The $1,000 Rule and the 4% Rule of Retirement

How much money will you need in order to get by in retirement? How much income will you need to withdraw each year? As you approach retirement, you will want to evaluate your different sources of income. You will receive income from Social Security benefits, as well as possibly retirement account distributions, or a pension. One popular strategy for determining how much money you will need is the “$1,000 per month” rule.

The $1,000 per month rule states that, for every $240,000 you set aside, you can receive $1,000 per month–assuming you withdraw your savings at a rate of 5% each year. So, you’ll need at least $240,000 if you plan to withdraw $1,000 of your savings each year. If you’re planning on withdrawing $2,000 every month, also at a withdrawal rate of 5%, you’ll need to set aside $480,000. And, for $3,000 monthly, you should aim to save at least $720,000. Following through on this involves developing passive sources of income. These could include investments, dividends, rental properties, or other sources that require no active effort from you… For example, a fixed indexed annuity.

Advantages of the $1,000 Rule

The more money you have to support yourself in retirement, the better. This is especially true during times of rising costs and high inflation. And, with the $1,000 per month rule, you can take some comfort in knowing what to expect. If you retire at age 65 with a nest egg of $480,000, for example, you can set up your monthly budget based on withdrawing $2,000 per month.

Use of this rule does, however, have its limitations: reliance on investments will expose you to risk. Your portfolio balance will rise and fall along with the stock market, and in the event of a stock market downturn, your portfolio balance could drop. Then, when retirement arrives, you might not have enough money to last you using the $1,000 per-month tactic. So, you may want to take out less than 5% each year in order to ensure your savings actually last.

The 4% Rule

The $1,000 per month rule is actually a variation of the 4% rule. The 4% rule has been a financial planning rule of thumb for many years. This rule states that retirees can deduct 4% from their portfolio each year (adjusted for inflation) and not run out of money for at least 30 years, assuming their portfolio is a mix of 40% stocks and 60% bonds. Like the $1,000 rule, however, this strategy has some limitations. Not all retirees want this mix of stocks and bonds. Furthermore, some people may need more or less money in a given year, making this rule less practical for them. These rules are guidelines, intended to ensure that you save up enough money for retirement and don’t withdraw your funds too quickly.

The 4% Rule is Back

For a long time, the 4% rule was considered the gospel of retirement planning. In recent years, however, this changed. Many financial advisors would’ve told you that you were likely to run out of money by starting with this rate. Based on the state of the economy a few years ago, Morningstar lowered their recommendation to only 3.3%. However, as of very recently, we have some good news: Thanks to higher interest rates, the 4% rule may once again be safe to use.

Spending 4% of your savings during your first year of retirement (adjusted for inflation in subsequent years) may once again be advantageous for new retirees. Someone who retires this year with a $1 million portfolio, with 40% of it in stocks and 60% in bonds, would spend no more than $40,000 from their portfolio in 2024. Assuming inflation rises by 3% in 2024, that investor would then give themselves a raise, withdrawing $41,200 in 2025, regardless of the state of the stock market. For those already retired, however, they’re better off sticking with the withdrawal amount they began their retirement with (adjusted for inflation) rather than switching to 4% now.

We Can Help

As retirement approaches, protecting your money becomes more and more important. You may want to move more and more of your money from investments into “safe money” options the older you get–One more guideline that could be of use to you is the “rule of 100.” The rule of 100 states that, the closer you get to age 100, the more of your money should be kept in places where it’ll be kept safe. For example, if you’re 62 years old, at least 62% of your savings should be kept somewhere safe, and only the remaining 38% can be invested. Then, when you’re 63, 63% of it should be kept safe, and only 37% at max can be invested. You get the picture.

And, speaking of safe money options, we may have some recommendations for you that you haven’t considered before. If you’re looking for a place to keep a percentage of your money protected, but still earn interest on it at a reasonable rate (over time) reach out to us. We may have some very useful information for you.

Sources: U.S. News, Wall Street Journal, The Balance