Many people have the goal of retiring early, whether it's to travel, pursue different hobbies, or simply enjoy a more laid-back schedule that doesn't involve spending 40 hours a week or more at the office. Now you might assume that if you've amassed a decent chunk of savings, you should be all set to retire early. But before you move forward with those plans, there's one essential move you'll need to make.
Break your savings down into annual income
If you've saved well in your IRA or 401(k) plan, it's easy to look at the nice big number that represents your savings balance and assume you're all set. But rather than rely on an impressive-looking figure, it's important to figure out how much annual income your savings will actually provide you with.
If you're retiring early, you may need your savings to last a good 30 years, or maybe more. And so you'll probably want to be somewhat conservative in taking withdrawals.
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This assumes, of course, that you don't plan to work part-time in retirement. If that's the case, you may get more leeway when it comes to withdrawals.
Similarly, if you're in line for a more generous Social Security benefit than the average recipient, that also buys you the flexibility to take larger withdrawals from your savings. It may be that between a higher earnings history and a delayed filing, you're looking at the maximum Social Security benefit someone your age can collect, or something in that ballpark.
But either way, it's a good idea to know how much annual income to expect from your savings. And so once you've settled on a withdrawal rate, you'll need to run those numbers and make sure they work for you.
Imagine you decide to err on the side of being conservative and stick to a 3% annual withdrawal rate. If you have a $1.5 million nest egg, that leaves you with an annual income of $45,000.
Now that income may work just fine for you. But if you're used to living on $120,000 a year, and you're only looking at, say, another $20,000 from Social Security, then that may be far from ideal.
This especially holds true if your goal is to not work at all during retirement because you did so your entire life and want a break. If that's the case, you're better off finding that out sooner rather than later so you can push yourself to work full-time a few more years rather than retire early and wind up cash-strapped.
Don't set yourself up for failure
The last thing you want to do is retire early and put yourself in a position where you can't lead the lifestyle you want. If you don't really run the numbers on your savings and determine what annual income you're in line for, you could end up overwhelmingly disappointed and stressed once you leave your career behind. A better bet is to do your number-crunching in advance and make adjustments to your plans as needed, even if it means retiring at a slightly later age.
