How to Retire Early: 7 Ways to Build Wealth

For many retiring early seems like a distant dream, one that is out of reach. But that is no longer the case with a discernible change in the attitudes and mentality of the younger folks who seek a healthy balance between their personal and professional lives. They do not associate retirement with old age. It was assumed that someone who is retired must at least be in their 60s, however, that view is changing as a sizable number of folks are considering taking early retirement. They wish for comfort in their lives, seeking peace of mind and a stress-free life instead of spending a substantial part of their lives slogging in their workplace.

The FIRE (Financial Independence, Retire Early) movement has played a significant role in changing people’s beliefs about retirement. FIRE is based on the idea that an individual can opt for early retirement in their 40s and 50s provided they have been careful about financial planning. In FIRE, the investment philosophy focuses on aggressive saving and investing money in high-return-bearing investments. The aim here is to attain early retirement even if you have to compromise on your lifestyle in the present. There is an increased focus on maximization of savings rate among people who wish to retire early. They tend to live frugally till their retirement however this way of living may not be appealing to everyone. That said, having to live within your means is not without certain advantages. You can take a step back and focus on living peacefully with your loved ones without the stress of having to meet deadlines, constant work pressure, or having to earn substantial amounts of money. If you require assistance with building a significant retirement corpus that will allow you to take early retirement, consult with a professional financial advisor who can advise you on the same. Now how successful your early retirement will depend on the investment strategies that you choose to deploy. It is advised that you start saving from a young age and choose the best investments to live comfortably in your retirement years. Let us find out how you can achieve this.

What strategies can you employ to take early retirement?

There are several retirement investment strategies that you can choose that will allow you to take early retirement. Some of these strategies are:

1. Plan for early retirement from a young age:

Early retirement is an ambitious goal considering if you retire in your 40s and live till your 70s/80s, you are looking at 30 to 40 years of retirement without a stable source of income. This means that you need to accumulate a substantial amount of savings that can last you for the aforesaid period of time. You have to factor in the impact of inflation on your savings as it will negatively affect the value of the dollar and reduce your purchasing power in the future. So, to negate this effect, you need to create a significant retirement corpus that can generate inflation-beating returns. To achieve this, you need to start investing from a young age and employ rational retirement investment strategies. You can reap several benefits if you start investing early, the foremost being, that you have a longer time horizon at your disposal. Since you are not pressed for time, you can create a well-researched plan and carry it forward to success. In addition, a longer time frame allows you to harness the power of compounding where you can reinvest your profits back into the market. Doing so enables you to earn higher returns on your investment. Lastly, the sooner you begin, the more wealth you can build for yourself and your family. You should optimally invest your savings, salary, bonuses, and gifts. Time plays the most critical role in achieving your goal of early retirement.

2. Maximize your savings:

For those seeking early retirement, their focus should be on saving more and spending less. This is a hard bargain to strike as you would have to give up some of your dreams and desires and live your years frugally. That said, you would need to inculcate this habit and start saving every possible dollar. This goes beyond simply saving 20 to 30% of your salary in the bank. You would need to fundamentally change your lifestyle to achieve early retirement. For example, you may need to switch to buses instead of taking a cab, forego eating out or only do so on special occasions, shop at thrift stores, and more. The measure and degree of austerity you practice depend on your current income and how much money you wish to have at retirement. The principles remain the same for everyone and only the degree of frugality varies. If your aim is to secure your retirement financially, you may have to stop using credit cards, cut down on socializing with your friends and family, start carrying your lunch to work, avoid all kinds of debts, cancel all travel plans, and more. Since you need to save significantly more for early retirement, you may have to double your efforts as well to achieve your goal.

3. Discover advantageous ways to invest your money for retirement:

To build a significant retirement corpus, you need to invest your money as well. You cannot build a financially secure life on savings alone. You need to pick the right investment instruments to invest your money. Consider mutual funds for instance. Considered to be one of the safest modes of investment for retirement, they offer two forms of investment: systematic investment plans or SIPs and lump sum investments. You can choose either of the two options. It is advised that you go for SIPs as it is considered to be more beneficial. Through SIPs, you can gradually build your wealth over time via several tiny investments that yield returns over time.

That said, you cannot ignore high-risk and high-reward investment instruments such as equity. Equity can help you generate the significant wealth needed for early retirement. Along with direct equity, you can also select equity mutual funds, gold, exchange-traded funds, and REITs (real estate investment trusts) to build a well-diversified portfolio. A well-diversified portfolio having a higher concentration on equity can help generate high returns while also providing a buffer against risk to produce better returns in the long run.

4. Don’t neglect to account for health expenses:

Health expenses may very well constitute a large part of your retirement costs. With growing age, your health may decline and you may contract certain illnesses or health issues. You must plan for costs related to medicines, long-term care, hospitalization, ambulance, surgeries, alternative medicine, therapies, etc., during your retirement years. A health savings account (HSA) can be an effective tool when it comes to dealing with health expenses in retirement. There are several benefits associated with opening an HSA such as tax-free earnings, tax-deductible contributions, and making tax-free withdrawals provided they are for medical purposes. Do keep in mind that HSA withdrawals become tax-and-penalty-free only if you are 65 years of age or above. If you take early retirement in your 40s or 50s or anytime before you turn 65, you would lose this benefit and will have to cover your health expenses on your own.

You can also consider taking out a health insurance plan that covers all kinds of medical costs, critical illnesses, long-term care, and more. Further, instead of relying on your employer’s plan, you should buy health insurance for yourself. The biggest risk associated with an employer plan is that the moment you lose or retire from your job, you will lose the health insurance cover at the same time. Also, there is less scope for customization in an employer-sponsored plan. It is advised that you buy your health insurance at a young age to get a more affordable rate. The older you are at the time of buying health insurance, the more expensive it is for you. Hence, it is considered prudent to buy an insurance plan at a young age.

5. Engage the services of a financial advisor:

To achieve early retirement, you may need help from a qualified financial advisor who can offer you professional guidance and assistance. You can do so by employing wise retirement investment strategies. These strategies will not only help you build wealth but also allow you to secure your financial future. Along with this, you will also need to pick out safe investments to mitigate risk. Not everyone possesses the necessary financial acumen or expertise to achieve this. This is where a professional financial advisor comes into the picture. He can help you achieve your financial goals by maximizing your savings through the deployment of the right investment strategies. The advisor can work with you to reduce your debt and create a budget that allows you to live within your means. Consulting with a professional financial advisor can help you get out of the planning mode and start putting things into action. Some folks may feel that an advisor’s fee is an avoidable expense, especially at a time when they are focused on saving every dollar for their retirement. Consider the fee as an investment rather than an expense. You are paying for their timely guidance and financial expertise that would allow you to attain your goals sooner than you may have envisioned. Further, there are various kinds of advisors that you can choose from based on your needs and goals. You can hire them on an hourly rate, a retainer, or commission model, etc., and manage your expenses at your convenience.

SPONSORED WISERADVISOR

6. Purchase a house:

A home is a great investment for early retirees as it is considered to be one of the safest investments for retirement. There are several benefits of owning real estate such as the value of a real estate asset appreciates faster than most other assets which make it a good hedge against inflation. It also offers you security and protection. In addition, a home also allows you to generate more wealth either through renting it out or giving it on lease. It serves an important role in providing you with financial security in retirement. You could also sell your home if you require money to meet any financial obligations that you may have. Having a home is a significant investment that can take you one step closer to your retirement.

7. Account for all miscellaneous expenses and losses:

Most folks rarely fail to consider the bigger expenses but it is the smaller cash outflows that tend to escape unnoticed and unaccounted for. Retirement can be a long phase of your life where you must account for every expense no matter how insignificant you may think it may be. You can manage these expenses by taking out insurance for them. So, apart from health insurance, you should also buy life insurance, car insurance, disability insurance, homeowners insurance, etc. You can protect yourself against emergencies through insurance, not to mention they also help in reducing costs. Compare different plans to find out the one that would be easy on your pocket.

You also need to find ways and strategies to reduce your risk exposure. Unexpected events having global ramifications such as the Covid-19 pandemic and the Russian invasion of Ukraine can mess up your plans and even affect your means of livelihood. You need to be careful when it comes to risk management especially if you are planning to retire early. You should consider investing in traditional retirement planning vehicles such as a 401(k) retirement account or an individual retirement account (IRA). Though these instruments may not be ideal for early retirees due to having a minimum age limit of 59.5 years for withdrawals, these retirement plans can still serve an important role in your investment portfolio. These plans offer multiple benefits such as tax-free earnings and grow along with tax benefits that can serve you well in retirement. No matter if you retire early or at the age of 65, investing in an IRA or a 401(k) is considered to be a great investment as it offers financial liquidity and financial safety to its investors.

To conclude

To secure early retirement, you need to exercise caution and prepare an exhaustive plan. The sooner you begin, the better the results will be, provided you have employed the right retirement investment strategies. However, not everyone is cut out for early retirement. You need to work hard, be diligent and disciplined, not to mention extremely focused to achieve your goal. This may not be possible for everyone. Also, some may choose to work till their official retirement age and beyond because they enjoy working and it gives them a sense of accomplishment and purpose in life. In the end, it is your call to determine what it is that you want to do and what course of action would work best for you.

If you want to get in touch with a fiduciary advisor who may help you understand the impact of a Roth IRA conversion on your taxability, withdrawals, and more, use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.