The FIRE (Financial Independence, Retire Early) movement has spread like…well…wildfire since its inception.
The concepts underlying the FIRE lifestyle circulated in the early 90s. But it didn’t really take off until the 2010s when the media started paying more attention. In the past few years, a few different “types” of FIRE have been coined to suit all kinds of lifestyles.
Let’s look at perhaps the most reacheable subset of FIRE: CoastFI.
What is the FIRE Movement?
Before we look at CoastFI, let’s take a brief refresher on the mainstream FIRE movement. As much a lifestyle as an investment strategy, CoastFI aims to make leaving the workforce before traditional retirement age a reality.
Essentially, the FIRE movement involves pursuing financial independence (FI) and retiring early (RE) by:
- Living frugally
- Saving aggressively
- Investing as much as possible
FIRE has been criticized as a movement of “tech bros” – a lifestyle for typically white, wealthy men looking to retire early on large salaries. And it’s true that if you’re not earning six figures or better, reaching FIRE often means sacrificing spendingfor many years.
Enter a less stressful, more workable alternative: CoastFI.
What is CoastFI?
CoastFI, also called Coast FI or Coast FIRE, is a FIRE strategy that may not require as much penny-pinching.
CoastFI does not mean coasting without needing to work during early retirement, but only having to pay for immediate life expenses.
Essentially, with CoastFI, you invest enough that you don’t have to keep contributing to retirement. With a large enough “nest egg,” compound interest will grow your account into a sizeable retirement fund. In other words, you save until your account reaches a tipping point, after which you “coast” until retirement.
Although it’s often called, Coast FIRE, that’s a misnomer, as many living the CoastFI lifestyle don’t retire until 65. Instead, they use it to “semi-retire,” often working a part-time job to fund their daily lives and other savings goals.
How Does CoastFI Work?
CoastFI is made possible by the effects of time and compound interest. Once you save enough, compound interest takes over by generating income on your investments.
For instance, if you deposited $100,000 into an account earning 7% annually, your account would be worth $761,000 in 30 years without you adding another dime. Double your initial investment, and your account would be worth $1.5 million.
That’s the power of CoastFI.
How to Calculate Coast FIRE
Coast FIRE relies more on long-term compound interest than the other FIRE variants. The younger you are, the lower your CoastFI savings target can be because you have longer for your account to grow.
Calculating your CoastFI savings target is fairly simple. All you need to know is:
- The number of years you have until retirement
- Your projected future expenses
- Your safe withdrawal rate (SWR)
- Your financial independence (FI) number
Then, you can add these variables into the simple compound interest formula:
CoastFI savings target = (FI number) / (1 + interest rate)Number of years to retirement
CoastFI Calculation Example
Let’s break down this math with an example.
Step 1: Your FI Number
First, we’ll use our SWR to find our FI. Essentially, your SWR is the amount you can withdraw from your portfolio each year without your principal balance shrinking. Generally, an SWR of 3-4% is recommended. For our examples, we’ll use a 4% withdrawal rate, written as 0.04.
To calculate our FI number, we’ll simply divide your projected annual spending by your SWR. If we plan to spend $50,000 per year in retirement, our SWR calculation would look like this:
FI number = $50,000 / 0.04 = $1.25 million
Step 2: Your Interest Rate
Next, we’ll need to estimate the annual rate of return on our accounts. Typically, the S&P 500 returns around 10% annually. But for a more conservative estimate, we’ll assume that our accounts return 7% every year.
We’ll also account for inflation by subtracting the estimated inflation rate from our expected return rate. If annual inflation stays around 2%, then we can assume we’ll earn 5% returns after inflation. (7% – 2% = 5%.)
Step 4: Years Until Retirement
Lastly, we need to know how long we have until retirement. For our example, we’ll say that we’re 20 years old and want to semi-retire by age 30. We plan to hit full retirement at age 65. So, we would subtract 30 from 65 to get 35 years until retirement. (Remember: the earlier you retire, the more you’ll need to save, as compound interest will have fewer years to work.)
Step 5: Plugging in the Numbers
So, compiling all our variables from above:
- FI = $1.25 million
- Annual interest rate = 5% (0.05) accounting for inflation
- Years to retirement: 35
Then, we’ll plug our variables into the simple interest formula to get our answer:
CoastFI number = $1,250,000 / (1 + 0.05)35 = $226,613
According to our formula, we have to save $226,613 by age 30 in order to stop contributing to our retirement account. That comes out to saving about $22,661 per year to meet our goal if we start at 20.
But remember that your Coast FIRE number isn’t set in stone. Inflation, returns, and your retirement spending can fluctuate on a dime. As with everything in finance, preparing for lower returns and saving more is often wise.
CoastFI vs Other Types of FIRE
Coast FIRE is just one subset of the FIRE lifestyle. Here, we’ll look at a few other popular FIRE models.
CoastFI vs FIRE
With regular FIRE, your goal isn’t to coast until retirement – it’s to retire early and live 100% off your investment portfolio.
To achieve FIRE, you need to build a big enough portfolio to kick off tens of thousands in passive income per year. Generally, the FIRE lifestyle involves saving 50-75% of your paycheck, which may require pretty severe sacrifices in your early years.
By contrast, with the Coast FIRE lifestyle, you still need to work to cover your annual expenses. You just don’t need to work enough to live and save money for retirement, too.
CoastFI vs Fat FIRE
Fat FIRE involves seeking early retirement without skimping on the finer things in life once you leave the workforce. Those who follow the Fat FIRE lifestyle typically aim to spend at least $100,000 annually in retirement.
Following the 4% withdrawal rule, Fat FIRE requires accumulating a portfolio of at least $2.5 million. In theory, a principal balance this high would allow you to withdraw $100,000 per year indefinitely.
However, the $2.5 million number assumes consistent returns in your investment portfolio. Additionally, few people earn enough money to save $2.5 million before they reach 65.
CoastFI vs Lean FIRE
Learn FIRE is the minimalist version of retiring early with financial independence. Typically, Lean FIRE adherents plan to spend under $40,000 per year in retirement. In other words, it’s the opposite of Fat FIRE – opting for a lower standard of living, rather than a higher one.
While achieving FIRE or Fat FIRE involve some sacrifices, the Lean FIRE lifestyle takes living minimally a step further. Lean living often means:
- Not having children
- Living with parents or in low-cost housing
- And intentionally keeping your income low enough to qualify for subsidized healthcare
CoastFI vs Barista FIRE
Barista FIRE is perhaps most similar to CoastFI. Essentially, Barista FIRE users save enough to retire early while working a part-time job that provides health insurance. Then, they supplement their part-time wages with withdrawals from their retirement account.
For instance, let’s say that you have $250,000 in your retirement account. Based on the 4% rule, you can withdraw $10,000 per year without touching your principal. Then, you can find a part-time job to supplement any other income you need.
The Barista FIRE lifestyle is named for Starbucks’ baristas, as Starbucks is one of a few major companies that provides health insurance for part-time workers. (Though that number is growing.)
But working at Starbucks isn’t required. Many modern Barista followers choose to work in a passion field, such as travel photography, writing, or working outdoors. The goal is to save enough that you can spend the rest of your working days doing what you love. And then, when it’s time to retire for good, you have a well-stocked retirement account already waiting.
Benefits of the CoastFI Lifestyle
Living a CoastFI lifestyle – semi-retiring once you save enough to “coast” on your investment returns – comes with some unique benefits.
To start, once you only have to cover your living expenses, you’ll free up “extra” money in your budget. That gives you some wiggle room to save for other goals, such as a house, or start splurging on yourself.
Or, if you’re happy with your life now, you can scale back your work hours at your current employer. Alternatively, you may choose to get a fun part-time job and spend your free time focusing on friends, family, and hobbies.
Because your account is fully funded for retirement, you’ll also have peace of mind knowing your future is secured. And the CoastFI lifestyle removes pressure to save for retirement even when money is tight. (For instance, if you lose your job or incur sudden medical expenses.)
Best of all, if you save for retirement beyond your CoastFI number, any additional money gets you that much closer to the second half of FIRE: Retire Early.
Drawbacks of CoastFI
For all its benefits, the CoastFI lifestyle does come with some drawbacks.
To start, CoastFI relies on compound interest to reach your goals and semi-retire in confidence. There’s no guarantee that you’ll earn a specific rate of return in the market. At the same time, you also can’t guarantee that your portfolio won’t lose money in a bad year. As such, if you only save enough to coast to retirement, you may find yourself in trouble down the road.
Fortunately, there’s a simple solution for this problem: recalculating your CoastFI every year. If you find that your portfolio value is lower than your CoastFI number, it’s time to top up your investments. For some, that may mean taking on more hours; for others, it’s about reallocating your savings.
Another drawback of CoastFI is that it requires a lot of effort, diligence, and sacrifice in your earlier years. Though it’s not as frugal as other FIRE lifestyles, you’ll still have to prioritize working hard over having fun. But once you reach your retirement milestones, you can ease off the gas and enjoy life to its fullest once again.
Lastly, as we mentioned before, Coast FIRE is a bit of a misnomer – which is why we’ve mostly called it CoastFI. In CoastFI, the “retire early” portion of FIRE doesn’t necessarily come true. Instead, you’re coasting to financial independence later, as you still have to work to pay your day-to-day expenses.
What to Do with Your CoastFI Lifestyle
So, you’ve spent 10-20 years scrimping and saving to reach your CoastFI number. Maybe you’ve even exceeded it. Now…what?
Well, it’s time to decide if you want to semi-retire and enjoy your life or keep plugging away. The choice is different for everyone, and may depend on your interests, hobbies, and desired lifestyle.
Some people use the time to:
- Continue their careers part-time
- Switch to a new career (or several) and try new things
- Take on a passion project, such as working with animals, crafting, or travelling
- Supplement their income in the gig economy to meet new people
- Start a small business
- Volunteering with an animal shelter, human rights organization, or charity of interest
Whatever you want to do once you achieve CoastFI, there’s no wrong answer as long as you’re enjoying the life you’ve built for yourself!