Most retirement planning advice assumes that your investments will need to sustain your current level of income. I once used a retirement calculator that said we'd need to save $7 million for our retirement. Seven million American dollars. I almost gave up on saving for retirement at all. Given our starting point, our time horizon, and the high cost of Southern California living, I knew the math wasn't about to start mathing.
What you actually need is for your investments to earn enough to have a comfortable life. That may be a different number from your current level of income. So ask yourself: "How much do I really need in order to live comfortably?"
Can you live well on $80,000 per year, even though you earn $120,000 now? Can you live on $50,000 if you earn $60,000 annually? Try it. Let's call this your minimum viable income. Seeing whether and where you can cut back will help you find the slack in your budget for investing.
Next ask yourself:
How much wealth will I need to amass in order to generate my minimum viable income? For retirement, most experts assume a 4% annual draw. Divide your minimum viable income by .04 to calculate your savings goal. If your goal is $50,000 annually, $50,000 ÷ .04 = $1,250,000. Anything you amass beyond that is gravy, but the savings goal is your minimum.
Lastly, figure out how much money you'll need to invest, over how many years, and what rate of return you will need to earn to reach that goal.
This is where speadsheet software comes in handy. Use its future value function to play with some numbers.1 You might discover that early retirement or a career downshift is more feasible than you thought, particularly if you're willing and able to move abroad. Of course, you might also learn that you'll have to work until you're 70 and hope that Social Security is still with us. You certainly won't be the only one.
Where to invest your money to get the return you need depends on your risk tolerance, timeline, and goals. Depending on your age and time horizon, retiring early might require using a taxable account (i.e. a brokerage account) instead of or in addition to an IRA, 401(K), or 403(b) plan2. You should probably have one of those anyway. Here's where I remind you that I am not a financial advisor or tax professional, I just read a lot. Kathy Kristof's Investing 101 can help you determine how much risk you can tolerate based on your financial situation and temperment.
In general, you must wait until you are 59½ to withdraw from your retirement accounts without a penalty. For some types of accounts and under some conditions, you may be able to take distributions beginning at age 55. ↩