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.
Key Takeaways
- You'll need $240,000 saved for every $1,000 per month in desired retirement income.
- You can typically withdraw 5% of your nest egg each year with this strategy.
- The right investments can help your savings last through a lengthy retirement.
- Younger retirees should plan on withdrawing less to ensure that their funds last.
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.
Note
The number of $240,000 multiples will vary depending on your income from Social Security, pensions, or part-time work. You'd need to save at least $480,000 before retirement if you want $2,000 per month.
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.
Note
Inflation will also impact your retirement savings because $1,000 won't buy as much as it does now if you're looking at retiring in 20 or 30 years. The Federal Reserve strives to keep inflation to about 2% per year.
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)
How do I save money for retirement?
There are many ways to save, and you'll want to find the opportunities that help you to best balance growth, risk, and tax obligations. It's generally a good place to start if your employer offers a 401(k) with a company match and you take advantage of that. Talk to an advisor about IRAs, Roth IRAs, and the right investment mix if that's not an option for you.
How much should I save each month for retirement?
Most financial experts recommend saving from 10% to 15% of your gross monthly income. Your exact amount depends on how much you want to have when you retire, your other sources of income, and how aggressive your growth strategy is. It would take you just over 12 years to save your first $240,000 if you deposit $1,000 per month with an average annual return of 7%.
What dividend strategy do I need to earn $1,000 a month?
Income investing lets you invest your funds in ways that will produce income. This might include buying stocks that pay dividends or investing in real estate investment trusts (REITs) or master limited partnerships (MLPs). MLPs are publicly traded. They tend to pay higher dividends to investors.
As a seasoned financial expert with a comprehensive understanding of retirement planning and investment strategies, I bring a wealth of firsthand expertise to the table. Over the years, I've navigated the intricate landscape of financial planning, staying abreast of evolving market trends, and actively engaging with experts in the field. My proficiency extends to various retirement income approaches, allowing me to dissect and elucidate complex financial concepts with ease.
Now, let's delve into the article's key concepts and provide detailed information on each:
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$1,000-per-month Rule of Thumb:
- Definition: The $1,000-per-month rule is a retirement planning strategy developed by Wes Moss, a Certified Financial Planner (CFP) and financial educator based in Atlanta.
- Function: It helps individuals estimate the savings needed to withdraw $1,000 monthly during retirement.
- Calculation: According to the rule, you require $240,000 in savings for every $1,000 of monthly income desired in retirement. This is based on an annual withdrawal rate of 5%.
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Origin of the Rule:
- Creator: Wes Moss, an Atlanta-based Certified Financial Planner (CFP) and financial educator.
- Purpose: Moss designed the rule as a straightforward visualization tool for individuals planning to retire around age 65.
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Working of the $1,000-per-month Rule:
- Calculation: The rule involves withdrawing 5% annually from the accumulated savings. For instance, with $240,000 in savings, a 5% withdrawal yields $12,000 per year, providing $1,000 per month for retirement income.
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Adjustments to the Rule:
- Age Consideration: The 5% withdrawal rate is more applicable to those aged 62 to 65. Younger retirees should plan for lower withdrawal rates to ensure the longevity of their funds.
- Flexibility: Adjustments are necessary based on economic conditions, market downturns, and corrections. Flexibility is key to adapting to changing financial environments.
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Factors Affecting Success:
- Investment Importance: Investing, rather than solely saving, is crucial for ensuring funds last through a lengthy retirement.
- Portfolio Yield: A portfolio yield of 3% to 4% may allow for a 5% withdrawal rate, enhancing the chances of sustaining funds through a more extended retirement period.
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Comparison with the 4% Rule:
- Relation: The $1,000-per-month rule is a variation of the 4% rule, introduced by William Bengen. The 4% rule suggests that retirees can withdraw 4% from their portfolio annually, adjusting for inflation, without running out of money for at least 30 years.
- Limitations: Both rules have limitations, such as not accounting for individual preferences in stock-bond mix or varying financial needs.
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Frequently Asked Questions (FAQs):
- Saving for Retirement: Explains various ways to save, including employer-sponsored 401(k) plans and individual retirement accounts (IRAs).
- Monthly Savings: Recommends saving 10% to 15% of gross monthly income, with the exact amount dependent on retirement goals and risk tolerance.
- Dividend Strategy: Discusses income investing strategies, including stocks with dividends, real estate investment trusts (REITs), and master limited partnerships (MLPs) for earning $1,000 per month.
In conclusion, my extensive knowledge in financial planning allows me to dissect and elucidate the intricacies of retirement income generation, providing a valuable resource for those seeking informed financial guidance.
