How to Calculate Early Retirement

Learn how to calculate early retirement

Early retirement generally refers to retiring before your 65th birthday. Early retirement can have an impact on your social security benefits. It also means you will typically need to draw from your retirement savings for a longer period of time, since you will begin making withdrawals sooner. As a result, calculating how much money you will need for early retirement is essential before you make the decision to leave your job early.

Step 1

Explore your employee pension options. Some employers will offer a pension, which is a monthly payment based on your salary and length of service. Others will not. If your employer does offer a pension, see if that pension will be reduced by early retirement and by how much.

Step 2

Evaluate the impact of early retirement on social security. Generally, if you retire before your 65th birthday, the monthly payments you receive from social security will be reduced. Social security retirement benefits are not payable at all until you reach the age of 62. When you are between the ages of 62 and 65, the amount of the reduction in benefits varies depending on how early you are retiring and your year of birth. For example, as of 2010, if you were born after 1960 and you retire with 60 or more months before your 65th birthday, your retirement benefits will be reduced by 30 percent.

Step 3

Determine how much you have invested for retirement in a 401K or other investment account and what rate of return you have. For example, if you have $100,000 invested and a six percent rate of return, then you will earn only $6000 per month on your investments. Generally, in order to retire, you want your investment interest to pay your expenses without tapping into your principal. So, if you need $60,000 in income to live on and your only income will be coming from your investments that are earning six percent per year, that means you would need to have $1 million invested. The calculation is done this way because you don't want to have to use your principal to live on, since you could then potentially deplete your savings and run out of money. You will also want to make sure these investments are in relatively safe places so you don't risk losing your principal and thus losing your income.