The $1,000-a-Month Retirement Savings Rule of Thumb

Several financial rules and guidelines can be applied to generating retirement income. A simple and popular investment strategy for those saving for retirement is the $1,000-per-month rule of thumb. How much do you need to invest to make $1,000 a month?

The $1,000-a-month rule helps you gauge how much you must save in order to withdraw a certain amount monthly in retirement. Find out how it works, what pitfalls to watch out for, and how this rule of thumb compares with other retirement guidance.

What Is the Origin of the $1,000-a-Month Rule?

This rule of thumb was created by Wes Moss, an Atlanta-based Certified Financial Planner (CFP) and financial educator. He designed it as a simple way to visualize how much in savings you should accumulate if you plan to retire at around age 65.

How Does the $1,000-a-Month Rule of Thumb Work?

The $1,000-a-month rule states that you'll need at least $240,000 saved for every $1,000 per month you want to have in income during retirement. You withdraw 5% of $240,000 each year, which is $12,000. That gives you $1,000 per month for that year.

The 5% withdrawal aspect of the rule becomes even more critical when interest rates are low and the stock market is volatile. The market can go months or even years without a gain, and the discipline surrounding the 5% withdrawal rate can help your savings last through these tough times.

Making Adjustments to the Rule

This rule of thumb does not apply equally to all retirees. Someone at a typical retirement age of 62 to 65 can plan on a 5% withdrawal rate from their investments based on the $1,000-a-month rule. But retirees in their 50s should plan on withdrawing less than 5% per year so that their funds last for the duration of a long retirement period.

The 5% withdrawal rate works well in years when the market and interest rates are in a typical historical range, assuming you're 62 years of age or older. But you must be willing to adjust your withdrawal rate in any year that the market experiences a downturn or correction. You'll have to be flexible enough to adapt to the economic environment as it changes. But you may be able to withdraw a little extra money in good years.

How To Increase Your Chances of Success

The success of a 5% withdrawal rate depends on a few factors. Retirement often lasts for more than 20 years. You want to be able to withdraw 5% of your savings each year and not run out of money.

Investing, instead of simply saving or only saving, can help ensure that your funds last through a lengthy retirement. Your money will last 20 years if you withdraw 5% while earning no interest on it. But retirement can last much longer for many people, and exhausting your funds doesn't allow you to leave money to family or charity.

You may be able to withdraw 5% or more if you have a portfolio yield of 3% to 4%. Withdrawing 5% would be well below your annual gain of 7% if your portfolio is earning a 4% yield from dividends and the markets rise by 3%. Any gains in the market can help boost your portfolio and increase the chances of being able to withdraw 5% per year.

The $1,000-a-Month Rule vs. the 4% Rule

The $1,000-a-month rule is a variation of the 4% rule, which has been a financial planning rule of thumb for many years. The 4% rule was first introduced by William Bengen, a financial planner who found that retirees could deduct 4% from their portfolio every year (and adjust for inflation) and not run out of money for at least 30 years. He said that retirees who had a mix of 50% stocks and 50% bonds and who lived on about 4% each year would be unlikely to run out of money in retirement.

Like the $1,000-a-month rule, the 4% rule has some limitations. Not all retirees want a 50/50 mix of stocks and bonds, and some may need more or less money in a given year. These rules are guidelines and intended to ensure that you save enough for retirement and don't withdraw funds too quickly.

Frequently Asked Questions (FAQs)