How to Actually Use the $1000-a-Month Retirement Savings Rule

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

        Steps For Figuring Out How Much You Need To Retire, And How To Get There Without Letting Despair Overwhelm You

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Step 1: Going From Annual Salary To Estimated Amount Needed In Retirement

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To figure out how much income John needs to replace in retirement, we’ll use T. Rowe Price’s guideline of 75%.

Let’s use a hypothetical guy, John, age 40, who makes $80,000 a year, putting him above 56% of Americans. 

Step 2: Using The $1000-A-Month Rule To Get A Rough Estimate Of Nest Egg Needed

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With no clear reason to prefer higher or lower rates, John plans 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.

John starts hyperventilating.

Step 3: Breathe

Step 4: Growth Of Existing Investments

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

Step 5: Social Security

Based on the Social Security Administration’s benefits estimator, John expects $2200 in monthly retirement benefits at age 65.

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.

Step 7: Work An Extra Couple Of Years Before Retiring?

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This has multiple advantages.

If John continues working part time for another 3 years after he turns 67, just enough to earn $2500 a month, he can make his life easier now.

Step 8: Work Part-Time For Another 3 Years

Step 9: Spending In Retirement Gradually Decreases

According to kitces.com, research shows that retirees don’t continue spending at the same level (adjusted for inflation) throughout retirement.

The Bottom Line

John’s example gives you a step-by-step method to figure out how to use the corrected $1000-a-month retirement savings rule to figure out how much you should invest each year for retirement.

Money Management

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