Measuring Economic Preparation for Retirement: Income Versus Consumption

Published: 2015
Project ID: UM15-10


The income replacement rate is widely used as a measure of economic preparation for retirement; yet it has a number of flaws. We propose to compare the income replacement rate with a consumption-based measure. We measure whether a household has, with high probability, the resources to finance a trajectory of spending from shortly following retirement until death in the case of a single person, or death of the surviving spouse in the case of a couple. Our method accounts for uncertainty about the date of death, differential mortality, taxes, spending out of assets, marital status, and a non-constant desired consumption path, and takes into account heterogeneity. We will find the mapping from an income replacement rate to a consumption-based preparation rate and determine how that mapping varies with observable characteristics.