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.
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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.