Coast FIRE is, by far, the easiest way to achieve financial freedom. Do you dream of a life where you can pursue your passions without financial stress? If so, then Coast FIRE might just be the path for you. This is especially true if you are relatively young (in your 20s or 30s) and have time on your side.
Let’s start by understanding what Coast FIRE is.
Coast FIRE, or Coast Financial Independence, refers to reaching a point where you have funded your retirement early and can stop contributing to it with the plan of letting compound growth do the heavy lifting. This allows you to “coast” towards full financial independence without actively adding more money to your investments. This allows you to stop saving so much for retirement and start enjoying life more now.
If you are in a demanding job that is leading to burnout, you could switch to a part-time role or a more flexible career that you enjoy as long as it covers your living expenses. For parents, down-shifting into a less demanding job would free them up to spend more time with their children. So Coast FIRE may appeal to young people who plan on having children in their 30s and want to get their retirement nest egg funded. Then, they can work less and focus more on family.
I didn’t know there was such as thing as Coast FIRE, but this is pretty much what I did. I put as much as possible into my retirement accounts in my 20s and 30s. Then I got married and had two children at ages 39 and 41. And, my husband and I switched to working part-time ever since. In the background, the retirement accounts were quietly compounding while we focused on doing work we love (the wonderful career of being a life coach) and raising a family.
Now, let’s dive into a step-by-step plan to help you achieve Coast FIRE!
1. Define Your Financial Goals:
Begin by clearly defining your financial goals. How much money do you need to cover your expenses each month? Which expenses are essential and which are discretionary? What are your long-term financial aspirations? Having a clear vision will guide you and help keep you focused.
2. Calculate Your Coast FIRE Number:
The next step in your Coast FIRE journey is to determine your Coast FIRE number. This number represents how much you need to invest to fund your retirement. It’s important to calculate this based on your current expenses and your estimated future financial goals and expenses. (Make sure to consider inflation in your plan because $50,000 may need to be $100,000 by the time you retire fully to keep your lifestyle intact.)
Use online calculators or consult with a financial advisor to get an accurate estimate. Or you can use the 4% rule as a basic guideline and plan to have 25 X your annual living expenses invested for retirement.
The formula for Coast FIRE is: A /(1+r)^t where:
A = the amount you need to save to be financially independent (FIRE)
r = your annual rate of return after inflation
t = the number of years investments have to compound
3. Maximize Savings and Investments:
Start saving and investing aggressively to build your Coast FIRE fund. Focus on reducing expenses, increasing your income, and channeling a significant portion of your earnings into high-return investments. These may include index funds, real estate, 401K, or retirement accounts.
4. Monitor and Adjust:
Regularly review your progress. Track your savings rate, investment performance, and overall financial health. Adjust your strategy as needed to stay on course and make improvements where possible.
5. Transition to Coast FIRE:
Once your investments reach your Coast FIRE number, you can transition to Coast FIRE. This doesn’t necessarily mean retiring early, but rather shifting your focus from accumulating wealth to enjoying financial freedom while maintaining a sustainable lifestyle. The plan assumes you’ll generate some income to cover your expenses. But you won’t need to keep funding your retirement accounts and can now afford to work part-time or pursue your ideal career.
Now, let’s explore some real-life examples of how individuals have achieved Coast FIRE:
Lucinda’s Story: Lucinda, a marketing consultant, diligently saved and invested throughout her career. By her early 40s, her investment portfolio had grown substantially, reaching her Coast FIRE number of $350,000. She decided to scale back her work hours, allowing her to spend more time with her family and pursue her passion for photography. Lucinda’s disciplined savings and smart investment plan paved the way for her to achieve financial freedom while enjoying a fulfilling lifestyle that earns sufficient income to cover her expenses. And, her nest egg to continues growing in the background.
James and Emily: James and Emily, a couple in their early 40s, focused on aggressive savings and investments to achieve Coast FIRE. They set their FIRE number at $1.2 million, based on their desired lifestyle and future plans. Through frugal living and smart investment choices, they reached their Coast FIRE goal within 10 years. Now, they enjoy a flexible work schedule, pursue travel adventures, and are active in their community, all without financial worries.
Michael’s Strategy: Michael, a software engineer, had a passion for real estate investing. He started acquiring rental properties in his late 20s and reinvested the rental income into additional properties. By his mid-40s, his real estate portfolio generated enough passive income to cover his living expenses, achieving his Coast FIRE number of $800,000. Michael now enjoys a comfortable lifestyle and continues to grow his real estate investments.
Are there any risks involved with Coast FIRE?
While pursuing Coast FIRE can be an effective strategy for achieving financial freedom, it’s important to be aware of the risks associated with this plan. Sam Dogen, who writes the popular Financial Samurai blog argues against Coast FIRE and thinks it isn’t safe enough. He worries that there are too many unknown variables for it to be an effective plan.
I agree that there are many unknowns, but life is full of unknowns. And it would be a shame to waste your life doing work you don’t enjoy while waiting until retirement to start living happily.
Coast FIRE isn’t for everyone. It depends on your temperament and your spending needs which will change throughout your life. However, if you feel that the standard FIRE is too far out of reach to even attempt, then Coast FIRE may be your path to financial freedom. (And even Sam Dogen admits that Coast FIRE is a better plan than no FIRE plan at all!)
Here are some potential risks to consider:
Market Volatility: One of the primary risks of Coast FIRE is market volatility. Since your investments are funding your lifestyle without additional contributions, fluctuations in the stock or real estate markets can impact your financial stability. A significant market downturn could reduce the value of your investment portfolio.
Since Coast FIRE assumes you’ll be doubling your money regularly through compounding, if your investments fail to compound over some time, this could dramatically reduce the sum you were expecting. If you were hoping to get a big final doubling (say from $500,000 to $1,000,000) in the last 10 years before retirement and instead your investments remain flat, you may have to continue working longer until your investments recover.
Of course, if this does happen you have options. You closely monitor your investments and if things are flat you can take steps, such as adding to your retirement funds to help them along. I also use a system to help mitigate risk at Allocate Smartly.
This is why I’m not so worried about Coast FIRE. You don’t set it and forget it entirely. There is nothing to stop you from topping up your funds throughout your life. Even if you drip-feed a small sum into your retirement accounts this can help ensure you have enough money. (I’d also pop any inheritance into the retirement accounts as well if you are lucky to have one!)
Inflation: Over time, inflation erodes the purchasing power of money. If your Coast FIRE plan is based on a fixed amount of investments to cover expenses, inflation can gradually increase your cost of living. Of course, rampant inflation can derail any retirement plan so this isn’t a risk exclusive to the Coast FIRE plan.
Unexpected Expenses: Life is unpredictable, and unexpected expenses such as medical emergencies, major home repairs, or job loss can disrupt your Coast FIRE plan. Without a sufficient emergency fund or backup plan, you may need to dip into your investments, impacting your long-term financial security. Again, this is a risk common to all retirement plans, not just Coast FIRE. So, turbo charge your savings and get your emergency fund set up ASAP.
Longevity Risk: Coast FIRE assumes that your investments will continue to generate enough income to sustain your lifestyle for an extended period, potentially several decades. However, if you live longer than expected or encounter health challenges that increase expenses, you may outlive your resources. (Another risk associated with all retirement plans.)
Healthcare Costs: Healthcare expenses can be a significant financial burden, especially as you age. Without adequate healthcare coverage or contingency plans for healthcare costs, your Coast FIRE plan may be at risk. Many people keep working until 65 when their Medicare benefits kick in for this reason.
To mitigate these risks and ensure a successful Coast FIRE journey, consider the following strategies:
Diversify Investments: Spread your investments across different asset classes to reduce exposure to market volatility. This can include diversifying your assets into stocks, bonds, real estate, commodities, and gold. Also, you may want to consider diversifying by investment strategy (see Allocate Smartly for different strategies).
Build an Emergency Fund: Maintain a separate emergency fund to cover unexpected expenses and avoid tapping into your investments unnecessarily.
Plan for Healthcare: Factor in healthcare costs in your calculations and explore options such as health insurance, long-term care insurance, or health savings accounts (HSAs) to manage healthcare expenses effectively.
Regular Monitoring: Continuously monitor your investment portfolio, expenses, and overall financial health. Regular reviews can help you identify potential risks early and make informed decisions to protect your financial well-being. Be prepared to adjust your spending and lifestyle if needed during economic downturns or unexpected life events.
What are the major benefits of Coast FIRE?
Early Financial Independence: One of the primary benefits of this plan is the option to achieve financial freedom at a relatively young age. You gain control over your time and can orient your life around priorities other than work.
Reduced Financial Stress: Coast FIRE provides a financial cushion that reduces or eliminates the stress associated with paycheck-to-paycheck living. Knowing that your investments are growing in the background allows for greater peace of mind and a sense of financial security.
Flexibility and Lifestyle Choices: Coast FIRE enables individuals to make lifestyle choices based on personal preferences rather than financial constraints. The plan offers the flexibility to design a life around the things you value and most enjoy. For aspiring entrepreneurs, Coast FIRE can serve as a safety net to pursue business ventures or creative endeavors without the pressure of generating a full-time income. It provides the freedom to take calculated risks and explore opportunities.
Financial Resilience: Coast FIRE encourages financial resilience through disciplined saving, investing, and planning. It prepares individuals to navigate economic uncertainties, unexpected expenses, and retirement challenges with greater confidence.
Overall, Coast FIRE, like traditional FIRE, offers a pathway to not only financial freedom but also a richer, more fulfilling life with a healthy balance between work, leisure, and personal goals. FIRE can empower you to live life on your terms and create a legacy of financial well-being. Chart your course for FIRE today and embark on a fulfilling financial journey!
Don’t just dream of early retirement—make it a reality with my FIRE course.
