LifeInsuranceTools

Income Replacement Calculator

Find the lump sum needed today to replace an income for a set number of years, accounting for growth and investment return.

Last reviewed

·

Free · No sign-up · Runs in your browser

Multiplying salary by years overstates the amount needed, because a lump sum can be invested while it is being drawn down. It also understates it, because incomes and costs rise over time. The two effects pull in opposite directions and the honest answer needs both.

This calculator discounts a growing income stream back to today. The result is the amount that, invested at the return you specify, would fund the payments you specify for the period you specify.

Your numbers

Results update as you type. Nothing is sent anywhere.

Result

Lump sum needed today

$1,082,593

Annual amount replaced
$64,400
Total without discounting
$1,288,000
Reduction from investment return
$205,407
Present value without growth
$875,217
Added by income growth
$207,376
Years covered
20

This is an estimate based on the values you entered. Actual premiums, coverage, eligibility and pricing vary by provider and by individual circumstances.

A lump sum can be invested, so the amount needed today is less than the raw total of future years. The discount rate you enter drives that difference - a conservative rate produces a larger, safer figure.

The household share reflects that some spending disappears with the person whose income is being replaced.

How to use the income replacement calculator

  1. Enter the annual income to be replaced and the number of years it must last.
  2. Set the household share - the portion of income the remaining household actually needs, since some spending disappears.
  3. Set an income growth rate for cost-of-living increases.
  4. Set a conservative investment return, then read the present value needed.

What people use this for

  • Setting a life cover amount that accounts for investment return rather than ignoring it.
  • Testing how sensitive the required amount is to the return assumption.
  • Comparing a lump-sum payout against a monthly income benefit.
  • Sizing income protection or disability cover on the same basis.

Worked examples

Every figure below is produced by running this calculator against the example inputs, so the numbers always match the tool.

Twenty years at a conservative return

$92,000 of income, 70% of which the household needs, for 20 years, with 2.5% growth and a 4% return.

Lump sum needed today
$1,082,593
Total without discounting
$1,288,000
Reduction from investment return
$205,407

The same need at a higher assumed return

Identical inputs with a 6% investment return instead of 4%.

Lump sum needed today
$899,892
Reduction from investment return
$388,108

Why the discount rate matters most

The return assumption drives this calculation more than anything else. At 4% a twenty-year income stream needs substantially more capital than at 7%, and the difference runs to hundreds of thousands of dollars on a normal income.

A conservative rate produces a larger, safer figure. Given that the money would be managed by someone dealing with a bereavement, and would need to survive a bad market at the wrong moment, conservative is the appropriate direction to be wrong in.

The household share

Some spending disappears with the person whose income is being replaced - their own food, transport, clothing and personal costs. The household share adjusts for that, and the usual range is between 60% and 80% depending on household size.

Fixed costs do not fall. A mortgage payment is the same for a household of three as for a household of four, which is why the share is never as low as people first estimate.

Methodology and assumptions

What this calculator does, and what it deliberately does not do.

  • Each future year’s payment grows at the income growth rate, then is discounted back to today at the investment return rate. The present value is the sum of those discounted payments.
  • The flat comparison figure discounts a level payment with no growth, so the difference between the two is the cost of inflation protection.
  • Tax on investment income is not modelled and would increase the amount required.
  • All figures are estimates produced from the values you enter. This site has no rate feed and no carrier data, so it cannot quote or price a policy.
  • Nothing you type is transmitted or stored - the calculation runs entirely inside your browser.

This calculator provides an estimate based on the information you enter. Actual insurance premiums, coverage, eligibility and pricing vary by provider and individual circumstances.

This website is not an insurance company, an insurance agency or a licensed broker. It does not sell insurance, does not provide insurance quotes, and is not authorised to give advice about which policy you should buy.

No result produced here is an offer of insurance or a guarantee of coverage. Only a licensed insurer or agent, working from your verified details, can quote or bind a policy.

Frequently asked questions

What return should I assume?

Something a bereaved household could realistically achieve in a conservative portfolio, after fees. Assuming an aggressive return produces a smaller figure that only works if the market cooperates.

Should I use gross or net income?

Net is closer to what the household actually spends, but a payout may itself be taxable in some jurisdictions. Being slightly generous here is reasonable.

Is this the same as the total in the life insurance calculator?

No. That tool adds obligations in today’s money without discounting. This one answers the narrower question of what income replacement alone is worth today.

Does it account for tax on the payout?

No. Life insurance proceeds are treated differently across jurisdictions, so no tax assumption is applied.

Related calculators

More life cover tools on LifeInsuranceTools.

Browse all 7 tools →