You've undoubtedly heard that retirement is likely to be more expensive than you expect. While it's good to know, it may also make you wonder how in the world you're supposed to plan for retirement. For example, you may be unsure how much you need to save to retire comfortably.
That's where the $1,000-a-month rule comes into play.
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How it works
According to the rule, you'll require $240,000 in savings for every $1,000 of monthly retirement income you want. The rule assumes a 5% annual withdrawal rate and that your savings remain invested so they can grow with inflation.
How much do you want to retire with? It's up to you to decide a number that's right for you. Experts suggest aiming to replace 80% of your working income to maintain your current standard of living.
Example scenario
Let's say you currently earn $100,000 a year. That means you're aiming to bring in $80,000 annually in retirement. The first thing you want to do is subtract from that amount any guaranteed income. For example, if you're expecting $2,500 from Social Security each month and $500 from a retirement annuity, that's a total of $3,000, or $36,000 a year.
Once you subtract that guaranteed income from $80,000, you're left with $44,000 to save for. Divide that amount by 12 to determine how much you want to bring in each month. In this case, it's $3,666. Ideally, using the $1,000-a-month rule, you can turn to your retirement account to provide you with that amount.
Now that you know how much monthly income you need, divide that number by $1,000. It will look like this: $3,666 ÷ $1,000 = 3.66.
Next, multiply the answer you came up with by $240,000, like this: 3.66 x $240,000 = $878,400.
According to the $1,000-a-month rule, by saving $878,400, you'll be able to withdraw $3,666 from your retirement account each month.
If you have different goals
If you decide that you need to withdraw less or more from your retirement account to live a comfortable life in retirement, here's an idea of how much you'll need to save:
|
Monthly Amount You're Aiming For |
How Much You'll Need Saved |
|---|---|
|
$1,000 |
$240,000 |
|
$2,000 |
$480,000 |
|
$3,000 |
$720,000 |
|
$4,000 |
$960,000 |
|
$5,000 |
$1.2 million |
Data source: Author's calculations.
Keep in mind that this money is intended only to supplement funds from monthly retirement benefits, Social Security, annuities, royalties, rental property, or other sources of income. It doesn't take into account how much you'll pay in taxes.
Before marrying yourself to any savings plan, it's a good idea to speak with a financial advisor to ensure your plan is likely to outpace inflation, leaves room to pay taxes, and meets your spending needs.
