Income replacement rate rule of thumb

This article explains more about our 35% income replacement rate rule of thumb so you can discover more about ‘what your retirement savings will cover in your retirement’

Important information
The figures quoted in these tools use generic assumptions and estimations designed to give some simple rules of thumb to help you look into your retirement savings journey and beyond. The figures are not personalised to you. They are based on average household incomes in the UK with typically two working adults and two state pensions. The assumptions we use may not represent what actually happens in the future - because no-one knows that. The tools should, therefore, not be used as a detailed retirement plan or act as a replacement for professional advice.

Read more about our assumptions here.

Our research* and calculations show that your retirement savings should cover about 35% of your pre-retirement annual household income before tax, with the rest coming from your State Pension.

Other important considerations that will impact the amount of your pre-retirement spending that you’ll need to continue to cover in retirement, and how much of that will need to come from savings, are your retirement age, your anticipated lifestyle and spend in retirement and your at retirement annual income.

We have analysed extensive retirement spending data and have found that most people only need to replace between 55% and 85% of their, pre-retirement household income before tax, after they stop working, in order to maintain their lifestyle in retirement. This is because you are not likely to be spending as much. For example you may not continue to make contributions to retirement savings plans, you could have lower taxes, there will be less need for certain forms of life insurance and you will likely have lower day-to-day expenses. You may also decide to pay off your mortgage.

Of this 55% - 85%, not all of it needs to come from your household retirement savings as both your State Pensions will cover some of your spending needs. How much will be dependent upon your household income at retirement as illustrated in the graph below.

Our research has found that people with between £30,000 and £120,000 annual household income at retirement, should plan for their retirement savings to replace about 35% of this income before tax. The exact amount, of course, may vary depending on your annual household income and your retirement age. We take these points into consideration below.

1. How much you earn matters to your retirement savings

Your annual household income plays a role in determining what total percentage of your annual household income you will need to replace in retirement. The higher your income, the higher the amount that will need to come from retirement savings.

State Pension covers less for households with higher incomes

For many people, a significant portion of retirement income comes from your State Pension, but that share is impacted by your income. As you can see in the graph below, a household with an income of £30,000 a year could expect State Pension to replace about 57% of income with the rest coming from savings. A household with an income of £90,000 each year could expect to get 18% of that income from State Pension.

While the proportion of pre-retirement income that your State Pensions can be expected to replace varies based on income, the required proportion from household retirement savings remains stable – at roughly 35% -- across a wide range of incomes.

2. When you retire matters

The age at which you retire is another big factor in how much of your pre-retirement annual household income you will need your retirement savings to replace in retirement. Just as we have discussed in other areas of our Fidelity Savings Rules, the later you retire the lower the amount you will need to replace in retirement.

If you defer your State Pension it is possible to increase your monthly benefit by 5.8% every year you can delay beyond your State Pension age. Delaying can also extend the period over which your retirement savings can grow, and reduce the number of years to be funded by those savings.

Therefore, the earlier you retire, the more you will have to rely on savings to meet your retirement income needs, because of the shorter effective period of pre-retirement investment growth and a longer retirement which must be funded.

*Source: Fidelity International's Retirement Savings Guidelines white paper. November 2018