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How much income will your nest egg produce?

Whether you can retire early with $600,000 depends how much income your savings and Social Security produce versus how much you'll need to live on.

Income from investments depends on your portfolio performance and your withdrawal strategy. You can't take out too much or earn returns that are too low or you'll risk going broke.

If you follow the 4% rule, with $600,000 in savings you can withdraw $24,000 annually. A portion of your remaining nest egg can be put toward safe investments, such as an S&P 500 index fund. The average annual return of the S&P 500 since 1957 has been 10.36%, according to the Official Data Foundation. It's also a good idea to maintain an emergency fund in case of any unexpected medical or housing expenses.

But considering you can't claim Social Security until age 62 at the earliest (more on this later), and withdrawals from 401(k) and IRA accounts may be subject to additional taxes until you're 59-and-a-half years old, retiring early might require you to dig more deeply into other savings at first before taking a more balanced withdrawal approach. But it's a huge risk if your investments don't perform well

Building a dividend portfolio is another strategy that can lower risk while receiving passive income. The goal is to live off the passive income from dividends and not touch your principal. With the right investments, you could theoretically generate substantial yields that will last as long as you need them.

To succeed at this approach, you may need to keep more than the recommended percentage of your portfolio in stocks and you must carefully select a diversified mix of dividend paying stocks. Energy, real estate and utility companies, for example, often pay out high dividends, but it pays to look at the company's long-term growth potential and not just focus on yields alone.

If you're a confident investor taking this approach, $600,000 might produce enough for early retirement. However, you'll need the knowledge to put together your dividend portfolio or help from an adviser with the necessary skills.

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How much income will Social Security produce?

The good news is, your savings and investments won't be your only income source. You'll have Social Security, too. Unfortunately, benefits aren't available until age 62.

When you claim Social Security also determines your benefit. Claiming at full retirement age (FRA) — between ages 66 and 67, depending on when you were born — will allow you to receive the entirety of the benefit you earned during your working years. If you decide to receive checks early, you could be penalized up to 30% — but if you delay benefits until after your FRA, you can receive even more money each month, around 8% more per year if you wait up until age 70.

The longer you wait to claim benefits, the more years you'll have to rely on savings. But the sooner you file, the less monthly income Social Security offers. If you claim at 62, the average monthly benefit was just $1,298 as of December.

With health care bills to cover, plus years of retirement on the horizon, attempting to live on under $40,000 a year combined from Social Security an​​d savings is going to be tough. So, unless you come up with an effective withdrawal strategy, your Social Security check is well above average or you have other income sources, you may want to stick it out on the job for a few extra years to bulk up your savings.

Correction, June 3, 2024: This article has been corrected to say that early withdrawals from 401(k) and IRA accounts may be subject to additional tax penalties.

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Christy Bieber Freelance Writer

Christy Bieber a freelance contributor to Moneywise, who has been writing professionally since 2008. She writes about everything related to money management and has been published by NY Post, Fox Business, USA Today, Forbes Advisor, Credible, Credit Karma, and more. She has a JD from UCLA School of Law and a BA in English Media and Communications from the University of Rochester.

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