What is Coast Fire? The I’m Done Saving for Retirement Plan
What is Coast FIRE?
Coast FIRE is a lesson in the present value of future money. There are a lot of new phrases within the FIRE community. Lean FIRE, FIRE, Fat FIRE, and Barista FIRE describe versions of Financial Independence. The basics are all similar. Each attempt to answer the question, how much is enough?
I like this newer term I’ve stumbled upon, Coast FIRE. Bloggers describe or define this term in different ways. They’re all driving at the same concept. The present value of future money.
Money invested in the stock market compounds over long periods of time. Compound interest builds upon the previous principal balance. That 5% return creates a bigger and bigger principal return as time goes on.
Let’s look at an example.
Let’s say you invest in the stock market and get an average 5% annual return. If you’re able to save and invest enough money early in your working career, you may be able to stop saving someday soon. Imagine that. One day you do the math and realize you can stop saving for retirement. Without adding more dollars to your 401(k) you can still hit your goals.
You can take your foot off the gas, and let compound interest do all the heavy lifting. After that, you can “coast” until your target early retirement date. The first thing we need to figure out: how much do you need to save to “retire early?”
Definition of Coast FIRE
I’ll start by proposing a definition for coast FIRE:
“An amount of money invested by a target date, so you can retire early without saving any more money.”Simple Money Habits
This can be a day early, or a decade early it depends on the individual’s goal.
Fellow blogger over at brewingfire.com has a similar definition.
Calculating your Coast FIRE date
Let’s calculate your coast FIRE date. Let’s say your projected annual expenses in early retirement will be $50,000 per year. You plan to target a safe withdrawal rate is 4%. That means you’ll need a portfolio balance of $1.25 million to FIRE.
In the first example, we’ll assume you retire early at the age of 65. Many might think that’s the traditional age, but for you that’s early. In the second example, we’ll move that age up to 55.
Ok, let’s say you’re 30 years old and you’ve been savings $15,000 per year since you started working at the age of 22. Your stock portfolio’s annual real return averaged 5% per year during the past 8 years. You expect this real rate of return to continue into the future. That’s a reasonable assumption based on historical data.
If you continue to save $15,000 dollars per year, you can stop contributing to retirement when you turn 35 years old! You’ll have an investment portfolio worth about $308,678 and that should do the trick! $308,678 invested with an annual real return of 5% will grow to $1.25 million dollars by the time you turn 65 years old. This is why you need to start investing early!
Habit #4 “Invest the difference and be an owner of assets” is crucial to long-term success.
In this example, you’ve saved and invested $210,000 from the age of 22 to 35 and then stopped. You can now “coast” throughout the rest of your working career.
What if you want to retire at 60 instead of 65? Let’s take a look! If you invest $15,000 per year, you’ll need to keep that up until your 42 if you want to call it quits at 60.
Just to recap, this exercise is useful once you start tracking how much you invest. It’s similar to the crossover date made famous by your money or your life. It’s a projection to determine when you can stop saving for retirement based on future expenses. If you’re able to increase your savings, at an increasing rate you’ll speed up your timeline. Let’s move to the next exercise, which I find more useful in the planning process. Calculating goals or coast FIRE milestones at different ages. If you’re able to hit one of these milestones, then that’s your Coast date!
Calculating your Coast FIRE amounts
In this example, we will show that coast fire is the same concept as the present value of money. Ok so, let’s restate the assumptions from our previous example.
- Projected annual expense: $50,000
- Safe Withdrawal Rate: 4%
- FIRE Goal: $1.25 million
- Annual Real Rate of Return: 5%
Below are your Coast FIRE numbers. If you’re able to save any one of these amounts by the corresponding target age, you can stop saving for retirement. Nada penny more will be required if your investments grow at 5% per year. Let father time take the wheel and coast you into retirement.
Think about how amazing it would feel to be 35 years old and be “done” with retirement savings. You got $289,222 invested in an all-stock portfolio, you’re reasonably sure the world won’t end over the next 30 years. Retirement planning? Check. Go find something else to worry about in life. Now stopping retirement savings altogether may not be wise!
Remember you still need to earn an income and pay for your monthly expenses for the next 30 years. The point of this model is to quantify the milestones at defined periods of time.
The chart above shows the PV of $1.25 million dollars at different ages. If your portfolio is at or above these numbers, you’re on track to coast FIRE.
Coast FIRE vs Barista FIRE
Barista FIRE as I described in this post, is about continuing to work after you reach FIRE. I view Barista FIRE as a strategy to generate income while working a lifestyle job. This income also reduces risk by lowering the withdrawal rate from my portfolio. Being and feeling productive are important elements of the FI lifestyle.
The Value of Coast FIRE
- By setting and pursuing your coast fire numbers, you’ll develop incredible habits!
- Building wealth is all about earning, saving, and investing for the long term.
- If you achieve a Coast FIRE milestone, you now have options.
- You can continue to invest and retire early than originally planned.
- You can continue to invest and increase the amount you plan to spend in retirement.
- You can find a different job that provides more satisfaction and enjoyment.
- You now understand the concept of the present value of money.
I’ve reached Coast FIRE, now what?
Celebrate your financial success! Reaching this milestone is a huge accomplishment. You’re among very rare company. Do a little google research on the average 401(k) balance for Americans by age group, it’s scary. Coast FIRE happened to me when I was 27 and never heard of the phrase at the time. I was calculating my networth one more and I realized I had $700,000 invested in my brokerage account.
I was fully coasted. I thought to myself, I’m pretty sure I don’t need to save anymore for retirement. Here’s the math I did that morning.
- Current Portfolio Value = $700,000
- Annual Real Rate of Return: 5%
- Additional Contribution = $0
- Years to Retirement Age = 38
Like any good dumbass 27-year-old male, I decided to take a vacation and reflect on my go-forward plan. I booked a weekend at the Ritz down in Florida and took a sojourn to figure out what I was going to do. It was during that trip that I stumbled upon this thing called the FIRE movement and I never looked back.
Here are a few things that happened next:
- I took a scheduled break from savings, aka I loosed up the purse string for the next 3 months. Nothing too crazy, but very different than my normal spending on a monthly basis.
- I promised myself I would spend mindful and think about the value of my increased spending.
- I began tracking my spending by category. What a tool that has been!
- I realized I didn’t feel that different after spending all this money. Life wasn’t that much better. I didn’t feel that much better on a typical day.
- My life was pretty much the same, less the shame and regret of all the extra spending
Being mindful when you spend money is so important! This experience taught me, that you don’t need that much stuff. Stuff stink. The feeling of financial security, that’s awesome. That feeling changed my life.
If you already hit your Coast FIRE number look at FIRE or FatFIRE. Raise the bar and pursue harder goals! Consider taking a career risk. Your financial security is leverage. This could be a better-paying job, a job with more opportunities, or a job that you’re more passionate about.
Still on your FIRE journey? Check out the list of habits that helped me achieve financial independence at 32 years old!