First, Let’s Talk About Financial Independence (FI)
It’s no longer appealing for some to pursue the traditional mindset of working for 40+ years,then retiring when you’re too frail to really enjoy what’s left of life. This is where achieving financial independence (FI) and Coast FI becomes extremely valuable.
FI iswhen your savings and investments can indefinitely sustain your lifestyle. This allows you to design your life exactly how you would like, pursue passions as they come and go, and even have the option toNOTwork.
FI allows you to retire early, making the full acronym of financial independence retire early (FIRE). We go into many more details on the FIRE movement in this post: What is FIRE?
The FIRE community encompasses a spectrum of different FIRE ideas. Each type of FIRE (Coast, Barista, Lean, Fat) share a core principle of achieving financial self-sufficiency.
The rate you accomplish them, and how much money you can spend during retirement are what separates each of these types of FI.
Check out our deep dive comparison of the different types of FI to learn more.
This post will be focusing in on Coast FI, which is a type of FI we were able to achieve in our 20s.
So What Is ‘Coast’ FI?
Reaching Coast FI means that you have saved enough for a retirement before traditional retirement age. This is done when you front-load your retirement savings to a point where the compound interest is projected to reach your traditional retirement needs.
You could say you are ‘coasting’ to retirement.
Without the need to contribute one more dollar to your retirement accounts, this would give you the freedom to spend your money and time how you choose. Many people consider this ‘semi-retirement’, as you only need to cover your living expenses.
The beauty of Coast FI is the time and choices it provides. What you do with these two things is ultimately up to you!
What Is The Difference Between Coast FI and FIRE?
The core principles of Coast FI and FIRE are the same:
- Drastically increase your savings rate
- Invest savings in low-cost index funds
- Live off the growth of your stock portfolio
The biggest difference between FIRE and Coast FI, however, is the amount you save. Coast FI requires less than traditional FIRE, so you can achieve it sooner!
Also, with Coast FI, your daily expenses still need to be covered until you reach your retirement age. FIRE, instead, allows you to COMPLETELY leave the workforce when you hit your “FIRE number”.
Another caveat with Coast FI – you can retire early, OR you can retire at the traditional age of 65. It depends on your preference! All this means is you choose when to take the foot of the pedal for saving and investing.
Because of this, the terms Coast FIRE or Coast FI can be used. With Coast FI (not retiring early), you still achieve financial independence by saving and investing, but you may not have the goal of completely exiting the workforce before the traditional retirement age.
We personally use the term Coast FI.
Coast FI is kind of like being semi-retired. You no longer need to aggressively save and invest your money for your future retirement. Instead, you only need to worry about covering your current cost of living.
This frees you your time and money to devote to things you really value.
The Benefits Of Coast FI Compared To FIRE
We are big proponents of Coast FIRE and Coast FI. We believe they give more short-term flexibility than FIRE, and they give a similar “financial relaxation” feeling when you achieve your Coast FIRE/FI number.
Here are the benefits of Coast FI compared to FIRE:
- Can be achieved much sooner in life (about 2-5 years, versus 5-20 years)
- Offers a balanced perspective on life
- Flexibility to travel or pursue passions during younger years
- Retain the purpose and motivation that a career gives some people
- More money to spend in the present
When you commit to Coast FI, you let compound interest do the heavy lifting for your future retirement. If you save diligently in a short amount of time, you could coast to retirement after a few short years.
FIRE requires diligent saving for a longer period. Even with a high savings rate of 70% (most Americans can’t even hit 10%), it takes almost 9 years to hit your FIRE number.
Try out this early retirement calculator and enter different savings rates to see how quickly you can reach retirement.
Also, be sure to read our post to learn why savings rate is so important for early retirement.
Once you have achieved your Coast FI number, you don’t have to save as vigorously. It took us 3 years of focused saving and investing to reach our number. Now we can work just enough to sustain our current lifestyle. We know our future needs will be met!
A problem with traditional FIRE is that it transforms savers into misers. It takes a total lifestyle change to save +50% of your income for so many years. Some people can never mentally return to a “life of spending” – what’s the point of money anyway?
We at Not Your Ordinary Plan (NYOP) believe the Coast FI mentality escapes this problem. Any money that you don’t spend at the end of the month can be used for travel or hobbies.
Plus, you don’t have to feel guilty about spending this money. You have already done your due diligence and saved for retirement. You can truly live in the moment!
How Do I Know If I reached Coast FI?
Coast FI has its own “number” that you can calculate, like the FIRE number. It’s trickier than the FIRE formula, however, because your time until retirement comes into account. We’ll go over the FIRE number first because it’s used to calculate your Coast FIRE number.
Your FIRE number can be calculated from this equation:
- FIRE Number = Yearly Expenses X 25
The equation for Coast FI looks like this:
- Coast FI Number = FIRE Number / [(1+Expected Growth Rate) ^ # of years until retirement]
As you can tell from the formula, Coast FI is calculated from three main things:
- Your yearly expenses
- When you want to retire (can be early, or not)
- The expected growth of your investments (we assume 6%, which is inflation adjusted)
So, how much do you need to reach Coast FI?
Let’s crunch the numbers for Sally, a fictitious 25-year-old expecting to retire at 55. For this example, Sally has a FI number of $1.5 million based on her $60,000 yearly expenses.
A small detail to remember with this equation is it represents Sally’s Coast FI number at that moment. If it takes her three years to save this amount, the goal post will have shifted a bit because she is closer to retirement age and has less time for compound interest to work its magic.
When Sally has $261,165 invested in index funds, then she has reached her Coast FI number.If you want to learn why we use index funds as a vehicle for retirement, read our post, Why You Should Invest In Index Funds.
Our Favorite Coast FI Resources
To make things easier, we use The Fioneer’s Coast FI Calculator, which is a free resource they provide to help you calculate your own Coast FI number. Money Flamingo has a Semi-Retirement Calculator that we also found very helpful.. and it’s a free resource!
We highly recommend their calculators and to read up on their content, as we were personally inspired by both of these bloggers when we first discovered Coast FI.
How Do I Achieve Coast FI?
Achieving any type of FI requires financial knowledge, discipline, and time. We have many posts on how to set realistic financial goals, stick to crucial financial habits, and the importance of increasing your savings rate to achieve FI.
We have even curated an optimized flowchart for how to achieve Coast FI or FIRE through investing. You can quickly know Where Your Next Dollar Goes. We even made an acronym for it, WYNDG (pronounced win-dig). You can check out the full article here: Order of Investing: How We Save For Retirement.
This flowchart can be used for any desired form of financial independence, too. So if you’re more interested in total retirement before 65, like what FIRE offers, you can still use this strategy to save and invest more.
Here is a summary of our optimized order of investing (follow in order):
There are a few more rules than what we listed, like making your minimum payments on your mortgage or credit cards every month. For more details, be sure to check out our order of investing post.
What Can I Do With Coast FI?
Imagine you have reached your Coast FI number. Based on your hypothetical calculations, you have 20 years until you fully retire. What can you do with your financial independence?… Follow your dreams!
This is a dream I’ve had since lunch, and I’m not giving up on it now.
Michael Scott
Just like Michael Scott from The Office, you don’t have to give up on your dreams. You no longer need the full time grind to sustain your daily living.
Now you can spend that extra time learning how to start a blog, spending more time with family, improving your physical fitness, or learning to surf in Bali. You can even choose to take a work sabbatical, or drop your work hours to part-time.
Financial independence will give you stability and peace of mind to pursue activities outside your work – unless you really love your job. You can still do that, too, but on your terms!
Reaching Coast FI is a similar feeling to having your first big emergency savings. You know all of your deductibles are covered, so finances don’t even cross your mind if an emergency happens.
This feeling – financial relaxation – is a powerful way to remove stress from your life. Your future self has been taken care of. Now you can focus on your present self.
Downfalls of Coast FI
The Coast FI retirement strategy has some downfalls, unfortunately. It’s not as lavish as Fat FIRE, and you can’t fully retire like Lean FIRE. Weigh your options and compare a Coast FI lifestyle with other types of FIRE.
The biggest drawback is you don’t get to quit your job as soon as you hit your Coast FI number. This IS the case for FIRE – hitting your number means full-on retirement, right now.
You still need to work to sustain your lifestyle, but for many people that just means cutting back on hours worked, or finding a job you love more even though it pays less. It could also mean seasonal work.
Another potential flaw of Coast FI is you are subject to the stock market’s ebbs and flows. Naturally, the stock market will go through cycles. If you are an emotional investor, it can be tough watching your portfolio drop 20% in a week span. Remember, the stock market is actually MORE predictable over longer timeframes (people usually think the opposite).
Coast FI is a type of financial independence designed for the long-term. If you can stay the investing course and buy (instead of sell) during market lows, you can make your investments grow with less effort.
You must also keep a diverse portfolio. This means finding an ideal ratio of stocks, bonds, and cash that can weather any financial storm.
A final obstacle is finding a balance of spending and saving. Your spending habits will undoubtedly change during your life. Coast FI requires you to anticipate your spending many years in the future, and make many assumptions on the matter.
We Reached Coast FI In Our 20s
It took 3 years to reach our Coast FI number in our 20s after we made it a financial goal. We didn’t expect to hit our goal so quickly, but that is the power of consistent saving and compound interest.
Achieving a savings rate of +50% is a quick strategy for reaching FI. We persistently saved 70% of our annual net income to hit Coast FI. If you want to learn more about why a high savings rate is crucial for an early retirement, check out our post here!
Reaching our Coast FI number has done some amazing things for us. Not only do we feel financially secure, but our mental health gets a positive boost knowing our future looks bright.
Of course nothing is guaranteed, and we cannot predict the future, but our strong financial habits with saving and investing money will always stick with us.
We can now spend more time developing relationships, practicing pickleball, or perfecting a new steamed bao bun recipe. There is no regret with how we spend our time.
Any time we feel the travel bug bite, we know we can take the time away from work to fly around the globe or take a work sabbatical. We don’t feel tied down by our employers or chained to the salary they pay us.
We believe that achieving this type of FI is within reach for those who put in the hard work to save and invest money consistently.
So Why Is THIS The Best Version Of FIRE?
We believe the worst case scenario after achieving Coast FI is returning to our old jobs. If we try Coast FIRE and fail, we can always go back to work.
Our plan B is everyone else’s plan A.
And realistically, you can return to work part-time before you drain your savings to literally nothing. Nobody makes a new plan in retirement after they realize they have zero cash left. The plan adapts, and spending habits would change before that point.
If we didn’t save enough, we at least enjoyed our travels during our younger years. We’ll have plenty of fun stories to tell our new coworkers, though!
Conclusion
The benefits of Coast FI span well beyond the financial aspect. It can give you emotional, mental, and temporal freedom. You can gain a new flexibility with your work-life balance.
Reclaim your time – live out the dreams you’ve had since lunch (or however long)!
Go out there and make a plan A that nobody expects! Your plan B can be everyone else’s plan A.
Check out our Other Posts!
- Barista FIRE: How to Semi-Retire Early and Enjoy Life
- Coast FI in our 20s: The Best Type of Financial Independence
- How To Invest Your First $1000 (So You Can Retire Early)
- Simple Investing Tips For Beginners
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