When Is It Safe to Give Up a Paycheck?

If you are in your 50s, 60s approaching 70 or older and have begun thinking about retiring and giving up your paycheck or other steady income, how do you know it's finally safe to say good-bye to full-time work?

It takes planning, and the more detailed the planning the better. Certainly, you can scribble some figures on the back of an envelope, but it's better to take some time to assess whether you are ready or not.

"One of the greatest threats to having a secure retirement is the failure to plan," said Nevenka Vrdoljak, managing director in the chief investment office at Merrill and Bank of America Private Bank.

There are different ways to make retirement work. Consider Jackie Lange, who decided to retire overseas with her husband back in 2010. Both were in their mid-50s when they left Texas for the small town of Boquete, Panama. She spent two years on her "quest" to decide where they were going to move. They wanted to relocate to a place where they would never need air conditioning or heat, and they considered Mexico, Honduras, Uruguay, Ecuador and Costa Rica before deciding on Panama.

She had been a stay-at-home mom and worked as a real estate investor. Her husband, who died in 2017, retired early as an electronics system engineer with Raytheon to move to Panama, at her urging. She wanted to get away from a relatively expensive, stressful lifestyle, and not wait.

Her husband had a small pension. She had income from rental properties in Texas that brought in $1,500 a month. "It's so much more affordable to live overseas," Lange said. "Look at your monthly budget, how much you spend every month."

Once you get off that "merry-go-round," she said, "when you get rid of those things, those big-ticket items, you don't need a big savings account at all. You can do fine with just your Social Security."

After relocating, Lange started helping other people who wanted to explore moving to Panama. Her efforts developed into Panama Relocation Tours. Though she stays involved, her children essentially run the business. Now 70, she describes herself as "semi-retired."

Not everyone will move to Panama or relocate at all but everyone would do well to create a budget, if they haven't already, before they leave their job or give up that steady income.

Retirement is not only about the numbers, but they matter a lot.

"There's a financial component as well an emotional and behavioral component to it," Roger Young, a vice president and thought leadership director with T. Rowe Price, said. "People struggle with it, how their days will change. In terms of the financial, there's some simple math to get a sense of are they ready to retire. Are your assets likely to last your lifetime?"

Before you leave your paycheck behind, consider your potential longevity based on how long your parents lived, your current health, and your lifestyle. Estimate how long you might live.

There are typically two ways to calculate how much you will need in retirement, and it, of course, depends on your goals. One approach is to assume you will need 75% to 80% of your preretirement gross income, and the other way is to work with a budget.

A drawback of the percentage method is that it doesn't necessarily factor in the lifestyle you prefer in retirement. Will you have paid off your mortgage? Will you be selling your home and relocating in the same market or a different, less expensive state or country?

Before giving up a paycheck, consider all factors carefully.

To start, figure out how much you are spending and what you are spending on: Food, clothes and shelter are the basics but consider every expense you have while you are still working. Essentially, it's a detailed budget.

"You have to do a budgeting exercise," Young said. "Look at the level of certainty around your income streams. Know what those numbers look like before you take the step of leaving your job."

Goals for the next part of your life are crucial. "We look at what they're spending now and what they want to accomplish in retirement," said certified financial planner Janet Briaud, a partner with Briaud Financial Advisors in College Station, Texas.

Next, consider what you anticipate spending in retirement. What will be essential? What are your hopes and dreams? Then, consider what your streams of income would be if you no longer had your paycheck or steady income from a business or professional practice.

"Decide what's important," said retired publishing executive Susan Harding, who is in her 70s. "What do I want to do with the rest of my life? That's the first question you ask."

Figure out where you or you and your spouse or partner stand financially.

Consider every source of income you will have after you leave a long-term job. These income streams include pensions from different parts of your life, 401(k) plans, traditional IRAs, Roth IRAs, Social Security benefits, brokerage accounts, certificates of deposit, Treasury bills, municipal bonds, preferred stock, income from work, inheritance and trust funds.

"What is the security of that income?" Vrdoljak said. Will your essential expenses — food, clothing, shelter, including property taxes, HOA (homeowners association) fees or other common charges such as condominium fees, and, a mortgage payment, if you have one — be covered by guaranteed sources of income such as a pension and Social Security retirement benefits?

Determine the amount of Social Security benefits you are likely to receive if you apply at age 62; see how much more you will get if you wait until your full retirement age (which can be between 66 and 67, depending on when you were born) or delay taking benefits until you turn 70 and qualify for the largest amount available to someone who earned as much as you did.

If you haven't already done so, create a mySocial Security account at SSA.gov, so you can check your earnings record and estimated benefits.

For example, a couple in which both spouses have worked might receive $110,000 in Social Security income, Briaud said. For some retirees, that is enough money in retirement. "It depends on the goals of the person," she said. "It depends on what you want to accomplish in retirement years."

Yet, the average monthly Social Security retirement benefit as of May 2024 was $1,916.63, according to the Social Security Administration. That is a yearly amount of approximately $23,000.

Some retirees are able to live comfortably on a defined-benefit pension and Social Security retirement benefits. Yet, with fewer retirees offered and receiving company pensions retirees often need to think about other ways to replace their paycheck or steady income.

For some people, buying an annuity such as a single-premium immediate annuity (SPIA), is a way to increase their guaranteed income.

For those who plan to rely on spending down their assets in retirement on an annual basis, caution is advised. The 4% rule first developed by William Bengen in 1994 — that is, spending no more than 4% of your 401(k), IRA or other personal retirement savings per year to avoid emptying your nest egg before you die — is a guideline that some advisers use. Yet, your age at retirement and an actuarial forecast of how many years your retirement is likely to last can help determine whether a 4% withdrawal rate will be safe.

"There is no one blanket sustainable spending rate," said Vrdoljak, "just more nuanced (rates) based on one's age and gender."

For example, she said, someone who retires at age 65 with a $1 million retirement portfolio can spend 4.14% of their savings, or $41,400, per year. Someone who waits 10 years and retires at 75 with the same portfolio spend more — $48,600 per year. In contrast, a person retiring at 55 with a $1 million portfolio can spend only $37,300 a year before risking exhausting their savings while they are still alive. These calculations are best updated on an annual basis, taking inflation into consideration.

Retirement income calculators can help you focus on your assets and expenses. Most major brokerages have versions of retirement income calculators on their websites. These tools use a variety of scenarios and the numbers you enter into the calculator. The online calculator will ask you a series of questions. You can save your answers by creating an account or just plug in all the numbers for the calculation to see how likely your resources will last your estimated lifetime.

Once you've completed the exercise, you may be offered ways to improve the likelihood your money will last. For example, say you thought you would claim your Social Security retirement benefits at 62 or between 66 or 67 rather than wait until you reach age 70. You might reconsider your strategy to increase your assets. "Social Security is often a very good protection against longevity," said Daniel Lee, vice president, Global, BrightPlan, a financial wellness benefit provider based in San Jose, California.

If you are reluctant to give up your paycheck, aim for a transition period or trial period in which you work three days a week rather than five, Vrdoljak said. This isn't possible for everyone. If you have the option or believe you may be able to negotiate it, it's worth a try.

If you have the resources, before you say good-bye to your paycheck, experiment with a "trial run" of your future retirement, "living off your savings and see how it feels," Lee said. Essentially, you try out what it would be like without your paycheck, and gain a sense of how far your money will take you.

However, deciding when to retire is not always up to you, Young said. "Age discrimination is real and can throw you for a loop."

A company may go through a reorganization, leaving your position in jeopardy. Your health may decline, making working full time challenging. Your manager could change, and the work environment could become less appealing. With planning, no matter what happens, you will be prepared.

Harriet Edleson is author of the book, “12 Ways to Retire on Less: Planning an Affordable Future” (Rowman & Littlefield). A former staff writer/editor/producer for AARP, she has written for The New York Times, The Washington Post and Kiplinger's Retirement Report. Read More