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A concept in financial planning that can help you know whether you are saving enough for retirement. This ratio or fraction is the yearly or monthly income needed to support your lifestyle in retirement as a percentage of your compensation (and any other income) before retirement. Executives usually need 70% to 80% of the annual income they received during their working years to maintain their desired standard of living.
To calculate the income stream you will have available, you need to calculate the total amount of savings you will need in retirement, your life expectancy, and the continued gains on any remaining amounts after your withdrawals. One of the main reasons for participating in a nonqualified deferred compensation plan is that the amount of income you can accumulate with a 401(k) plan (given its limits) and your Social Security benefits may not result in a high enough income replacement ratio to support your likely spending needs in retirement. NQDC plans allow you to save much more for retirement and for other financial goals.