The 4% Rule and the $100 Per Month Rule of Retirement

How much income will you need each year in order to get by in retirement? How much will you spend per month? As you approach retirement, you may want to evaluate your different sources of income. You will receive income from Social Security benefits, as well as possibly retirement account distributions or a pension. One popular strategy for determining how much money you will need is the “$1,000 per month” rule.

The $1,000 per month rule states that for every $240,000 that you set aside, you can have $1,000  each month in retirement, assuming that you withdraw 5% of your savings each year.

At a withdrawal rate of 5%, you’ll need at least $240,000 if you’ll need $1,000 per month. If you’re planning on withdrawing $2,000 every month, you’ll need to set aside at least $480,000. And for $3,000 per month, you should aim to save at least $720,000. Following through on this strategy involves developing multiple passive sources of income. These could include 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 during retirement, the better. This is especially true in times of rising costs and high inflation. Using this tactic, you can take some comfort in knowing what to expect: If you retire at age 65 with a $480,000 nest egg, you can set up your monthly budget based on the knowledge that you’ll have $2,000 each month.

This rule does, however, have some limitations. If you rely heavily on investments, your portfolio balance will rise and fall along with the stock market. In the event of a stock market downturn, your balance could drop. Then, when retirement arrives, you may not have enough money to last you employing the $1,000 per month rule.

You may want to take out less than 5% yearly in order to ensure your savings actually last you. Additionally, you may want to take a more “active” approach to managing your money, and look for some “safe money” options.

The 4% Rule

The $1,000 per month rule is a variation of the 4% rule. The 4% rule is a financial strategy that states that you can deduct 4% from your portfolio each year during retirement (adjusted for inflation each year) 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 rule does have some limitations. For starters, not all retirees want a mix of 50% stocks and 50% bonds for their portfolio. Some people want less risk than that. Furthermore, some people may need more or less money than that in a given year. In this case, this strategy may not be right for them.

These rules are guidelines, intended to ensure that you save up enough money for retirement and don’t withdraw your funds too fast.

The 4% Rule Is Back?

For a long time, the 4% rule was considered a financial planning rule of thumb. However, in recent years, this changed. Many financial advisors would tell you you’re likely to run out of money if you start your retirement with that rate. Based on the state of the economy a few years ago, Morningstar, Inc. lowered their recommendation to only 3.3%.

But recently, thanks to higher interest rates, it may once again be safe to make use of the 4% rule. Using 4% of your savings during the first year of your retirement (and then adjusting for inflation in subsequent years) may be advantageous for new retirees. Someone who retires this year with a $1 million 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. And then, assuming inflation rose by 3% in 2024, that investor would then give themselves a raise–withdrawing $41,200 in 2025.

For those who have already retired, however, it’d be better for them to stick with the withdrawal amount they began retirement with (adjusted for inflation) rather than switching to 4% now.

Reach Out to Us

As you get older, protecting your money becomes more and more important. You may want to move more and more of your money from investments to “safe money” options as you get older–One guideline you can use for this is the “rule of 100.” Basically, the rule of 100 states that the closer you get to age 100, the more of your money should be kept safe.

For example, if you’re 63 years old, at least 63% of your savings should be kept someplace safe, while the remaining 37% can be invested. When you’re 65, 65% of it should be kept safe, and only 35% should be invested. You get the picture.

And speaking of safe money options, we may have some recommendations you haven’t considered. We may be able to show you options for keeping your money safe while earning interest at a reasonable rate (over time) reach out to us for more information.

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