The Appeal of Coast FI
I have been thinking a bit about Coast FI lately.
I assume that’s a normal thing for people who are well on their way in their savings journey. You’ve saved a bunch of money and you want to figure out what would happen if you just stopped saving today. You could either change jobs or spend more or whatever but the question is always out there.
For me, it’s probably because I’ve barely saved anything this year due to various expenses(house, medical, etc.) but also because I’ve reached the point in my career where coasting feels enticing and I could see myself switching jobs, making less and just being less stressed out about things.
If you’re not familiar with Coast FI then let me jump into that quickly so you know what the hell I’m talking about.
What is Coast FI?
Coast FI in simple terms is the ability to reach FI(financial independence) at a target age without further savings assuming your expenses continue to be covered and your portfolio grows with time.
In essence, you can coast in terms of savings(by not saving anymore) and still retire at your target date. The coasting in this regard is driven by the fact that you’re no longer doing the work of saving but are letting time take care of portfolio growth.
That’s the beauty of investing, as long as you have enough time and enough starting capital, you can not save at all and still have a healthy sum by the time you want to retire. Naturally, saving more helps meaning you can be financially independent faster or end up with more money. However, it’s not necessary for the concept of Coast FI to work.
In even simpler terms, once you have enough money, you can reduce your savings rate to 0 and still reach your target goal given enough time. You’ve got enough in your investment accounts today that you don’t need to save anymore and still reach your target number.
The enticing part of this is that it can often impact your mindset about the corporate rat race. Many of us are driven by that extra dollar and the prospect of saving more or buying more and change careers in order to progress, and do just that and while that can be good for some, it can also be mentally and physically draining.
For some, moving away from that never ending ladder and just coasting in your career(or even taking a pay cut) while spending more time on personal hobbies and growth can be a change that’s very beneficial to your lifestyle. In the sense, that can be another part of your life where coasting(this time in your career or work life) can be rewarding.
After all, you’re saving nothing so all you really your job to do is to cover your expenses and that may mean downsizing in terms of responsibility.
Here’s a simple example of how Coast FI works in practice.
Imagine a person who’s currently 30 and wants to retire at 50 with $2M dollars. As long as they currently have ~$429,000 in their bank account at 30 and get a market return of 8% during the next 20 years, they will end up with $2M dollars at 50 without an additional dollar saved.
That’s the key idea behind Coast FI. Once you hit a certain point, you can just coast on the wave of life and let time take you to your goal. You don’t have to do anything more, you don’t have to save another dollar and as long as the market returns are there, you’ll hit your goals.
Now this doesn’t mean this person can quit their job once they hit 30 and be OK because their expenses still have to be covered. However, the idea of Coast FI can certainly offer a variety of benefits to someone who has gotten a head start on savings and wants to know what options come next. I’ve always said the beauty of the FIRE movement(Financial Independence/Retire Early) is that it gives you options later in life and this is certainly one of those.
The Benefits of Coasting
Let’s talk about the person in the example above. Having $429,000 in your bank account at 30 doesn’t come easy for most.
It requires sacrifice, luck and a variety of other factors too.
Whether it be giving up things or experiences to maintain a high savings rate or taking on a high stress job to get the pay that allows you to do so, there’s a lot to be said about the things one may give up to get there.
That’s certainly not the case for everyone as many in the FI movement simply like living a simple life and saving a lot is a natural extension of that. However, that’s not the case for everyone.
Imagine that person above again. Let’s say she worked through her 30s in a high pressure accounting job that covered all of her expenses and allowed her to save a bunch on the side. She didn’t hate her life but she did give up quite a few things to get there and the 80 hour weeks during busy season eventually started to take a toll on her mental and physical health.
The beautiful part about the idea of Coast FI is that it allows a person to take a more moderate path to financial independence. While it may take a bit of sacrifice to get there this early, it also allows a person like the woman above to pivot into a lifestyle that is more fitting to what she wants going forward.
Let’s say she reached 30 and realized that she hates her job, she hates her life and she wants to do something different. The concept of Coast FI allows her to do that even if it means sacrificing your timeline because you’re not saving as much anymore.
Remember, Coast FI means you have enough in your investments accounts that you no longer have to save as long as your expenses are covered. In the example above, the woman might have been earning $90,000/year post-tax at the age of 30 and spending $50,000/year meaning her savings were $40,000/year.
While continuing that level of savings would mean she’d have more money faster when it comes to her FIRE timeline, it may also mean that she lives a miserable life while doing that.
What’s the solution? Well there’s a few.
For one, she can quit her high stress job and get a job that basically covers her expenses. As long as her new job pays at least $50,000/year post-tax then she should still be fine to retire at 50 because her current portfolio doesn’t require any additional savings to reach her target of $2M by 50 assuming an 8% market return.
She can also pursue a dream career without worrying so much about the fact that the entry level job she takes on pays less than her current job. Maybe even go freelance or work a seasonal job if her expenses are low enough.
Another benefit be the other side of that coin; spending more. Let’s change the story a bit and assume she enjoys her job but feels like she has missed out on a lot of experiences and travel because of her propensity to save so much. She can certainly spend a bit more without impacting her ability to FI as long as she’s not touching that portfolio.
You can also combine the two, find a less stressful job and spend a bit more. It all can work as long as that initial portfolio isn’t touched and your investments continue to grow with time.
In a world like today, maybe it’s as simple as valuing things like work at home over anything else even if it means taking a pay cut or whatever may be important to you in your job and personal life.
That’s the nice part about Coast FI and why so many people who are in this space often try to calculate their own Coast FI number because it can be very freeing and allow you to look at your job and life very differently.
After all, just knowing you have that option may make you take your job less seriously. I know it has for me as I’ve simply realized that my job is a means to an end rather quickly and find myself coasting a bit more instead of going above and beyond and trying to climb that corporate ladder with no end in sight.
It’s easy to get lost in the quagmire of saving more and spending more and aiming for a number that’s as high as possible so you can retire and live well but it’s also important to realize that you should be living the life you want right now and for some that may mean more spending or a career change.
Is This Just for the Young?
The example above assumes that a person at 30 already has a pretty big head start and often blog articles about Coast FI make it seem like the concept can only apply to the young who save a ton early in their life.
However, the concept can also help illustrate the power of compound growth in the market and drive one towards goals that don’t have to be reached when you’re 30. Still, the reality is that investing works a lot better when you start early because compound growth takes time to work its magic.
In the example above, let’s say the 30 year old person wanted to retire at 65. She’d only need $135,000 at the age of 30 to get there.
How about a 40 year old person aiming to retire at 65 with the same $2M in assets. What does that person have to have today in order for them to coast all the way to retirement? It’s $292,000 which isn’t too terrible but you can see the gap start to form as you get older.
And yes I said $292,000 isn’t too terrible but that comes from the mind of a saver. For many, that may seem ridiculous.
However, most investors should be able to reach that number. For example, someone who starts investing at 23 and saves about $6,000 in their 401k per year with a $1,500(2.5% of a $60000 average salary) employer match would have $303,000 in their account by the time they hit 40 assuming 8% growth.
At that point, they could stop investing and spend more and still hit their $2M goal by 65 assuming an 8% growth rate.
How about a 55 year old wishing to retire at 65? Well that magic number to Coast FI at 8% is $926,000 so a lot higher than the below examples which again shows the importance to starting early.
It’s clear from the above examples that while Coast FI does exist as an option as you get older, it does require you to be quite a bit along the path of savings to get there. It’s not quite so easy to get $926,000 at 55 if you’re just starting to save while it’s a lot easier to get that Coast FI number when you’re much younger and have the power of time on your side.
Figuring Out Your Coast FI Number
No matter your age, one fun thing to do is to figure out your Coast FI number.
Again Coast FI isn’t for everyone as some of us are happy with their current lifestyle/job and want to continue saving. After all saving more is always going to mean you end up with more money upon reaching your retirement age.
However, even for those that don’t want to coast, figuring out the Coast FI number can still be freeing in that it allows you to realize how far along the path you really are and it always gives you that option of slowing things down if you want.
That’s because Coast FI is basically the slower path to financial independence or retiring early. It’s certainly not the most efficient way because saving more every year will always be better but it might be the most rewarding way if the other choice is being miserable for the next ten years with the hope that once you reach that number, things will be better.
So whether or not you want to coast, it’s important to know how to calculate that number and instead of boring you with all the math behind it, I’ve created a simple google sheet you can use to calculate that number.
The sheet is right here. In order to use it, go to the upper left and hit file then make a copy and all the cells will open for your entries.
It’s a simple spreadsheet that allows you put the dollar amount you want to have to retire, your goal FI/retirement age and your current age and then your expected return.
It then spits you the dollars you need today to be considered FI. I’ve also added a current total for yourself to see how far along to Coast FI you are as of right now.
Remember, because of the power of compounding, as long as you’re currently investing, you’ll eventually reach a Coast FI number. It might not be today but it will be a few years in the future. That’s because the Coast FI number assumes no further investing so it’ll always allow an investor to catch up to it as long as they’re investing from their current total.
Most savers eventually be Coast FI but for many it may be important to reach that number earlier than later since the flexibility and peace of mind it gives you are totally worth it.
The Risks of Coast FI
Saying hey I’m going to stop saving today and just coast, spend more and/or get a lower stress lower pay job and focus on my hobbies sounds great but it does come with risks.
The most obvious one is that it assumes that you’ll continue being employed and covering your expenses for the entirety of that time period. Sure you’re Coast FI at 30 if you work until 50 and never save another dollar but losing your job in the middle of that can be a problem.
An emergency fund can limit that risk as it means you won’t be touching your investments but a long term job loss may also put you at risk of having trouble finding a job which covers your expenses leaving you with an option of cutting back on your costs or worse yet touching the portfolio which is a big no-no for this to work.
On the other side, if you continue saving, you’re always creating a buffer that will mean you have more money earlier and even later when you hit 50. That may mean the risk of job loss is muted since you have more money earlier.
For example, the woman above who was Coast FI at 30 with her $429,000 would reach $2M by 50 with no further savings. However, if she stayed in her job and continued to save $40,000/year she’d have $2M by the time she was 42 and end up with $4.3M by the time she was 50.
That’s a big difference and means she could have retired earlier if she kept saving(maybe a trade off worth making) and/or retired with a much bigger cash cushion when she hit 50.
That cash cushion is another risk you have to keep in mind. All this assumes that your expenses will remain constant through the years and if you experience lifestyle inflation or have some unexpected costs, your $2M at 50 may not be enough.
A 3.5% withdrawal rate at $2M means she’d have access to about $70,000 per year to spend whereas if she kept working in her current job, she’d have over $150,000 per year to spend(or she could have retired 8 years earlier).
If that $70,000 is enough by the time she’s 50 then she’s all set but given inflation and unexpected expenses, it may not be. She could stretch the withdrawal rate to 4% as many do but if that number still doesn’t do it then maybe she’ll have to work a bit longer to cover her new costs.
If she’s in her dream job then it might not matter but for some working longer might be a dreadful experience if they dreamt of a getting out of the rat race at a certain age forever.
Again, these are all personal items because maybe working 20 more years in that accounting job would have been absolutely awful and finding a new lower paying job would have been amazing. On the flip side, maybe sticking out with the accounting job to retire 8 years earlier would have been worth it.
It’s easy to quantify the numbers but much harder to quantify the quality of life changes that may come with these decisions.
It can also be harder to make changes to your FI plan if you Coast FI. Let’s say you decide you decide to coast at the age of 30 but change your mind at 42 thinking you want to exit with more money and start saving again. Those savings are worth a lot less than the savings at 30 due to the compounding nature of returns. Maybe it was worth it to spend more in your 30s but maybe it wasn’t. Again, personal choices.
On the same front, if you change jobs and start coasting and realize every job sucks and you just want to make as much money as possible, it can be difficult to get back into certain industries once you’re out of them for a few years.
Another huge risk is the assumption around returns you have to make in order for this to work. I assumed an 8% return which is in line with historical market returns(~10% minus ~2% inflation) but perhaps that number is much lower going forward given the market returns we’ve seen in recent years and where market prices lie today.
If the market returns are much lower then you may find yourself working a lot longer. This would be an issue for many since all FIRE scenarios are based on expected returns but someone saving consistently would certainly be better off than someone coasting.
Overall, these risk are real but may be worth it for many. In either case, if you’re even thinking about Coast FI and are anywhere near your Coast FI number then you’re much better off than many and can certainly feel well about your investing journey.
The Overview of Coast FI
In the end, Coast FI is just one retirement path of many in the financial independence/early retirement journey.
In simple terms, it’s defined as the point in your journey where you have enough money in your investing accounts that you no longer need to save anymore to reach your target number as long as expenses are covered.
It can be a good target to aim for even if you’re not planning to downsize your life or career as it gives you a feeling of freedom and choice when that number is reached. You can calculate yours here(file-make a copy to edit).
If Coast FI is the path you choose, you can have the benefit of losing the need to climb that corporate ladder, change jobs to a more rewarding one or spending a bit more because your focus is no longer on savings but enjoying the things that may matter to you.
If Coast FI is not the path you choose then you still want to know the number because your view on life may change. Knowing where you are can also make years where you’re not saving much a lot easier to deal with and it may make you feel more comfortable about taking that once in a lifetime trip even if it costs a lot. After all, once you hit that number, you’re well on your way to the retirement you want even if you don’t save as much.
Many people can get trapped in that loop of spending too much or saving too much and it’s important to realize that the journey should be one of balance. Saving is important but so is enjoying life today because you never know what’s around the corner for you.
For me, I’m still saving even though I’m a bit above my Coast FI number already. Right now, I don’t hate my job right now and don’t necessarily find the need to spend a lot. However, I have found myself slowing down at work and coasting a bit more simply because I have a better sense of security these days than I had before. I know I don’t have to climb the corporate ladder to get where I’m going and can focus on things that are more important to me. And for me, 100% of those things are outside of work.
Knowing that I’m Coast FI and growing that number still with a combination of savings and growth is a good mental reminder of the successes one can have on this journey. It also makes years like this one where I’m barely saving anything a lot easier to deal with and helps me realize that spending money on things that bring you joy and value isn’t the worst thing in the world.
After all, once you hit that number, the market gains are even more powerful than the amount you can save most times and that’s the entire idea of why investing works and how a concept like Coast FI can exist.
That’s the beauty of investing and why it makes sense to save as much as you can early on because it gives you a lot of options as you get older. That’s really what Coast FI is about. It’s an option and a powerful one for many who can make that choice but even those who don’t can benefit from knowing their number.
So I’ll as you, how far along to your Coast FI number are you?