Question

Margaret, a 35-year-old client who earns $70,000 a year, pays 7.65% of her gross pay in Social Security payroll taxes, spends14% on a 30-year mortgage, and saves 8% of her annual gross income. Assume that Margaret wants to maintain her exact pre-retirement lifestyle. Calculate Margaret’s wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars.

Answer 1

Answer:

84.35%

Explanation:

The computation of  Margaret’s wage replacement ratio using the top-down approach is shown below:

= 100 - Social Security payroll tax rate - saving rate

= 100 - 7.65% - 8%

= 84.35%

For determining Margaret’s wage replacement ratio, we subtract the Social Security payroll tax rate and the saving rate from the percentage value i.e 100 so that the accurate ratio can come.