Choosing when to retire has tremendous and irreversible financial consequences. When I make the decision, I'll be guided by one factor alone.
Here's the only thing I'll consider when deciding whether it's the right time for me to leave the working world.
Image source: Getty Images.
How I'll know I'm ready to retire
My decision about when I am ready to retire will be driven solely by when my investment accounts will produce sufficient income to support me. And I won't reach that milestone until I have chosen a safe withdrawal rate and have ensured the income I take out of my accounts at that rate will cover all of the necessities.
There are two big reasons this will tell me when to give up work.
1. I know I can't count on Social Security as a sole source of support
The big reason I'm focusing on investment income is because I understand that Social Security alone isn't sufficient to pay for what I need.
In a best-case scenario, the program is designed to replace only around 40% of pre-retirement income. I'm not interested in taking a 60% cut to my take-home pay. And I'm also aware Social Security benefits lose buying power over time because cost-of-living adjustments built into the program aren't keeping pace with inflation.
There's also a chance an automatic benefits cut will take effect before I reach Social Security age, since retirees are expected to face a reduction in monthly income if the program's trust fund runs dry -- as its trustees are currently projecting will happen in a little over a decade. While I expect Congress to take action to prevent this, any compromise legislation to shore up Social Security could also lead to a de facto reduction in the income this program provides.
Since my investment income is within my control, but the future of Social Security isn't, I want to make absolutely sure my investments cover what I need before I retire.
2. I want to make sure I don't use up my retirement nest egg too fast
The other big reason I'm focusing on my investment accounts when choosing when to retire is that I want to make absolutely certain these accounts are there for me as long as I need them.
I understand that a variety of different factors including interest rates, the stock market's performance, and inflation can all affect the value of my investment accounts and my buying power. I want to ensure I won't be left struggling even if things unexpectedly go worse than planned and inflation surges or my investments don't perform up to par.
And I know life expectancies have been getting longer, so I'm not willing to take the risk of ending up without the money I need in my 80s or 90s.
There are a few different ways to establish a safe withdrawal rate, but I'm planning to be very conservative by trying to live on investment returns alone without touching my principal. This will give me a good financial cushion if things do go wrong.
Now, taking this approach in deciding when to retire might mean I need to work longer than many people -- even though I'm trying to save more throughout my career to make sure I still feel ready to retire at a young age. But I'd rather make the sacrifice of putting in a few extra years on the job while I'm able to do so to ensure I have plenty of security later on when working is no longer an option.
