The $1,000 a Month Rule: 9 Steps to Know How Much You Need to Retire

And how to get there without letting despair overwhelm you.

I love simplicity.

But, sometimes, even if you avoid the trap of over-simplifying things, the simple answer is far from easy.

Case in point – the $1,000-a-month savings retirement rule.

If you’re not sure what that is, here’s a quick explanation of the $1,000 a month rule, including how to tailor it to your personal situation.

Done?

Great, let’s start figuring out how to use the rule without getting overwhelmed by how much you think you’ll need to save for retirement.

Step 1: Going from Annual Salary to Estimated Amount Needed in Retirement

Let’s use a hypothetical guy, John, age 40, who makes $80,000 a year, putting him above 56% of Americans. To figure out how much income John needs to replace in retirement, we’ll use T. Rowe Price’s guideline of 75%.

As they explain, “Why 75%? Generally, living expenses do go down in retirement. Taxes will likely be reduced as well, especially payroll taxes when you stop working. And you won’t be saving for retirement any longer.”

A bit of simple math – 75% of $80,000 is $60,000, so John expects to need $5,000/month in retirement.

Step 2: Using the $1,000-a-Month Rule to Get a Rough Estimate of Nest Egg Needed

Next, we can determine how much John needs to save to generate $5,000 in monthly income.

John chooses to draw 3.5% of his nest egg in year 1 of his retirement, and update that dollar amount each year thereafter to account for inflation. Using the table in the above-mentioned article, John calculates he needs a nest egg of $1,715,000 ($343,000 for each $1,000/month).

Simple, but over $1.7 million?! Yikes!

P. Timothy Uihlein, CFP^®, MBA, Partner, Managing Director, and Senior Wealth Manager at Vincere Wealth Management says, “With inflation and market uncertainty, I prefer a 3.75%-4% maximum distribution rate for my clients in retirement. That works out to $750-$800 per month on a $240,000 nest egg. Conversely, to get $1,000 monthly, the math says the portfolio needs to be $300,000-$320,000. The risk of taking 5% out is that the portfolio will not be able to sustain itself between distributions and growth.”

Step 3: Breathe

John starts hyperventilating.

Wouldn’t you, in his situation? Saving over $1.7 million on an $80,000 salary before turning 150?

After a bit, he calms himself down and starts figuring out his options.

Step 4: Growth to Existing Investments

John started saving for retirement but has a below-average (for his age) balance of $10,000.

Assuming the market returns its historic average of 10%/year from now until John wants to be able to retire at age 65, that $10,000 will grow to about $108,000.

Not bad, but far short of $1.7 million, and that doesn’t even account for the effects of inflation. Assuming the historic average inflation of 3%/year, that $108,000 in 30 years will be worth only about $52,000 in today’s dollars.

It’s a start, but nowhere near enough.

He needs to think some more.

Step 5: Social Security

Based on the Social Security Administration’s benefits estimator, John expects $2,200 in monthly retirement benefits at age 65. However, considering the expected shortfall in Social Security’s ability to pay full benefits, John uses 79% of that, based on a cnbc.com article, or $1750/month.

According to the $1,000-a-month rule, this reduces the nest egg John needs by a hefty $600,000!

Instead of $1,715,000, he’ll only need $1,115,000. Considering the $52,000 he expects his existing investments to reach by then, he needs to add $1,063,000.

That’s still a lot. Can he get there?

Step 6: Regular Investing Helps

John has some time on his side.

For every dollar he invests annually, assuming the same historic average of 10%/year returns, he expects to end up with $98 in 25 years. After accounting for 3% annual inflation, that’s $61 in today’s dollars.

John does the math…

To add $1,063,000, he’d need to save $17,500 each year (updating that each year by inflation).

Can he do that? That’s a lot of money for someone earning $80,000. John considers his annual budget…

• Taxes (federal, state, and local) $23,000 (assuming no retirement savings tax deduction)
• Rent and utilities $19,000
• Health insurance $6,000
• Car ownership (loan payments, insurance, gas, maintenance, etc.) $5,000
• Food and groceries $6,000
• Miscellaneous (clothes, recreation, etc.) $6,000

That’s $65,000, leaving him with $15,000 a year, which is less than the $17,500.

However, investing the $17,500 in a 401(k) reduces his taxes by $5,000, so he only needs $12,500 which would leave him with a $2,500 annual margin.

Doable, but it makes other goals like saving to buy a house very hard. What else can he do?

Step 7: Work an Extra Couple of Years Before Retiring

This has multiple advantages.

First, retiring at age 67 means he’d be at the Social Security full retirement age, so his monthly benefits would increase to about $2560, or just over $2,000 at the 79% level he’s more comfortable with.

This reduces his nest egg needs by another $86,000, to $977,000.

Second, his existing $10,000, adjusting for inflation, should grow to about $59,000, reducing his nest egg needs by another $7,000, to $970,000.

Finally, with 27 years to contribute to his 401(k) and let the investments grow, the factor of 61 grows to 72, so the amount he needs to invest each year is just under $13,500. This reduces the tax benefit to $4,000, but it still helps reduce the extra strain on his budget from $12,500 down to $9,500.

With this, he’d have a somewhat more comfortable $5,500 left after taking care of his budget and his retirement investments. However, it’s still hard to save tens of thousands of dollars for a down payment on a home with only $5,500 left over each year.

Is there anything more he can do?

Step 8: Work Part-Time for Another 3 Years

If John continues working part-time for another 3 years after he turns 67, just enough to earn $2,500 a month, he can make his life easier now.

If John delays claiming benefits until he turns 70, his monthly Social Security retirement benefit would increase to $3,200, or just over $2,500 a month based on the 79% assumption.

The $1,000-a-month rule says this reduces his nest egg needs by another $171,500, to $798,500.

Dividing by the same factor of 72, the annual investment he needs drops to just over $11,000. With a $3,000 tax benefit, he’d need $8,000 out of the $15,000 his budget leaves over, leaving him $7,000 a year instead of $5,500.

According to a recent article by the Bryn Mawr Trust, the median home price in the US is about $300,000 (with state-specific prices ranging from a low of $107,000 in West Virginia to a high of $647,000 in Hawaii). Saving up for a 20% down payment requires about $60,000 for the US median-price home. If John saves $7,000 each year for this, he can pull it off in about eight and a half years.

Not ideal, but not terrible either. Plus, if he manages to score raises faster than inflation eats away at the purchasing power of his salary, and if he avoids lifestyle inflation, he can accomplish it faster.

Step 9: Spending in Retirement Gradually Decreases

According to kitces.com, research shows retirees don’t continue spending at the same level (adjusted for inflation) throughout retirement. Rather, they seem to reduce their spending by about 1% a year.

The simplest way to see the potential impact of this is to increase the assumed draw in the first year of retirement by 1% since that could reduce the nest egg by 1% each year, which would then reduce the amount available to draw the following year by 1%.

John realizes this means he could go back to the $1,000-a-month rule table and use the line for a 4.5% draw instead of 3.5%, reducing the nest egg size needed from $343,000 per $1,000 monthly to $267,000.

With this final step, the nest egg he needs to add drops to just over $621,000, which reduces how much he needs to invest each month to just over $700. Accounting for a $2,000 tax deduction, the annual impact on his budget is only $6,000, leaving him $9,000 a year toward a down payment on a house. He can save $60,000 for that in under 7 years.

The Bottom Line

While many people will hire a financial advisor to develop a personalized plan to achieve their retirement goals, John’s example gives you a step-by-step method to figure out how to use the corrected $1,000-a-month retirement savings rule to figure out how much you should invest each year for retirement.

It also helps you figure out how to make it work if your income and spending don’t quite allow you to reach the level of retirement investing you might first think you’d need.

Here’s what Cecil Staton, CFP® CSLP^®, President & Wealth Advisor at Arch Financial Planning, LLC, says of his process when helping clients plan, “As a financial planner, I often assist clients to understand retirement expenses. The process begins by reviewing their tax return, as this provides all sources of income and taxes paid. Then we monitor the clients’ savings to determine how much income is available for expenses. What’s left after taxes and isn’t saved is tracked back to identify what expenses are needed in retirement. After these steps, I can provide an accurate solution for retirement spending that allows my clients to make the most efficient use of their money and maximize their quality of life during retirement.”

Michael R. Acosta, CFP®, ChFC®, CSLP®, Financial Planner at Genesis Wealth Planning, LLC sees some benefit in ‘rules’ like the $1,000/month one, but thinks their usefulness is limited. He says, “The ‘4% Rule’ or the ‘$1,000/month Rule’ are great generalized benchmarks or reference points for clients. In my opinion, though, they are flawed in various ways. For these ‘rules’ to be successful the assumptions used around variables like expected return on investment, longevity, annual savings rate, inflation rate, and the investor’s health can’t deviate too far.

“Our approach is driven by planning based on facts and variables we know today. Instead of trying to guess the future and mathematically working backward, we focus on today’s savings rate and strive to save 15% to 20% of the client’s gross income. We also exclude any employer match from that annual savings rate treating it as the “cherry on top.” This holds the clients accountable, teaching them to live off 80%-85% of their gross income from now until retirement. We prefer this method because we can’t control how the stock market, bond market, or crypto market will behave in any given year. The only thing we can control is how much we save each year.”

The following table recaps the gist of the steps, in case you prefer to see all the numbers in one place.

As you can see, using the above 9 steps, John reduces the amount he needs to invest for retirement each month by almost 70%!

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.