Why Retirees Should Follow The $1,000 Dollar Retirement Rule

When it comes to retirement, there can be a lot to navigate. From where and even when to retire, retirement planning should begin earlier than you might think. Whether you're considering retiring in sunny and affordable Portugal or you're planning to stay where you are, financial planning can be the key to ensuring you can maintain the lifestyle you want in your golden years. Living on a fixed income can be a significant change for many retirees, so setting yourself up for financial success early can be extremely important. This can be especially important when you consider that, as of 2024, one in five Americans aged 50 and over reported having no retirement savings whatsoever in an AARP survey.

Even more troubling is that 70% of respondents to AARP's survey reported worrying about prices outpacing their income. While you might already know that it's important to have different sources of income during retirement (i.e. don't rely entirely on Social Security benefits) you might not know exactly how much you should plan on saving. This can feel especially complicated in the wake of rising inflation and interest rates. However, even though the amount of money that Americans think they need to retire comfortably goes up every year, there are some easy ways to help you calculate the amount that might work best for you. One way in particular is known as the $1,000 a month rule, and it can serve as a great place to start your retirement savings journey. 

Used as a way to help you calculate exactly how much money you need to save in order to afford the kind of retirement lifestyle you want, the $1,000 a month rule serves as a great starting guideline for those planning their retirement. The rule is simple enough, for every $240,000 you save you can withdraw $1,000 a month to live on. This is predicated on retirees using a 5% annual withdrawal fee (although some financial experts recommend more conservative rates, and a new report recommends a 3.7% withdrawal rate).

A great way to work backwards with this rule is to list out all of your planned monthly expenses during retirement. This should include regular monthly items like housing, transportation, healthcare, utilities, and even groceries. Once you have your monthly expense amount you can then multiply that total by 12 (for every month in a year) to reach the amount of money you need to live on in a given year. Once you have your annual expense total you can divide it by the 5% withdrawal rate (or 0.05) to find the amount of money you need to save for retirement. According to The Motley Fool, the average monthly expenses in 2023 for a single household was $6,440. This would give an annual expense total of $77,280. Using a 5% withdrawal rate, this would mean the average consumer unit would need to save at least $1,545,600 for retirement.

While the $1,000 a month rule can be a great retirement planning starting point, it's important to remember that this rule is only a good way to expand your planning rather than a complete retirement strategy. Outside factors like inflation, in particular, can significantly change how far your money might go in the future. This could mean saving even more than you think. As Marc Russell, a financial consultant at Better Wallet, explained to U.S. News & World Report, "Because of market conditions and inflation, you must constantly adjust [your retirement contributions]. The way to beat that is by over-contributing, so your contribution rate and the amount you need to have invested should be on the higher end to ensure you have enough in retirement."

Similarly, unexpected expenses during retirement, such as medical or even housing needs (like those living in states retirees won't be able to afford to live in over the next decade) can affect how much money you might need to withdraw in a given year. This is why it can be important to view your calculated total from the $1,000 dollar a month rule as a guideline minimum rather than the grand total you should aim for. It's also worth mentioning that, according to the Federal Reserve's 2022 Survey of Consumer Finances (which is the most recent study publicly available), the average savings balance for consumers aged 64 and under in 2022 was between $20,540 and $72,520. However, the median balances ranged from $5,400 to $8,700, well below the amount needed.