allowance Scheme from gov.hk. The average income replacement target of 48% is based on the objective of maintaining a similar lifestyle to before retirement. This target is defined at 38% for “below average” lifestyle and 58% of preretirement income for ”above average” lifestyle. Therefore, the final income multiplier target of 12x the final income goes down to 9x for ‘below average’ lifestyle and increases to 14x for ‘above average’ lifestyle. See point 2 for investment growth assumptions.  Assumes a single-income household retiring at age 65.

2. Fidelity has developed a series of income multiplier targets corresponding to different ages, assuming a retirement age of 65, a 20% savings rate (excluding an assumed 10% MPF contribution), a 2% constant real wage growth, a planning age through 94, and an income replacement target of 48% of pre-retirement income (which excludes Social Security Allowance Scheme benefits and assumes no private defined benefit pension income or other lifetime income sources). The final income multiplier is calculated to be 12x your pre-retirement income and assumes a retirement age of 65. The 48% personal income replacement target from retirement savings, which is an average we considered in our study where we found that whose with monthly pre-retirement income between HK$25,000 and HK$150,000 should plan for a replacement of between 45% and 55%. These income replacement ratio guidelines may have diminished applicability if your income is significantly outside that range. The 48% income replacement target from retirement savings assumes a retirement age of 65, access to MPF asset at age 65, and a Social Security Allowance Scheme (Old Age Allowance) claiming age of 70.  For an earlier retirement age, this target goes up due to shorter period of pre-retirement investment growth and a long retirement horizon over which expenses must be funded.  Similarly, the target goes down for a later retirement age to account for these factors.  For a retirement age of 62, this target is defined as 50% of preretirement annual income, and for a retirement age of 70, this target is defined as 45% of pre-retirement income. As the income multiplier target is based on both income replacement target and retirement age, for an earlier retirement age this target goes up due to a shorter period of pre-retirement investment growth, and a long retirement horizon over which expenses must be funded. Similarly, the target goes down for a later retirement age. For a retirement age of 62, this target is defined as 13x and for a retirement age of 70, this target is defined as 10x.