If you’ve been reading about saving for retirement for a while, you’ve probably heard of the popular “4% rule,” which is based on a study from the 1990s about how to save for retirement.
That rule said that a balanced portfolio of stocks and bonds would last for a 30-year retirement if you only took out 4% of its value in your first year of retirement and then changed that dollar amount each year by the rate of inflation. If you want $1,000 per month, which is $12,000 per year, you would need $300,000.
So, according to the new $1,000-a-month rule, you need to save $300,000 for every $1,000-a-month you want in retirement.
Based on results from the 1920s to the 1990s, the 4% rule was made. At the moment, it looks like market profits will be lower in the coming decades. This means that a draw of 3.5% in the first year would be safer, and a draw of 3% would be even safer.
Recent research painted a more nuanced picture, showing that people whose retirement expenses are almost all non-discretionary (think mortgage, property taxes, utilities, food, etc.) and especially if they retired early and/or had no defined benefits (think pensions and fixed annuities), could only safely draw 2%.
On the other hand, people who retired later had a lot of defined-benefit income and spent most of their retirement money on gifts, trips, clothes, etc., which could take as much as 7% of their assets.
Because of all these differences, there is no easy rule that says everyone should make $1,000 a month.
You want to retire at least when you’re 60.
- When you retire, you want to move to a country with a lower cost of living.
- Most of your retirement budget will be paid for by set income, like Social Security, pensions, and fixed investments.
- Most of your retirement income is for things you can choose to do or not do, so you can cut your spending quickly if the market goes down.
- Your family usually has a shorter life span than most.
- You have health problems that make it unlikely that you’ll live a long time.
- You aren’t too worried about leaving a gift.
You want to retire early (in your 50s, 40s, or 30s)
- You want to retire in a place with a high cost of living, like the US, the UK, most of the EU, Japan, etc. set income, like Social Security, pensions, and set annuities, won’t cover much (or any) of your retirement expenses.
- Most of your retirement budget is for things you have to pay for, so you can’t cut back much even if the market goes down.
- Your family usually has a longer life span than normal.
- You are in good health.
- It’s important to you to leave a gift.
- If you’re kind of in the middle or don’t know where you stand, you could start with 3.5% and reevaluate when you’re closer to retirement.
In this case, your personal $1,000-a-month rule is simple, but not as easy to follow: “For every $1,000 per month you want to have in retirement, you need to have $343,000 saved.”
The $1,000 a Month Rule: 9 Steps to Figure Out How Much You Need to Retire
Step 1: From Annual Salary to Estimated Retirement Needed Amount
Step 2: Use the $1,000-a-month rule to get an idea of how much of a nest egg you’ll need.
Step 3: Take a breath
Step 4: Make your investments grow
Step 5: Social Security
Step 6: Investing often helps
Step 7: Work for a few more years before you retire.
Step 8: Keep working part-time for three more years.
Step 9: Retirement spending goes down gradually
Many people hire a financial advisor to make a personalized plan to reach their retirement goals, but the above is how to use the corrected $1,000-a-month retirement savings rule to figure out how much you should invest each year for retirement. It also helps you figure out how to make it work if your income and spending don’t let you save as much as you might think you need for retirement.