The decision to retire is a big one, and so it's important to go in financially prepared. Some people assume that because they've saved a lot of money for retirement, they're all set to leave the workforce on schedule. But before you make that call, you'll need to ask yourself one very important question.
How much annual income will my retirement savings give me?
One thing that tends to trip up retirement savers is seeing a big number on screen when they go to check their IRA or 401(k) plan balance. After all, if you log into your account and see that you've amassed $600,000, you might think, "Hey, that's a lot of money, so I must be in pretty good shape."
But one thing you need to realize is that your nest egg will need to last you throughout retirement. Sure, you'll have some money from Social Security to look forward to, but it probably won't come close to being enough to paying your bills. And so you'll need to have continuous access to savings to supplement those benefits.
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That's why instead of focusing on the amount of savings you have, think about what annual income it translates to. As a general rule, if you want your savings to last for several decades, it's a good idea to use a 4% withdrawal rate as a starting point. So if you're sitting on $600,000 in savings and you're able to access 4% of that a year, you get $24,000 worth of income.
Now that may or may not be enough money for you to live on, depending on what your Social Security benefits look like and what your retirement plans include. But the key is to understand what annual income you're in line for based on your savings. And if you're not happy with the number you arrive at, you may need to make some changes -- either to your retirement date or your plans once you exit the workforce for good.
Crunch the numbers before you retire
It's sometimes possible to retire and then undo that decision. If you leave the workforce and realize your income is falling short as far as paying your bills goes, you may be able to reenter the labor force or pick up part-time work in your former field.
But chances are, you don't want to be forced out of retirement due to financial concerns. And so that's why it's important to assess your savings balance before tendering your resignation.
Going back to our example, if you determine that your nest egg will provide $24,000 a year in income, but you need it to provide $30,000 a year, you can opt to stay at your job longer to boost your savings. You can also potentially change your planned Social Security filing date to score a higher benefit so you can retire with a little less money in savings. Delaying your filing past full retirement age will give you a more generous benefit for life.
Either way, don't get swept away by a large retirement plan balance. Instead, figure out what that number means when you break it down on a yearly basis so you can rest assured you're covered for your income-related needs.
