What’s Coast FIRE? (My favorite flavor of financial independence)
Coast FIRE (financial independence, retire early) is the early retirement milestone reached once you have enough money invested so that even if you never contributed another dollar, you’d still have enough to pay for your future retirement. In practice, it works by front-loading your investment contributions as much as possible while you’re young(ish). Then, you let compound growth do the heavy lifting for you while you coast to full retirement.
Coast FIRE is considered an “early” early retirement milestone. Assuming you still have time to let your money grow, you’ll reach Coast FIRE well before you achieve the ability to fully retire. Before we explore Coast FIRE any further, let’s establish that full retirement is an amount of money you have saved and not necessarily an age.
How to Calculate Your FIRE Number
So, how much do you need? If you plan to fully retire (early or not), you’ll want to have at least 25x your annual expenses stashed away. This amount of money enables you to withdraw 4% per year from your investments and feel reasonably certain you’ll never run out of money.
This strategy is known as the 4% Rule and could be considered a religion to some. Covering the 4% rule could be a series of blog posts itself. What you want to understand for now is that researchers have found that 4% is the maximum, magical “safe withdrawal rate” that enables you to live off of your investment portfolios while being reasonably certain you’re not going to deplete them for at least 30 years. In other words, if you want to sustainably harvest money from your investment accounts, 4% a year is the most you should take out so you don’t kill the plant.
Our calculation of 25x annual living expenses is born from the 4% rule. It tells you the amount of assets needed to support your annual living expenses without going over your 4% safe withdrawal limit.
FIRE Number = 25 * Annual Living Expenses
Example: If you spend $100,000 a year, you will reach financial independence when you have $2.5MM in investment assets. (25 * $100,000 = $2.5MM)
How to Calculate Your Coast FIRE Number
You’d reach Coast FIRE much sooner than full FIRE assuming you 1) are willing to consistently invest your money, and 2) you still have time to let it grow. You’ll still need $2.5MM available to retire if you want to spend $100,000 a year, but you’re using time in the market to your advantage. Really, it’s a super simple time value of money calculation where “future value” is your FIRE number calculated above. The “present value” of this equation is your Coast FIRE number.
Coast FIRE Number = FIRE Number / ((1+R)^n)
In this calculation, R is the rate of return you anticipate earning. I would use somewhere between 5-7%. (Anything higher is risky business, especially if you are not explicitly growing your future expenses by inflation.) Variable n should be the number of years you are willing to let your money stay invested. In other words, subtract your current age from the age at which you want to fully retire to get n.
Example: You plan to spend $100,000 a year in retirement, putting your full FIRE number at $2.5MM. You’re 40 years old and plan to fully retire by 60, giving you 20 years to let this money cook. You’ll reach Coast FIRE once you have $779,512 invested for retirement. ($2.5MM / ((1+6%)^20) = $779,512)
Here’s one of my favorite Coast FIRE calculators on the internet. What do I like about it? You can bake in an inflation rate and customize your investment return. I also appreciate that it measures how long until you reach your Coast FI goal, helping you create a gameplan for the next several years.
So, you’ve reached Coast FIRE. Now what?
Some of my clients are delightfully surprised that they’ve already reached this milestone when we begin planning. By consistently saving into investment accounts, especially when you’re in your 20s and 30s, it’s entirely doable. Here are different paths to consider if you find yourself coasting (had to) in this boat.
Technically, you could stop contributing to your investment accounts, but in practice, most folks don’t stop this unless they’re making another major life change. In fact, hardcore FIRE enthusiasts poke fun that Coast FIRE isn’t a true financial independence milestone, partly because the only thing that changes is you can stop contributing to your investments…but no one actually stops contributing to their investments. You could be giving up substantial tax savings by stopping, so if you plan to keep working and have the extra cashflow, keep contributing.
Example of tax savings: You regularly max out your 401(k) plan with $23,500 of Traditional (pre-tax) contributions. You’re in the 22% tax bracket. By stopping your investment contributions, you’ll pay an extra $5,171 in taxes over the year.
But let’s say you’re looking to make a major life change, and that’s why you were gunning for Coast FIRE in the first place. Pausing investment contributions can take a major line item out of your budget. Your job at this point shifts to earning just enough to fully cover your living expenses and taxes. This might give your family flexibility to go down to a single income, which has appeal to those of us with small, expensive chaos-goblins. Just like all the old ladies tell you at the grocery store, they aren’t little for long. Others use the newfound flexibility to take a risk, like starting that business, or to do more purpose-driven work that pays the bills but little more.
Finally, if you’re not looking to make a major life change, you can always use Coast FIRE to give yourself permission to start saving for other goals beyond retirement. This might look like shifting some of your retirement contributions (but perhaps not all) into college savings for your kids. Even more fun, it could be saving for a down payment on a home or a needed career sabbatical.
Coast FIRE Means Flexibility
I’m a strong believer that this flavor of financial independence is the most useful for normal families. Your average person is still thinking of retirement as an age and not as an amount of money you save. Coast FI literally answers the big question ‘How much must I save for retirement?’ with a real number.
No matter what you decide to do once you reach your goal, know that you’ve earned yourself major financial flexibility. Saving for retirement sometimes feels a little bit like saving for an entirely different person, because it seems so far away. Coast FIRE lets you enjoy some of the benefits of your hard work now, during the years when you’re still able-bodied and you might need the time flexibility the most.
Related Post: How I Reached Coast FI Before Motherhood
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.