How the $1,000-a-Month Rule Will Save Your Retirement
An Important Rule for Retirees to Remember
There are a number of financial “rules of thumb” that I feel strongly about as they relate to supplementing retirement income with retirement savings. While I like to believe all of these rules hold a good bit of value and are well understood, one of my all-time favorites is the $1,000-Bucks-a-Month Rule.
Before we delve into the details of the $1,000-Bucks-a-Month Rule, it’s imperative to understand that this rule is a rule of thumb.
The rule does not work linearly in any given year, and it doesn’t work the same at every age. Before you put the rule to work, be sure that you understand these two important things:
- Based on my $1,000-Bucks-a-Month Rule, someone at “normal” retirement age retirees (62-65), can plan on a 5 percent withdrawal rate from their investments. However, younger retirees in their 50s should plan on withdrawing a lower number than 5 percent per year, typically 4 percent or less. The reason for this is because if you retire in 50s, there is simply too long a time horizon to start withdrawing 5 percent — it’s just too early.
- In years that the market and interest rates are in a normal historical range, the 5 percent withdrawal rate works well (again, if you are normal retirement age or an older retiree). But you must be willing to adjust your withdrawal rate in any given year if market forces work against you. You may need to take less in those years and be flexible enough to adapt to what’s happening in our economic environment. This might mean that you can take a little extra in the good years, but it’s critical to understand that you might need to take less in the years that aren’t as good.
Defining the $1,000-Bucks-a-Month Rule
Simply put, the $1,000 Bucks-a-Month Rule works like this: For every $1,000 bucks per month you want to have at your disposal in retirement, you need to have $240,000 saved.
Taking a closer look, let’s see how $240,000 in the bank equals $1,000 a month:
$240,000 x 5 percent (withdrawal rate) = $12,000
$12,000 divided by 12 months = $1,000 a month
Why Is This Rule Important?
The $1,000 Bucks-a-Month rule is important because it adds an extra slice of “income pie” on a monthly basis. Each $1,000 will:
- Supplement social security income
- Supplement pension income
- Supplement part-time work income
- Supplement any other streams you can manage to establish
Depending on the size of your social security, pensions, or part-time work streams, the number of $240,000 multiples will vary. The rule itself won’t vary; the $1,000 Bucks-a-Month rule is a rule that is constant. For every $1,000 you want each month in retirement, it’s imperative you save at least $240,000.
In a world of low interest rates and a volatile stock market, the 5 percent withdrawal rate is most assuredly significant, especially when there are periods of time — and sometimes even decades — when the stock market itself doesn’t see much of a gain. But the 5 percent withdrawal rate is predicated on two key factors:
- Income investing is a way to generate consistent cash flow from your liquid investments. It comes from three places: dividends, interest, and distributions. If your cash flow number is already close to 4 percent, then we are already near the 5 percent number we are looking for.
- 5 percent rate with zero interest. Assume you have your retirement reservoir sitting in cash and yielding little to no yield. In fact, let’s assume that the yield is actually 0 percent per year. Even if you take 5 percent at a 0 percent interest rate, the funds will still last you 20 years. A level 5 percent withdrawal per year x 20 years = 100 percent. All of your funds are gone, but it took 20 years, and that’s not too shabby. But it could be a lot better. What if you have 30 or 40 years in retirement? What if you are thinking about leaving something to your children?
Factor #1: (Using income investing to generate some return each year on your portfolio reservoir) is crucial to the 1,000 Bucks-a-Month Rule. It allows your money a good chance of lasting a retirement lifetime rather than running out in 20 years.
As it relates to Factor #2, if you have a portfolio yield of 3 to 4 percent (dividends and interest only) and the portfolio experiences even a little bit of growth/appreciation, then a 3 to 4 percent yield plus 1, 2, or 3 percent in growth over time suggests that you can take out 5 percent over an extended period of time.
Discussing the 4 percent rule; a long standing financial planning rule of thumb as well. This rule was first introduced by William Bengen, a financial planner who declared that retirees could deduct 4 percent from their portfolio every year (in addition to adjusting up for inflation) and not run out of money for at least 30 years. Analysts and academics verified Bengen’s data and supported his assertion. He said that retirees who had a mix of 60 percent stocks and 40 percent bonds, and lived on 4 percent or so each year, would never have to worry about running out of money. I am a big believer that this is the way people should plan, as it hinges on the income part of income investing.
The $1,000 Bucks-a-Month Rule is a guide to use as you are accumulating assets (increments of $240,000), and a guide to carry you into your retirement years. To re-cap: For every $1,000 bucks per month you have to have at your disposal in retirement, you need to have $240,000 saved. This easy-to-follow bit of wisdom can help you remember that you are saving money so that it can one day replace the income stream you will lose when you stop working.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
Wes Moss is the Chief Investment Strategist at the financial planning firms Capital Investment Advisors and Wela. He is also the host of the Money Matters radio show on WSB Radio.