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Retirement Tip of the Month

The $1000 Rule and the 4% Rule of Retirement

How much money do you need to save for retirement? How much income will you need each year? As you approach retirement, you will want to evaluate what options you have when it comes to your income. During retirement, 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 income you will need in retirement is the “$1,000 per month” rule. This rule states that for every $240,000 that you have set aside, you can receive $1,000 each month, assuming you withdraw 5% of your savings each year. 

So, with the $1,000 per month rule, you’ll need at least $240,000 if you plan to withdraw 5% of your savings each year. If you’re planning on taking out $2,000 every month, at a withdrawal rate of 5%, you’ll need to set aside $480,000. For $3,000, you should aim to save $720,000. Following through on this involves creating investments and developing passive sources of income: Your income could come from investments, dividends, rental properties, or other sources that require no active effort from you. 

Advantages of the $1000 Rule

The more money you have access to in retirement, the better. This is especially true in times of rising costs and high inflation. With this strategy, you can take some comfort in knowing what to expect: If you retire at age 65 with a nest egg of $480,000, you can set up your monthly budget based on withdrawing $2,000 monthly. You may even be motivated to save more to receive a higher level of passive income in retirement. This strategy does, however, have some limitations. 

Savings can help you prepare for the future. However, reliance on investments exposes you to risk; your portfolio balance will rise and fall based on the state of the stock market. In the event of a market downturn, your portfolio balance could drop, and when retirement arrives you might not have enough money to last you using the $1,000 strategy. You may want to take out less than 5% each year in order to ensure your savings last. 

The 4% Rule

The $1,000 per month rule is actually a variation of the 4% rule, which has been a financial planning rule of thumb for many years. It states that retirees can deduct 4% from their portfolio each year (adjusted for inflation) and not run out of money for at least 30 years, assuming their portfolio is a mix of 50% stocks and 50% bonds. Like the $1,000 rule, however, this tactic has some limitations. Not all retirees want a 50-50 mix of stocks and bonds. Furthermore, some people may need more or less money in a given year. These rules are guidelines, intended to ensure that you save up enough for retirement and don’t withdraw funds too quickly.

The 4% rule was considered the gospel of retirement strategies for a long time. But, in recent years, this has changed. Many financial advisors have warned that you’re likely to run out of money by starting with that rate. Based on the state of the economy a few years ago, the recommendation was lowered to only 3.3%.

The 4% Rule Is Relevant Again

Thanks to higher interest rates and bond yields recently, it may once again be safe for new retirees to spend 4% of their savings during their first year of retirement (and then adjust for inflation in subsequent years). Using this method, someone who retires this year with a $1 million portfolio with 40% of it in stocks and the other 60% in bonds would spend no more than $40,000 from that portfolio in 2024. Assuming inflation rises by 3% next year, that investor would then give themselves a raise up to $41,200 in 2025, regardless of the performance of the market.

In the case of those already retired, however, it’s best to stick with the recommended withdrawal amount they began their retirement with (adjusted for inflation) rather than switching to 4% now.

We Can Help

Investing in the stock market is a tricky process. The performance of a stock will change as time goes on, which is great when you have time on your side. But as you get closer to retirement, preventing risk becomes more important. If you’re looking to prevent losses as much as possible, you should do your research, and invest in the right stocks at the right times. If you need help with this, it would be best to work with a qualified financial advisor with an “active” approach to money management. We may be able to help with this.

Reach out to Messina’s Wealth Management today: you could reserve a seat at one of our educational dinner seminars, where we’ll disclose potentially helpful information in regard to planning for retirement. Or, you could reach out to us to schedule a one-on-one meeting, where we can review your retirement strategy and discuss your financial future. 

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

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