He called this “The 1,000 Bucks-A-Month Rule.”
The (Overly) Simple Math Behind the “$1000/Month Rule”
The math behind the $1000-a-month rule-of-thumb is simple.
If you take 5% of a $240,000 retirement nest egg each year, that works out to $12,000/year, which divided into 12 months gives you $1000 each month.
Two Problems with Moss’s “$1000/Month Rule”
Moss assumed that if you retire between the ages of 62 and 65, you could safely withdraw 5% each year and not run out of money before you die. His case was that if you keep your nest egg in ultra-safe accounts that (earn close to nothing but) have close to zero risk of losing principal, a 5% withdrawal would be sustainable for 20 years.
One of my favorite Albert Einstein quotes says, “Every problem should be simplified as far as possible, but no further!”
Moss’s 1,000 Bucks-A-Month Rule does well in the first part – simplifying, but fails miserably in the second part – it does indeed simplify too far.
This over-simplification leads to two problems.
First, 20 years is not enough if you’re planning to retire in your early- to mid-60s.
According to the Social Security Administration’s Actuarial Life Table of 2017, the life expectancy of an American male was 20 years at age 62 and 18 years at age 65, while for an American female those numbers were 23 and 20, respectively (all numbers rounded to the nearest whole year).
The way life expectancy is defined means that half of American men who reach age 62, and half of American women who reach age 65 would live longer than 20 years.
How would you like to take a 50% chance of running out of money when you’re too old to do anything about it?
Didn’t think so.
Neither would I.
The second problem is that inflation will eat away at the value of your planned $1000.
If you’re 30 years old now, assuming the long-term average inflation rate of 3%/year, you’ll need $2575 when you’re 62 to buy what you can buy for $1000 today.
Further, even if you plan for the expected value of $1000 when you’re 62, by the time you’re 82, 20 years later, you’d need $1806 to buy what you could buy with $1000 at age 62. You’d need a whopping $4650 at age 82 to buy what $1000 would buy you at age 30.
And that’s without crazy inflation like the US had in the 1970s, when it averaged 7.1%/year over the decade, and was higher than 10% in 1974 and in 1979. It averaged over 13% in the UK that decade.
What the $1000-a-Month Savings Rule Really Means Now
If you’ve been reading about saving for retirement for a while, I’m sure you’ve heard of the famous “4% rule,” based on retirement savings research from the 1990s.
That rule stated that a balanced portfolio of stocks and bonds would last through a 30-year-long retirement if you’d only draw 4% of its value in your first year of retirement, and then adjust that dollar amount by the rate of inflation each year. If we assume you want $1000 each month, or $12,000 a year, this would require $300,000.
So, the new $1000-a-month rule means you need $300,000 invested for each $1000/month you want to have in retirement?
Well… not so fast.
The 4% rule was based on historic returns from the 1920s to the 1990s. Currently, market returns are projected to be more muted in the coming decades. This means that a 3.5% first-year draw would be safer, and a 3% draw safer yet.
Recent research drew a more nuanced picture, where people whose retirement expenses are almost all non-discretionary (think mortgage, property taxes, utilities, food, etc.), and especially if they retired early and/or had no defined benefits (think pensions and fixed annuities) could only safely draw 2%.
On the other hand, those whose expenses in retirement were mostly discretionary (think gifts, travel, clothing, etc.), who retired later, and who had lots of defined-benefit income could draw as much as 7% of their portfolio.
Given all these nuances, there is no simple $1000-a-month rule that applies equally to everyone.
So, given that, here’s a table that lets you pick your own version of this rule of thumb.
How to Use the Table
Consider which and how many of the following factors is true for you. The more of these, the higher in the table you can safely go.
- You plan to retire when you’re at least in your 60s
- You plan to move to a lower-cost-of-living country when you retire
- Fixed income (Social Security benefits, pensions, fixed annuities) will cover most of your retirement budget
- Most of your retirement budget is discretionary, so you can reduce your spending sharply when the market tanks
- Your family typically has a lower-than-average life expectancy
- You suffer from conditions that make a long life unlikely
- You don’t care too much about leaving a bequest
The more of this next set of factors holds true for you, the lower in the table you should go.
- You plan to retire early (think 50s, 40s, and especially if 30s)
- You plan to retire in a higher-cost-of-living country (think the US, UK, most of EU, Japan, etc.)
- Fixed income (Social Security benefits, pensions, fixed annuities) will cover only a small part (or none) of your retirement budget
- Most of your retirement budget is non-discretionary, so you can’t reduce your spending much even when the market tanks
- Your family typically has a higher-than-average life expectancy
- You’re in excellent health
- Leaving a bequest is important to you
If you’re sort of in the middle about all these, or don’t have a good idea of where you fall, you could do worse than assuming 3.5% as your starting point, and reevaluating when you’re closer to retiring.
In this scenario, your personal $1000-a-month rule does become simple again, if not as easy to achieve: “For every $1,000 per month you want to have at your disposal in retirement, you need to have $343,000 saved.”
The Bottom Line
As I’m fond of saying, personal finance is… personal.
What’s right for me could be totally wrong for you, or mostly wrong, or somewhat right, or even totally right. It depends on too many factors to be able to rely on rules of thumb and follow them blindly, not knowing whether they apply to your personal situation or not.
Perhaps the only personal finance rule of thumb I’d sign off on for (almost) everyone is this: “If it fits in a tweet or on a bumper sticker, don’t count on it being accurate for you.”
However, that doesn’t mean you can’t or shouldn’t personalize a rule of thumb to your personal situation, as long as you periodically reevaluate if it still seems to fit.
This article is intended for informational purposes only, and should not be considered financial or legal advice. You should consult a relevant professional before making any major decisions.