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6 Cards in this Set
- Front
- Back
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QBS 2: 1 of 8
Common characteristics of replacement ratios |
1) Government retirement benefit replaces largest portion of retirement income for low wage levels
2) Replacement ratios are highest for the lowest paid employees 3) By individual, replacement ratios vary more widely for higher income earners than lower income 4) The right ratio will vary from person and person |
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QBS 2: 2 of 8
Typical reasons need less income after retirement |
1) Income taxes go down
2) Taxes funding government social program cease at retirement 3) Government retirement benefits partially or fully tax-free 4) Savings no longer a goal 5) Age and work related expenses may decrease |
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QBS 2: 3 to 5 of 8
Variables that Impact the Replacement Ratio (1 to 3 of 3) |
1) Income: - Replacement rates increase as income decreases
2) Returns on Investment: - Good asset performance requires less savings which requires a higher replacement ratio 3) Benefit Formula Generosity Levels: - More generous the pension the higher the replacement ratio 4) Providing Retiree Health Benefits: - The more need to save to provide for health care expenses the lower the replacement ratio - However, higher post-retirement medical costs increase replacement ratio needs 5) Being Single Versus Being Married - Married couple with nonworking spouse and working spouse need to have a higher replacement ratio 6) Taxes - Higher post-retirement taxes increases ratio 7) Non-increasing annuities - The higher the post-retirement inflation the higher the required replacement ratio 8) Savings (tenure and rate) - The earlier savings begin the higher the replacement ratio - Higher savings rates lowers required replacement ratios - Higher saving rate need to fund longer life expectancy 9) Expenses - The higher the pre-retirement expenses the lower the required replacement ratio 10) Retirement - Replacement rates decrease if you retire early |
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QBS 2: 6 of 8
Plan design and communications considerations regarding replacement ratios |
1) Should consider tenures ranging from 15 o 35, or 40 years
2) Employer plans unlikely to meet the minimal level of needs of the lowest-income earners 3) Employer should communicate goals of retirement accumulation and the individual's responsibility |
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QBS 2: 7 of 8
Benefits of a Target Model |
1) Can design formula to attract certain employees
2) Delineates responsibility of providing benefit between worker and employer 3) Provides structure for communications and measurement programs a) But, contributing only enough to reach target may result in shortfall |
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QBS 2: 8 of 8
Replacement ratio formula |
Replacement ratio equals = (PrRPG - PrRT - PrRS +/- NCCR + PoRT) / PrPRG
PrRPG: Gross pre-retirement income PrRT: Pre-retirement taxes PrRS: Pre-retirement savings NCCR: Change in age- and work-related expenses PoRT: Post-retirement taxes |
