When stress at work threatened to overwhelm me, I’d perform a calming ritual.
I’d type some numbers into a spreadsheet and do a quick calculation.
The result gave me the feedback and the energy to power through yet another day.
That calculation? Checking how close I was to Coast FI, although at the time I didn’t have a name for it.
FI or financial independence is when you have enough passive investment income to cover your living expenses, otherwise known as being able to retire.
Ok, what is Coast FI? Read on to learn about this path to potential freedom before you achieve financial independence (FI).
Note: I’m not a financial adviser, and this is not financial advice. It’s meant to be purely educational and motivational!
What Is Coast FI, and How Could It Help Me?
Coast FI is a point where you’ve saved enough for retirement that if you let your money grow, it could support you when you want to retire. You have enough money and enough time that your portfolio will grow to the size you need it to be when you decide to stop working—due to the power of compound interest.
If you have a decent-sized portfolio, it may surprise you how ample it could get with a few decades of healthy investment returns.
Coast FI means that instead of continuing to save for retirement, you could potentially “coast” because the heavy lifting has been done. You could reduce your savings rate and still hit your FI goal.
If you’ve been saving a considerable portion of your income, it means that you could now potentially work less because you no longer need to save as much.
Sounds great, although you still need to cover your living expenses. But the lower your expenses are, the easier it will be to meet them (go frugality for freedom!).
Who Is Coast FI For?
It’s for people interested in FIRE but looking for a more moderate path, one that allows you to exit the rat race sooner.
You may not retire as early as FIRE, but you get the option of working less sooner or working for reasons besides money.
There are many benefits to working, and without a laser focus on the money part, working can be a different experience.
Coast FI still requires up-front sacrifice to build your retirement funds. It also requires a dose of frugality since if your expenses grow each year, you’ll “un-Coast FI” yourself.
Most articles I’ve read talk about this being a path for younger people in their 20s and 30s. Coast FI sounds great in theory when you’re younger, but you probably don’t earn as much when starting a career. Plus, you’re likely setting up a household, and that’s expensive.
Don’t let this stop you, but don’t feel guilty if you find it challenging. It is.
Do what you can and celebrate every bit you save since it will make your life so much easier later!
Coast FI depends on compound interest, so the earlier you start, the less you need upfront. Compound interest can be incredible, but it needs time to work its magic. If you start investing early, you give that money decades to grow.
If you’re older, you have less time to let your portfolio grow, but you may earn more than you did when you were younger. Or, if your kids are grown, this could free up money to supercharge your savings.
If you planned on semi-retiring instead of retiring at 65, this would give more time for that retirement portfolio to grow.
If you’re at midlife, and you’ve been saving and investing right along, Coast FI may be closer than you thought, and you may be pleasantly surprised. You don’t have as long to let the money compound, but you may have more in your portfolio to start. Being Coast FI can open up possibilities you hadn’t considered before!
Here’s an example:
If you were 45 years old, with $603,000 in investments, and you earned 5% a year (an inflation-adjusted return rate), in 20 years, you’d have $1,600,000. At around a 3.5% withdrawal rate, that would give you $56,000 a year starting at 65 years old. Combined with potential Social Security payments, and some creative frugality, not bad.
How Do I Calculate My Coast FI Number?
First, you need to know your financial independence (FI) number or the amount of money you’d need to retire.
FI number = Current (or Expected) Expenses x (1/Safe Withdrawal Rate)
Two things you need to estimate to calculate this are:
- Your annual living expenses (or expected living expenses). If you plan on retiring before you’re eligible for Medicare at 65, add in health insurance costs since it’s expensive!
- The safe withdrawal rate you feel comfortable with, typically anywhere from 3%-4%. The lower the withdrawal rate, the more conservative the calculation is.
If your annual living expenses are $45,000 and you use a 3% withdrawal rate, your FI number would be $1,500,000.
$1,500,000 = $45,000 x (1/.03)
Now you can use that to calculate your Coast FI number:
Coast FI number = FI number/ (1+ inflation-adjusted rate of return)^years of compounding
The inflation-adjusted rate of return is the return you expect on your investments reduced by an expected inflation rate. Inflation erodes the buying power of your money over time, so you always want to capture it. I’m using 5% to be conservative.
Years of compounding is the age you want to become FI less your current age. If you’re 45 now and want to retire at 67, that’s 22 years.
So for this example,
Coast FI # = $1,500,000/(1.05)^22
Type this equation into a spreadsheet such as Google Docs or Microsoft Excel, and you’ll get $512,775.
What does this mean?
If you’re 45 years old, spend $45,000 a year, and have $512,775 in your retirement portfolio, you are now Coast FI.
Again, this doesn’t mean you can retire right now because you still need to earn enough to cover your $45,000 a year in spending. But it means if you stop contributing, you could still have enough to retire on later.
Note that the results depend on your best guesses (estimates), and you should re-calculate frequently to ensure you are still on track.
What Are the Risks of Coast FI?
This all sounds wonderful, right?
But please remember that your Coast FI calculation is only an estimate. It’s meant to show you that you’re headed in the right direction.
Be careful about completely depending on it and making major life choices without a backup plan.
The first risk is that the expense number you use is too low. Be realistic about what your living expenses will be later in life.
For example, you may do all those calculations and happily decide you’re Coast FI. Then you’ll look around and see your friends upgrading their houses, their cars, and you’ll want the toys too. Next thing you know, your expenses are higher, much higher.
It’s called lifestyle creep, and it’s tough to fight. If you choose a level of spending, make sure it’s at your “enough” level, and realize it may not be easy to keep it there. Build in a buffer for unexpected expenses, like parents that need your financial help.
The younger you are, the bigger the buffer you’ll want to build into your numbers.
Another risk is that the Coast FI calculation depends on historical rates of return and inflation. Don’t forget that with higher rates of return come higher levels of risk. No one knows what the future holds, but don’t count on the plump returns we’ve been enjoying in the stock market as of 2021.
As I’m updating this in 2022, it’s looking quite possible that the next decade could bring low returns or even flat or negative returns.
It’s happened before.
As this Kiplinger article states:
“For example, the U.S. had a lost decade from the year 2000 through 2009. If one had invested a lump sum of $1 million in the S&P 500 at the beginning the decade, it would have resulted in a final balance of just over $900,000 by the end of it.”
So be as conservative as possible in the inflation-adjusted rate of return you use.
Note, there are two primary ways to “fix” low rates of return so you can still have enough money to retire on when you plan on it—you can save more money or work longer.
The safest path to Coast FI is to use your “coasting” time to find work you enjoy doing because your ability to earn money is most likely one of your most valuable financial assets.
There’s also the risk is that you’ll find yourself either wanting or needing to retire earlier than expected.
Prepare to be flexible. Instead of completely coasting, you may want to save less, not stop saving entirely.
Also, with Coast FI, you can take your foot off the gas, but you still need to earn a living.
Exercise extreme caution in planning to become a part-time (insert typically fun occupation). There’s a world of difference between working because you want to and working because you have to. That job could end up becoming a low-paid nightmare.
And once you leave the full-time grind, it will be tough to go back. Either you won’t want to go back, or employers may not want you back.
If you plan on working part-time, consider doing it as an entrepreneur, not as an employee. This way, you have far more flexibility and freedom around your work schedule.
If you’re new to freelancing or want to learn the skills you’ll need as a solopreneur, budget for online classes such as Freelance University.
What Are the Benefits of Coast FI?
The number one benefit is the sense of freedom, knowing that you’ve done most of the work to take care of your future self. Once you hit Coast FI, you have more options for your work life.
This sense of freedom can give you the confidence to find a job you love, or at least one you don’t hate. You get to pursue work that pays less money but means more to you. You get to prioritize meaning over money.
The journey to FI takes a long time, so do what you can to enjoy the journey along the way!
Here’s a sampling of the benefits once you can “coast” safely.
- Leave a high-stress, high-paying career to downshift to something with less stress, even if it pays less.
- Stop climbing the corporate ladder. Enjoy your role as an individual contributor and just say no to a stressful management job or that hour-sucking promotion.
- Pursue your dream career, the one you put aside to “earn a living.”
- Take a chance on freelance. Select only the clients you want to work with and set your own schedule.
- Work seasonally—hustling in the winter and enjoying your summers off.
- Become semi-retired and work part-time.
Coast FI can give you the work/life balance that the default plan of a traditional retirement (full-time work until 65) doesn’t have.
Coast FI is Just the Beginning
After obsessively running those Coast FI calculations, I finally quit my job.
My husband and I had lived on only half of our income for around 10 years, which did two things. It gave us a healthy savings rate of 50%, which plumped up our retirement portfolios. It also trained us to keep our expenses in check and prevented lifestyle creep from gobbling up our raises.
So, when I quit my full-time job, I knew we could afford to live on my husband’s paycheck alone.
I planned on taking a year off. Instead, I never went back to an office.
I’m using the time to experiment with different business ideas and to rediscover my passion for writing. This blog is a result, and it’s only the beginning of my new life and career.
It takes time and sacrifice, but Coast FI is well worth it!