Real-life data vs. traditional assumptions

The financial services industry has long-used 70% to 80% as a reasonable estimate for how much of their pre-retirement income an individual must replace after they stop working.

Now, new research from J.P. Morgan Asset Management, utilizing anonymized Chase household data, reveals a more nuanced picture, showing a range of income replacement needs far broader than previously thought.

Variability across income levels

Significantly, our research found: Income replacement requirements vary significantly across household income levels, as people in each income bracket exhibit distinctly different pre-retirement savings habits, spending behaviors and tax obligations.

The chart below provides a detailed breakdown of the percentage of pre-retirement income needed to sustain a comparable lifestyle in retirement, highlighting the contributions from Social Security (in green), personal savings (in blue) and changes in expenditures, taxes and pre-retirement savings (in grey).

With this real-world data, advisors will be better able to help clients pinpoint their income replacement needs, given their specific income level—a far more accurate approach than relying on assumptions about Social Security income or survey-based spending estimates that have traditionally been used.

This distinction is important because general estimates fail to capture the diverse earnings histories individuals may experience, including career interruptions or salary fluctuations, and typically only consider steady inflation-adjusted raises.

Our data also takes into account real spending behaviors in the three years following retirement, given levels of pre-retirement income.

Key findings and implications

Our analysis of Chase household data also revealed:

• Households with a $30,000 income must replace 104% of their pre-retirement income. This surprising finding—based on observations that these households spend more than their income—indicate other income sources are likely being tapped to maintain spending levels. These may include borrowing from friends or family, using tax credits and/or incurring debt. (Note: The 2024 Employee Benefit Research Institute (EBRI) Confidence Survey found 23% of retirees view debt as negatively impacting their ability to live comfortably in retirement.)
• Predictably, Social Security covers a smaller portion of income needs for higher-income retirees than for lower-income individuals. However, the percentage of income required from private sources and former employers remains relatively consistent across income levels.
• Together, expenditures, taxes and pre-retirement savings exert the greatest influence on income replacement rates. Higher-income households typically have more discretionary spending for a variety of reasons. For example, as they transition into retirement, their tax burden decreases and they cease saving for retirement. At the same time, their household income drops more than for lower-income households because wealthier households have less of their income replaced by Social Security.

Additionally, higher-income households often accumulate substantial wealth over time. As they transition into retirement and their income decreases, they may aim to preserve their investment portfolios. Typically, spending patterns are closely tied to income levels, leading these households to spend a smaller proportion of their pre-retirement income. Consequently, higher-income households experience a lower replacement rate, which, according to our research, is approximately 55% for those with an income level of $300,000.

The power of personalization

With this real-world data, advisors now have an opportunity to provide more tailored advice to their clients based on their lifestyle and preferences. Meanwhile, plan sponsors can use participants’ characteristics, behaviors and income sources to better select investment options in their plans.

We believe these developments will lead to more successful retirement outcomes and advance retirement planning beyond conventional and sometimes outdated assumptions.

Learn more about income replacement in J.P. Morgan’s Guide to Retirement.

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