Do you have your sights set on a comfortable—or perhaps even lavish—retirement lifestyle? Are you all about saving for your retirement years as effortlessly and affordably as possible? What if there was a simple and effective way to ensure you have precisely the amount you anticipate needing post-retirement, no financial strain required?
Enter the $1,000-a-month retirement savings rule of thumb. A concept developed by US-based financial planner Wes Ross, the idea is that for every $1,000 in monthly income you expect to access in retirement, you’ll need $240,000 in savings. For example, if you’re planning on a modest living of $2,000 per month, you’d need to save about $480,000 before retirement.
This financial concept will ultimately help you gauge how much you should have saved by the time you retire to withdraw the monthly amount you desire. In this article, we’ll cover how the strategy works, how you can leverage it for your financial goals, how to avoid pitfalls, and how the $1,000-a-month rule of thumb compares with other retirement guidance.
Where did the $1,000-a-Month Rule Come From?
The $1,000-a-Month rule became a financial strategy for retirement reasonably recently—just over the last ten years or so. Wes Ross, a certified financial planner based in Atlanta, Georgia, proposed it. Ross is the bestselling author and host of the popular financial radio show MONEY MATTERS. He has devoted his entire career to helping people retire sooner than they’d believed to be possible.
Ross’s strategy is straightforward. A person should determine how much money they plan to need each month once they hit retirement age and then assume $240,000 in savings per $1,000 a month.
The $1,000-a-month concept is easy, and so is the math. That was Ross’s goal in developing it. He states that “charts and lengthy equations have their place in the investment world, but I’m a fan of memorable ‘rules of thumb’ that are easy to understand and even easier to apply to your saving strategy.”
With the $1,000-a-month rule of thumb, Ross had the goal of making it that much easier for people to visualize how much they need in retirement savings to manage their daily, monthly, and annual expenses comfortably. The one caveat to the rule is that it can fluctuate by year and by age. It is geared towards people of retirement age who fall within the 62–65 age bracket.
Where does the 5% Recommendation Come From?
The 5% recommendation is one component of the $1,000-a-month rule. It works a bit differently for retirees of different ages.
In short, those of “normal” retirement age (62–65 years) can expect a comfortable withdrawal rate of 5% from their investments, whereas those of younger retirement age (early 50s) should plan on withdrawing no more than 4% of their total savings each year. The reason behind this rule is that younger retirees who withdraw 5% each year will end up burning through their savings too quickly.
Meanwhile, the 5% rule ties directly into the previously discussed $240,000 in savings per $1,000 of monthly retirement income for those of a more standard retirement age. The breakdown is as follows:
$240,000 x 5% (withdrawal) = $12,000
$12,000 / 12 (months in a year) = $1,000 per month.
Of course, this withdrawal rate assumes a healthy economy. In years when the market is volatile and uncertain, a more conservative withdrawal rate and overall financial approach are strongly recommended.
Why Is This Rule Important?
There’s a two-part breakdown to this question:
- Why is the $1,000 per month rule necessary?
- Why is the 5% recommendation important?
Well, for a few reasons. Let’s start with the overarching $1,000-a-month rule.
The $1,000-a-month rule gives you a concrete idea of what you can expect from retirement life. Because retirement often lasts for twenty years or longer, you need to be sure you have enough saved to cover your living expenses and your ideal lifestyle during that time in your life.
By utilizing the $1,000-a-month rule starting at 30 years of age to save for your retirement lifestyle, you will have a clear savings goal in mind that you know will cover you in your later years. If you plan, say, on a modest monthly income of $4,000 per month, you’ll need to have approximately $960,000 in your retirement savings by the time you are in your 60s. Bam—no crazy charts, spreadsheets, or tables required! It’s simple math.
Now, on to the 5% rule. It is significant because it helps retirees stay on target with their spending, without overspending and being stretched too thin after a certain point. However, if you withdraw 5% each month from your retirement savings while earning no returns on investments, your savings will only last about 20 years or so.
That said, if you continue to enjoy a portfolio yield of 3–4% in retirement, a 5% monthly withdrawal (or more) can carry you well past 20 years and ensure there is even some money left over for your loved ones upon passing.
How Long Will Your Nest Egg Last If You Adhere to the $1,000-a-Month rule?
If the average person retires at a minimum of 62 years and a maximum of 65 years of age, financial planners estimate that retirement lasts anywhere between 20–30 years. This fact implies that the amount you plan to save and withdraw every month is significant for your retirement plan.
To recap from the previous section: if you adhere to the 5% rule when following the $1,000-a-month strategy, you will have used all your retirement funds by the time that 20 years have elapsed, especially if you are not continuing to yield funds from investments. However, let’s play a little more with the scenario that you’re continuing to earn interest and dividends on investments during retirement.
If you plan to retire at a slightly younger age than what is “normal”—say, in your mid-50s rather than your early to mid-60s—a portfolio yield of 3–4% with even the smallest amount of appreciation (say, 1–3%) could allow you to withdraw 5% or more of your retirement funds longer than 20 years. Actually, a withdrawal rate of up to 7% is possible, depending upon the amount of growth you accumulate.
Ultimately, how long your nest egg will last depends on several factors, such as your withdrawal rate, retirement age, whether you are continuing to invest, and the rise and fall of the market throughout your retirement period.
Conclusion & Recommendations
In summary, the $1,000-a-month rule is an excellent financial strategy to consider for your retirement plans, especially from a bird’s-eye-view. However, because it is a more simplified approach to retirement planning, it does not take extenuating factors—such as market volatility and age of retirement—into account. Thus, those who use this model may find it more helpful as a base than as a highly accurate projection.
In general, most financial experts agree that you should try to save anywhere between 10–15% of your total monthly income for retirement. This rule is another relatively straightforward strategy that you might employ alongside the $1,000-a-month retirement savings rule of thumb.