What Is The $1000 A Month Rule For Retirement?

The $ 1,000-a-month rule for retirement states that you can draw $1,000 per month from your retirement account for every $240,000 saved without decreasing your principal investment.

Knowing how much retirement savings is enough is challenging and as you look for answers you might come across the $1,000 a month rule. So what is the $1,000 a month rule for retirement? Simply put, it states that for every $240,000 in your retirement accounts, you can comfortably draw $1,000 per month without decreasing your principal. You can use that metric to decide how much you need to save before retiring. Here’s how to use this rule for retirement planning.

What Is the $1K Per Month in Retirement Rule?

Wes Moss, certified financial planner (CFP), coined the $1K per month retirement rule. Moss’s system states that you can draw $1,000 monthly from your retirement plan for every $240,000 you have saved. 

This is based on the concept that you can earn 5% each year on your retirement savings. If you have $240,000 saved, you’ll earn $12,000 per year on those savings if you leave them invested. Divide that by 12 months in the year, giving you $1,000 of income without decreasing the value of your accounts.

Moss acknowledges that many factors can impact investment returns, including the stock market, inflation, etc. Your income needs will vary based on additional income, such as Social Security, pensions, and income from work you continue doing into retirement age. 

Why $1000 Per Month?

When people think of their retirement, they likely think of it in $1,000 increments. It makes planning easier and can help people visualize how much money they’ll have for retirement. You can see how $1,000 per month would impact your budgets based on other retirement income to guide your savings plan and start helping you reach your goals.

Advantages of the $1000 Per Month Rule

When considering whether the rule will work for you, consider these advantages.

• Financial security when you have $1,000 of discretionary income in retirement
• Helps offset rising costs and inflation if you plan for an extra $1,000 above what you would currently need
• Helps you plan for vacations and hobbies in retirement without reducing your total retirement savings since you’re only spending your return on investments
• Provides clarity on expected passive income
• Offers peace of mind that you’ll still have a retirement nest egg in case of unexpected expenses
• Keeps you motivated toward a specific saving goal

Limitations of the $1000 Per Month Rule

While the rule has many benefits, you should be aware of some limitations this retirement planning can have.

• As your retirement portfolio changes, so will your returns and your passive income
• Exposes you to investment risks
• Doesn’t account for taxes on distributions
• You might chip away at your nest egg during economic downturns, impacting its returns moving forward and, therefore, your passive income
• If you retire before 65, you’ll likely need to take less than 5% annually to protect your savings and make them last

How to Use the $1000-a-month Rule for Retirement

To use the $1,000-a-month rule for retirement, determine how much you need per month. For example, if you need $5,000 per month from your accounts in retirement, you’ll need $1.2 million saved by retirement age. Assume this is by age 65.

If you’re currently 25, you have 40 years to accumulate those retirement account savings. Assuming a 5% return on investment, you’d need to contribute $810 monthly toward retirement savings.

Saving $1,000 a month for retirement would put you at just shy of $1.5 million in retirement savings by age 65. That way, you have a buffer in your budget to pull back on your savings rate for some years or not quite achieve your expected rate of return for some years due to economic downturns.

If you’re age 30, you’ll need to contribute $1,100 per month to retirement savings to reach your $5,000 per month passive income in retirement. Those aged 40 must contribute $2,050 to their retirement accounts to have $1.2 million saved to draw $5,000 per month in passive income from their retirement accounts each month at age 65.

Alternatives to the $1000 A Month Rule for Retirement Rule

This retirement saving calculation method might be wrong for you. If it isn’t, consider one of these other ways of estimating how much you need to retire.

• The 4% rule: For this calculation, you’ll look at the value of your retirement account at the start of the year and multiply it by 4%. If you have $1 million in the account, 4% is $40,000. That allows you to draw $3,333 monthly for 30 years without running out of savings.
• The 25X rule: Under this rule, you calculate your anticipated annual expenses and multiply that by 25 to find how much you need to have saved before you retire. If you anticipate having $100,000 per year in expenses, you’ll need to save $2.5 million before retirement.

Building Confidence in Your Retirement Savings

The $1,000 per month rule can help you build confidence in your retirement savings and peace of mind knowing you’ll preserve your nest egg so long as you can earn 5% returns annually. Calculate how much you’ll need and start working toward your goals with a clear benchmark for your savings.