Heard of Coast FIRE? Want to know how the math behind Coast FIRE works? Read on!
Conceptually, Coast FIRE is not too terribly complicated. I cannot say that it is a 100% reliable investing strategy, though. “Reaching Coast FIRE” usually involves a decade (or a few decades) of projected investment returns. If you take anything away from this article, please understand the fact that it is not at all possible to project an investment’s return with perfect accuracy.
I would always err on the side of lower return projections and hope to be happily surprised with higher actual returns. I am also a big fan of running multiple scenarios to gain an understanding of the full range of possible outcomes.
Without further ado, let’s get into what Coast FIRE actually is!
So we are all saving for retirement, right? If you’re here reading this, I would like to hope so!
Let’s say, for example, that you have a 401(k) through your employer. In our example here, let’s assume that you are 30 years old, have 100% of your 401(k) invested in a low cost S&P 500 index fund, and you intend to refrain from using these funds until you are 65 years old. Let’s also assume that you have $25,000 saved up in this account.
**Quick disclaimer, I would probably (at least for me personally) find some level of diversification beyond just a 100% allocation to the S&P 500. While it is an awesome index (that I own), and is innately well diversified with large US companies, exposure to other asset classes is usually not a bad idea. Every situation is different, always do your research, but keep in mind that this here is just an example and I’ve made it as simple as possible**
The S&P 500 has actually returned roughly an average of 12% each year over the last several decades.
Please note, I feel that 12% is extremely aggressive for Coast FIRE projections in my opinion, so I would personally be a little more conservative. We’ll use more conservative returns in our example here.
One requirement for finding this Coast FIRE number is knowing your financial independence – FI – number. This is the amount of money that you would need the have invested to generate enough in returns and cash flow (dividends in many cases) to allow you to stop working.
Many use the assumption of 25x their annual expenses as a rough starting place, but going above that is never a bad idea.
The big question here, the antithesis of Coast FIRE, what would your retirement funds grow to if you were to completely stop contributing today?
To calculate, simply take:
(1 + your expected return), raised (^) to the number of years until the date you are forecasting for, and multiply the result by the current value of the account!
In this example, we will try both a 5% and a 9% return to simulate two possible outcomes. Check out the math for each return below!
5% Rate of Return
9% Rate of Return
In these scenarios, again, we would completely stop contributing to our retirement accounts today. To do this yourself, just change out the return % you think you can safely achieve and the number of years until you would begin using these funds!
Something to consider, many people have multiple retirement accounts!
I even go over my own personal retirement saving strategy in this article here!
You can apply this math to all of your retirement accounts and add up the values to see your full financial picture.
How is this helpful? Why would anyone do that?
I like to think of Coast FIRE as more of a milestone than an actual action plan. There is an extra level of comfort you will experience knowing that, in theory, compounding alone could carry your retirement accounts to the level that they need to be by the time you will be using them.
Reaching this can also allow you to consider switching to a less stressful career field that may pay less, but allow for a more flexible work schedule (or just better quality of life). Always worth considering discussing any life changing moves like the above with a professional if you are unsure!
That’s cool, but what does that actually do for me?
Well, in theory, you could do one of two things if you truly have reached a point where you project that your account(s) will grow to a substantial enough level.
***Please note, I do not find it wise to refrain from contributing to retirement accounts. This is hypothetical***
Option 1: Stop contributing to your retirement accounts and use those funds elsewhere (pay off debt, fund a taxable brokerage account in an effort to consider an early retirement etc.)
Option 2: Now that your retirement accounts are taken care of, you could pursue a job/career in a less stressful industry that covers all of your expenses. Any option to contribute further to retirement accounts in a lower paying role would either be icing on the cake, or could be disregarded (in theory).
This option is essentially the same thing as Barista FIRE, which I broke down in this article here!
Fortunately, neither of these options are irreversible. So long as you never burn bridges and you plan carefully, you can always go back to working full time and contributing to retirement accounts if you aren’t seeing the returns you thought you would.
As stated before, reaching this is more of a milestone that provides an extra level of comfort and peace of mind!
One last note
If you reach this point, it is worth celebrating! This is a very cool milestone!
Also, if you do decide to go down a different career path or just stop contributing as a result of reaching Coast FIRE, I would highly suggest that you map out exactly what account value(s) you would need to be sitting at each year between now and your retirement date to ensure that you are staying on track (or maybe even exceeding expectations if you were smart and used conservative numbers).
Deciding that you have reached Coast FIRE, stopping contributions, and finding out at 60 that you don’t have enough money would be devastating. Please keep that in mind.
As stated at the beginning of this article, I personally cannot get behind the idea of completely ceasing to fund retirement accounts. I see, however, that there are definitely some situations where this could make sense, and at a minimum, it is certainly a concept worth understanding.
Always plan carefully and continue to monitor your financial health.
I also enjoyed this article from the Financial Samurai covering Coast FIRE, give it a read!
To wrap it all up, reaching Coast FIRE is when your retirement account(s) are funded with enough money to hypothetically allow you investments’ compounding to carry the balances to high enough levels to actually retire once you reach the age where you can access these funds penalty free (59.5 years old here in the good old USA).
To me, it is extremely important to keep in mind that this is more of a milestone than an end point.
In the event that the above didn’t cover the concept as well as you would’ve liked, below is a video I made that explains the concept in full, check it out!
As always, I sincerely appreciate you for taking the time to read this article!
Please do not hesitate to reach out to me with any questions, comments, or suggestions!