It is always a possibility to leave the workforce early due to medical complications, a disability, or caring responsibilities, and it may seem difficult, especially when it comes to the topic of your finances; after all, retiring early means you will have more money to live on over a period of longer time.
Although it may seem almost impossible, with careful planning, a firm long-term strategy, and a commitment to carefully managing your money, it is possible to retire early without having to sacrifice too much. Here are some expert opinions on the matter about how people can better plan for an early retirement that allows them to maintain a comfortable lifestyle.
Understand How Much Money You’ll Need in Retirement
David Blain, a chartered financial analyst (CFA) and CEO of BlueSky Wealth Advisors, who has guided handfuls of clients to achieve early retirement while maintaining a comfortable lifestyle, said it’s important to first develop a solid understanding of how much capital you’ll need during retirement life.
“You need to make informed assumptions about your future expenses, including medical costs, housing and leisure activities,” he said.
“Don’t forget to account for inflation and potential price increases over time,” Blain said. “For example, when planning for early retirement, I encourage clients to factor in higher health care costs due to the longer duration before qualifying for Medicare.”
Have a Well-Thought-Out Investment Strategy
“The investment strategy is another crucial component,” said Blain. “Diversify your portfolio across global allocations and multiple asset classes to limit volatility and ensure predictable returns over longer periods.”
“For retirement accounts, I recommend putting less tax-efficient assets, such as bonds and dividend-paying stocks, into qualified accounts (such as 401(k)s and IRAs), while more tax-efficient assets tax, such as stocks or ETFs, in taxable accounts,” he said. “
This can improve your after-tax returns and stretch your retirement dollars even further.”
Consider Alternative Income Strategies and Backup Plans
Blain said that if completely stepping away from work seems risky, you should consider moving to a part-time or lower-stress position that allows you to continue contributing to retirement savings and maintain health care coverage.
“I also use tools like Monte Carlo simulations to test various scenarios for clients, ensuring their plans hold up under different market conditions and unexpected life events,” he said. “By combining careful planning, strategic investments and contingency planning, it is entirely possible to retire early without compromising your lifestyle.
Take Advantage of SSI Benefits if Applicable
Jamie Upson, owner and senior financial advisor at Stonehearth Capital Management, said he has had a handful of clients who previously retired due to disability. “Traditional retirement savings will help with cash flow needs, but nothing will compare to a disability policy in place to cover that risk.”
“Disability policies typically replace a percentage of lost wages. If these are employer group policies, long-term disability typically replaces 50% to 70% of employees’ wages,” Upson said. “And these benefits are often paid up to age 65. If [and, or] when available, it is preferred that the employee pay 100% of their disability policy premiums because the benefits paid would be tax-free. If the employer pays the premiums, then the benefits are taxable.”
Upson also He said while most disability policies require that when benefits are paid, the disabled person applies for Social Security disability benefits (SSDI); if a claim is approved, group disability policy benefits are usually reduced by the amount received for Social Security disability benefits.
“Some employers also offer disability pensions, which would allow someone to retire early from their employer,” added. “Not only would this give employees early access to pensions, but it may also be particularly important if health insurance benefits are provided to employees who retire, rather than those who resign.”