The $1000 Rule and the 4% Rule of Retirement

How much money will you need saved for retirement? How much income should you withdraw each year? As retirement draws closer, you probably want to evaluate your income strategy. What sources of income will you have? You will receive income from Social Security benefits, as well as possibly retirement account distributions, a pension, et cetera. One popular strategy for determining how much income you will need in retirement is the “1,000 per month rule.”

This rule states that for every $240,000 that you set aside, you can receive $1,000 per month in retirement, at a withdrawal rate of 5% yearly. So, going by this rule, you’ll need at least $240,000 in savings if you’ll need $1,000 per month. For $2,000 each month, you’ll need to set aside $480,000. And for $3,000 monthly, you’ll need a total of $720,000 set aside.

Following through on this strategy entails creating investments and developing passive sources of income. Your income could come from investments, rental properties, dividends, or other sources that don’t require active effort from you.

Advantages of the $1000 Rule

The more money you have access to in retirement, the better. This is true, especially in times of rising costs and high inflation. With this tactic, you can take some comfort in knowing what to expect: If you retire at age 65 with $480,000 in savings, you can set up your monthly budget based on consistently withdrawing $2,000 each month. You may even be motivated to save up more to receive a higher level of passive income. This rule does, however, come with some limitations. Relying on investments will expose you to risk. Your portfolio balance will rise and fall with the market, and in the event of a stock market downturn, your balance could drop. Then, when retirement arrives you might not have enough money to last you using the $1,000 strategy. You may want to take out less than 5% yearly in order to ensure your savings actually last.

The 4% Rule

The $1,000 rule is a variation of the 4% rule. The 4% rule has been a financial planning rule of thumb for many years. It states that you can deduct 4% from your portfolio in the first year of your retirement (adjusted for inflation in subsequent years) and not run out of money for at least 30 years, assuming your portfolio is a mix of 50% stocks and 50% bonds.

Like the $1,000 rule, however, this strategy has some limitations. Not all retirees want a 50-50 mix of stocks and bonds. Additionally, some people may need more or less money in a given year, making this tactic impractical. These rules are guidelines, intended to ensure that you save up enough for retirement and don’t withdraw funds too quickly.

The 4% Rule Is Back?

The 4% rule was considered the gospel of retirement planning for a long time. However, in recent years, this has changed. Many financial advisors warned that you’d be likely to run out of money by starting with that rate. Based on the state of the economy a few years ago, the recommendation was lowered to only 3.3%.

Very recently, though, thanks to higher interest rates, it may once again be safe to use the 4% rule. Using 4% of your savings in your first year of retirement (and then adjusting for inflation in subsequent years) may be advantageous for new retirees. An individual who retires right now with $1 million in their portfolio with 40% of it in stocks and 60% of it in bonds would spend no more than $40,000 from their portfolio in 2024. Assuming inflation rose by 3% in 2024, that investor would then give themselves a raise, withdrawing $41,200 in 2025.

For those already retired, however, it’s most advantageous to stick with the withdrawal amount they began their retirement with (adjusted for inflation) rather than switching to 4% now.

Reach Out to Us

Investing in the stock market is a complex process. The performance of a stock will change over time. And, when you have time on your side, this is great. But as retirement draws closer, preventing risk becomes more important. Pretty soon, you’re going to need that money. If you’re looking to prevent losses as much as possible, it’s important to do your research, and invest in the right stocks at the right times.

If you need help with this, it would be best to work with a qualified financial advisor with an “active” money management approach. DPG Senior Signature Solutions may be able to help with this! Reach out to us today: you could reserve a seat at one of our educational seminar events, where we’ll discuss potentially helpful information about planning for retirement. Or, you could schedule a one-on-one meeting with us, where we can review your retirement strategy and discuss your financial future. Contact us today.

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

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