Income Replacement Calculator

How the income replacement calculator works

This calculator answers a specific question: how large a lump sum would your family need today so that, invested carefully, it could pay them a steady yearly income for a set number of years? It is useful when you want to cover living costs rather than add up every individual expense.

The formula

First, the yearly amount to replace equals your annual income multiplied by the percentage you choose. Then the lump sum is the present value of an annuity: payment x (1 - (1 + r)^-n) / r, where r is your expected return and n is the number of years. If you set the return to zero, the tool simply multiplies the payment by the years.

Choosing the percentage

Your family will not need 100 percent of your income. Your own spending, commuting and some taxes disappear, so planners commonly use 60 to 80 percent. A household with young children, high fixed costs or a non-working spouse may want a higher percentage, while a couple with two incomes and few debts may need less.

Choosing years and return

Pick the period your family would realistically need support. For parents this is often until the youngest child becomes independent. For a spouse close to retirement it might be until retirement income begins. For the return, a cautious 3 to 5 percent is sensible, since survivors will usually keep the money in safer assets and need to withdraw it regularly. A higher return lowers the lump sum but adds risk.

Example

Suppose you earn $75,000, want to replace 70 percent, and support is needed for 15 years with a 4 percent return. The yearly payment is $52,500 and the lump sum required is about $584,000. Total payouts over the period are $787,500, because the invested balance keeps earning while it is drawn down.

Using this alongside other tools

This estimate covers living expenses only. It does not include your mortgage, other debts, education or funeral costs, so compare it with the Life Insurance Needs Calculator, which adds those items. Many people use the larger of the two results or add them in the areas that do not overlap.

Limitations

The tool ignores taxes on investment income, inflation and benefits such as Social Security survivor payments. To account for inflation, subtract roughly 2 to 3 percent from your expected return. Review the result whenever your income or family situation changes.

Frequently asked questions

Reviewed by Umer Shabbir, 10+ years in insurance and personal finance.