- 401k plans, personal finance, savings, wealth management
Saving for retirement comes in many shapes and sizes, and strategies are not one-size-fits-all. Having a successful and beneficial retirement plan requires research, adjustments, and work from the participant.
Having a set-it-and-forget-it mindset when saving for retirement will only go so far. That’s why it’s important to try new approaches to make your money grow and work for you in the future. One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
As a general rule of thumb, you will withdraw approximately 5% of your retirement income every year for expenses. The Balance breaks down the numbers below:
Start with $240,000 and multiply it by 5%, which equals $12,000. Next, divide $12,000 by 12 months, which totals $1,000 per month.
Moss notes that this strategy is a rule of thumb, and depending on factors such as inflation, the stock market, Social Security, pensions, part-time work, and more, the total will vary throughout your lifetime.
Adjusting the Rule
Like most things in life, there are exceptions to the $1,000/month rule. For example, some people retire earlier than others, and some retire after the age of 62. Your retirement age will determine how much you should plan to withdraw each month, and will, therefore, impact the rule.
Someone who retires early in their 50s will have to withdraw smaller amounts each month for their retirement savings to last longer, and someone retiring after the age of 62 can afford to increase their spending.
Everyone – regardless of age – will have to watch market conditions and adjust accordingly as well. For example, years that experience high inflation will change the value of your dollar and require assessment and adjustment. The Balance notes that market changes will require individuals to adapt and change consistently, so be mindful of economic conditions.
Setting Yourself Up for Success
Knowing that your strategy will continuously change throughout your life, and adjusting as needed, is key to a successful retirement plan. While 5% withdrawals every year will last approximately 20 years for the average participant, many will need funds for a longer period.
Investing, rather than only storing money in a savings account, can help your dollars stretch longer and puts your money to work for you. Some examples of supplemental savings include:
- Individual Retirement Accounts (IRAs): These accounts can be opened online through financial institutions like Fidelity and can easily be managed at your fingertips. The IRS sets contribution maximums for retirement accounts on an annual basis, and in 2024 the limits are listed as $7,000 for a Traditional IRA and $8,000 for those over the age of 50. If you can maximize these accounts every year, you can significantly improve your retirement savings for the future.
- Health Savings Account (HSA): As you age, your health expenses will likely increase. Having an HSA can help you plan and cover those increasing costs with a tax-deductible account. In 2023, the contribution maximum was $3,850 for individuals and $7,750 for families. For participants over the age of 55, an extra $1,000 is added for catch-up contributions. By maximizing these accounts early, you will have health expenses covered in the future that won’t impact other areas of retirement savings, such as 401(k) plans, IRAs, and regular savings accounts.
Having a diverse savings strategy can help you pad current and future economic downturns, protecting cash and investments that can be used in retirement. Learn about the importance of diversifying your investments on the Slavic401k blog.
While saving for retirement does not have a one-size-fits-all approach, utilizing different methods, such as the $1,000/month rule, can help you reach your goals. Remember that saving, maximizing contributions, and planning will look different at various stages in your life, and utilizing resources like retirement calculators, can help you keep yourself on track financially.
Check out Slavic401k’s diverse catalog of calculators, including a retirement nest egg calculator and retirement planner calculator.
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