Are you dreaming of giving notice at your job and beginning a life of leisure as a retiree? Before you do, make sure you're financially prepared, otherwise this dream could turn into a nightmare. 

To determine if you're financially ready to leave work for good, ask yourself three key questions: 

Senior couple reviewing financial paperwork.

Image source: Getty Images.

1. How much will your Social Security benefits be?

Social Security benefits are lower than most people realize, and they definitely aren't sufficient to be your sole source of retirement income. The average benefit for 2020 is just $1,503 per month, but the specific amount you'll get depends on both your earnings and the age you claim benefits.

You can check your Social Security account online to see what your monthly benefit will be. It shows your benefit at 62, full retirement age, and 70. If you're a different age and thinking about retiring, you'll have to calculate how early filing penalties or delayed-retirement credits will affect your benefit.

2. How much can you withdraw from your retirement accounts?

Social Security should be just one of your sources of income as a retiree; you'll also likely need to rely on income from your investments. You want to make sure you aren't taking too much out of your accounts, though, or you could run short of funds.

There are different approaches to deciding how much you can safely withdraw from your retirement accounts.

  1. One is to live only on the interest income, but this won't work for most people because their account balances aren't large enough to produce a sufficient amount of interest.
  2. Another is to withdraw 4% of your account balance in the first year of retirement and then adjust withdrawals upward annually to account for inflation. 
  3. A third is to use tables prepared by the IRS that are designed to calculate required minimum distributions from certain tax-advantaged retirement accounts. The Center for Retirement Research at Boston College recommends this approach, even when you're below the age when you have to take RMDs.

Whatever approach you take, make sure you've decided on a withdrawal rate that reduces the chances of running out of cash late in retirement, and figure out how much income you'll have available at that rate. 

3. How much will you need to live on?

By adding up the amount of your Social Security benefit and income from investments, you'll find out how much cash is available to you to spend if you retire now. If you have income from other sources, such as a pension, add that in, too.

You need to decide if this amount of income is enough to support you. Since you're close to retirement, the best way to do that is to make a sample budget. Consider how your current expenses will change, factoring in cost cuts you can make once you're no longer working as well as potential increases in expenditures on travel and hobbies. Don't forget healthcare spending, which could be quite substantial, especially later in life. 

If you find you can't afford your desired lifestyle with the funds you've got, you're not ready to retire.

Make sure you go through this exercise before giving notice

While it can take some time to do all these calculations, they should be done before you decide to leave the workforce. Otherwise, you could find yourself retired without the funds you need to live on.