Here's What Happens to Your Nest Egg When You Retire Early

Some people dream of an early retirement. And if you save well and invest savvily during your career, you may wind up in a position to wrap up your career at an earlier age than average.

A good 32% of workers say they plan to retire before age 65, according to the Employee Benefit Research Institute. But the term "early retirement" can mean a lot of things. It can mean retiring at age 60, 55, 50, or earlier.

The earlier you retire, the sooner you might end up tapping your nest egg and shrinking your savings balance. So it's important to put a lot of thought into early retirement -- and figure out a way to make your money last if you decide to go that route.

The danger of early retirement

It's easy to see why early retirement is appealing. You're likely to have more energy to travel and enjoy life when you're in your 50s or early 60s than when you're in your late 60s or early 70s. So it makes sense to want to stop working at an earlier point in time.

The problem, though, is that the earlier you retire, the longer your savings might need to last. And if you start tapping your savings at an earlier age, you might end up running out of money before you reach your later years.

Let's say you've managed to build a $1 million nest egg. That's quite impressive. But there's a big difference between needing that money to last 20 years, which may be the case if you retire in your mid-60s or beyond, versus needing to last 30 years or more, which may be the case if you retire early.

Plus, if you stop working at an early age, you won't be contributing to your IRA or 401(k) any longer. So not only will you potentially be drawing down your savings, but you also won't be putting in more money in the absence of earning a salary from a job.

Remember, too, that age 62 is the earliest age to sign up for Social Security. If you stop working completely at age 58, you might have a few years where you have to dip into your savings heavily because you have no other income at your disposal.

Should you retire early?

If you have a lot of savings, then you may be inclined to retire early. And why not, if you can afford it?

Let's say you start taking $50,000 a year out of a $2 million nest egg in your 50s so that by the time you reach age 65, you're down to $1.6 million. That still leaves you with a nice sum of money at a more traditional retirement age, so the fact that you took those withdrawals may not be problematic.

However, if you're only starting out with $800,000 and you get down to $400,000 by age 65, that's a little more precarious. Granted, it still may not be a problem if you plan, from that point on, to collect Social Security benefits and live more frugally.

The point, however, is that retiring early puts you at risk of spending down your savings in your lifetime and reaching a point where you've run out of money. So you'll need to make sure early retirement is something you can afford, and also, come up with a withdrawal plan rather than just tapping your savings at random.

In this regard, sitting down with a financial advisor could be a smart bet. Someone with those skills can look at your needs, goals, and savings to help you not only determine whether early retirement is financially feasible, but how to manage your savings in light of it.