As people approach retirement age, many employees become eager to trade in the office chair for a La-Z-Boy recliner. But retiring too early can be a major financial mistake: If you retire without enough funds to keep you going for the rest of your life, you'll either have to scrape up another job, drastically reduce your lifestyle, or both.

Here's an easy test you can use to see if you have enough money saved up to provide retirement income for life.

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1. Estimate your annual expenses

This is easy to calculate if you are already tracking your monthly expenses, since you can just remove any that won't be a factor during retirement, add in enough to pay for planned retirement activities (e.g. cruises), multiply by 12, and there's your annual estimate. If you don't have such a budget, you can get a quick-and-dirty estimate by choosing a percentage of your current income based on your plans for retired life. If you'll have no housing expenses (i.e. your mortgage is paid off or you live with the kids) and you expect to live fairly simply, you can probably get by with 70% of your working income. If you plan to spend your retirement years traveling around the world and otherwise living it up, you may need as much as 100% of your working income -- or more! -- to finance your retirement dreams. Keep in mind, though, that one expense likely to increase during retirement is healthcare. Indeed, the Fidelity's Retiree Health Care Cost Estimate calculated that an average 65-year old couple retiring in 2016 would need $260,000 saved just for medical expenses. You can use this calculator to get a more specific number based on your own medical history. Once you settle on a number, write it down (or fire up a word processor and type it in) next to the words "Annual Expenses."

2. Add up your other sources of retirement income

Most retirees will receive Social Security benefits; you can find the exact amount you'll be receiving on your annual Social Security statement, or use a calculator to estimate your benefits. Other potential sources of income include pensions, real estate rental properties, business ownerships, and so on. When calculating income from potentially variable sources such as rental properties, be pessimistic. It's better to be pleasantly surprised than unpleasantly surprised given what's at stake. Add up all of these income sources using their annual totals and write down this number beneath the "Annual Expenses" number, next to the words "Other Income."

3. Calculate your minimum income from savings

Take the number from "Other Income" and subtract it from the "Annual Expenses" figure. The result is the minimum amount of income you'll need to produce from your retirement savings accounts. Write this number down beneath the first two numbers, next to the words "Required Savings Income."

4. Add up your current retirement savings

Include any money in accounts earmarked for retirement (IRAs, 401(k)s, etc.). If you have money in an HSA account, you can include that too; once you hit official retirement age, you'll be able to take those funds out penalty-free for any purpose, not just medical expenses. Move down a couple of lines on your document and write this total down next to the words "Current Savings."

5. Decide on a withdrawal rate

For a long time, experts agreed that withdrawing 4.5% of the total value of your invested retirement savings accounts each year would allow you to maintain those accounts indefinitely. However, that percentage may be too high for safety nowadays, particularly if you plan to retire on the early side. If you want to retire at age 65, you might choose a withdrawal percentage of 3% to keep your accounts producing for your lifetime. If you plan to hold off on retiring until age 70, you might be able to get away with a withdrawal rate of 5% or even 6%. Choose a percentage that will let you sleep at night: if you tend to be a worrywart about money, stick with a more conservative percentage. Write the percentage you choose down beneath the "Current Savings" number, using decimal form (so 3% would be 0.03, 4% would be 0.04, 4.5% would be 0.045, etc.), next to the words "Withdrawal Percentage." 

6. Calculate your annual withdrawals

Multiply your "Current Savings" number by the "Withdrawal Percentage" number. The result is the amount of money you can safely take out of your retirement savings accounts every year. Write this number down next to the words "Annual Withdrawals."

Sample retirement spreadsheet

Sample retirement spreadsheet

7. Compare your requirements with your reality

Look at the "Annual Withdrawals" number you just wrote down and compare it to the "Required Savings Income" number. If it's lower than the "Required Savings Income" number, then you don't have enough saved to guarantee you'll meet your income needs in retirement. If the shortfall is small, you may be able to tweak the numbers just a little bit to make it work. For example, you might be able to live a bit leaner in retirement, at least for the first few years, or perhaps you'll decide to pick up some work on the side rather than retiring completely. Or you may find that if you put off retirement by just a few years, you'll be able to easily produce enough income for your needs. Knowing how much extra income you'll need to find will give you a chance to build a new strategy, so that you can still have the retirement you've been hoping for.

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