How The $1,000-a-Month Rule Will Save Your Retirement
There are a number of financial “rules of thumb” that can be applied to generating retirement income with retirement savings. Although there are many valid methods, one of the more popular strategies for those saving for retirement is the 1,000-Dollars-a-Month Rule.
Before delving into the details, it’s important to understand that this rule is a rule of thumb or guideline. It 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 the 1,000-Dollars-a-Month Rule, someone at “normal” retirement age (say 65) can plan on a 5% withdrawal rate from their investments. However, younger retirees in their 50s should plan on withdrawing a lower number than 5% per year, typically 4% or less. This is because if you retire in your 50s, there is too long of a time horizon to be able to withdraw 5% per year. In other words, you’ll exhaust your savings at some point in your retirement, and you don’t want your money to expire before you do!
- In years that the market and interest rates are in a typical historical range, the 5% withdrawal rate works well, assuming you are 65 years of age or older. But you must be willing to adjust your withdrawal rate lower in any given year the market experiences a downturn or correction. You will need to be flexible enough to adapt to the current economic environment, otherwise (assuming no growth) your money will run out after 20 years. However, in good years, you may be able to withdraw a little extra money, as long as it’s not too much.
Defining The 1,000-Dollars-A-Month Rule
For every $1,000 per month you want to have at your disposal in retirement, you need to have $240,000 saved. This is because $240,000 in a deposit savings account can result in $1,000 a month in income:
$240,000 x 5% (withdrawal rate) = $12,000
$12,000 divided by 12 months = $1,000 a month
Why The Rule Is Important?
The 1,000 Dollars-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 income streams you can manage to establish
Depending on the size of your income from Social Security, Pensions, or part-time work: the number of $240,000 multiples will vary. The rule itself won’t vary; the 1,000 Dollars-a-Month rule is a rule that is constant. For every $1,000 you want in each month of retirement, it’s imperative you save at least $240,000 in total before you retire.
We live, and have lived for a considerable number of years now, in a low-interest rate environment. In times when the stock market is volatile or fluctuates wildly, the 5% withdrawal rate can be most significant. It’s important to note that the market can go for months or even years without a gain and the discipline surrounding the 5% withdrawal rate can help your savings last through those tough times.
Income investing is a way to generate consistent cash flow from your liquid investments. It comes from three places: dividends, interest, and distributions. If you have enough savings so that your cash flow allows you to withdraw 4%, then you’re close to attaining a 5% withdrawal rate. Employing an income-investing strategy to generate a return each year on your portfolio is crucial to the success of the 1,000 Dollars-a-Month Rule. Income investing allows you to earn interest on your savings through bonds or other stable investments. As a result, your money has a better chance of lasting throughout your retirement.
What If Your Retirement Lasts Longer than 20 Years?
What if you earn zero interest on your money for period of time? Let’s assume your retirement savings is invested in cash and yielding little to no yield. If you withdraw 5% while earning zero interest on your money, your funds will still last 20 years. A consistent 5% withdrawal amount per year x 20 years = 100 per cent. However, in 20 years’ time, your funds will have been exhausted. What to do if your retirement lasts for 30 or 40 years? And what if you are planning on leaving something to your Children? If you have a portfolio yield of 3% to 4% (dividends and interest only) and the portfolio experiences a small percentage of growth or appreciation, you may be able to withdraw 5% or more. For example, if your portfolio is earning a 4% yield from interest and dividends and the markets rise yielding an additional 3% in capital gains, withdrawing 5% would be well below your annual gain of 7% for the year. Any gains in the markets can help boost your portfolio and increase your chances of being able to withdraw 5% per year over an extended period of time; or last more than 20 years if you don’t take the “extra”.
The 1,000 Dollars-a-Month Rule And The 4% Rule
The 1,000 Dollars-a-Month Rule is a variation of the 4% rule, which has been a financial planning rule of thumb for many years. The 4% rule was first introduced by William Bengen, a Financial Planner who declared that retirees could deduct 4% from their portfolio every year (in addition to adjusting 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% stocks and 40% bonds, and lived on 4% or so each year, would never have to worry about running out of money.
Call To Action
The 1,000 Dollars-a-Month Rule is a guide to help you plan how much to save as you’re accumulating wealth for retirement in increments of $240,000. It’s also a guide to help make sure you don’t withdraw too much in your retirement years. This easy-to-follow bit of wisdom can help you remember that you’re saving money so that one day it can replace the income stream you will lose when you stop working.
Do you need help getting on track for your future? Do you need to re-balance your portfolio? Let me know…….
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