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What Replacement Rates Should Households Use?

John Scholz () and Ananth Seshadri ()

Working Papers from University of Michigan, Michigan Retirement Research Center

Abstract: Common financial planning advice calls for households to ensure that retirement income exceeds 70 percent of average pre-retirement income. We use an augmented life-cycle model of household behavior to examine optimal replacement rates for a representative set of retired American households. We relate optimal replacement rates to observable household characteristics and in doing so, make progress in developing a set of theory-based, but readily understandable financial guidelines. Our work should be a useful building block for efforts to assess the adequacy of retirement wealth preparation and efforts to promote financial literacy and well-being.

Pages: 38 pages
Date: 2009-09
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