In the summer of 2019, I had the opportunity to increase my work hours to 4 days/week. I started a new job in January of 2019 working 3 days/week. The job was advertised as part-time (3 or 4 days/week).
Because I was still learning to manage my anxiety and panic attacks, I chose 3 days/week. I intended to go up to 4 days/week after about 6 months (or when I knew my mental health could handle it).
Around the same time, we also started to better define what our ideal life would look like.
Through this reflection, we realized that retiring early was no longer a component of our ideal lives. We had recently come across the idea of semi-retirement, which sounded like the best of both worlds!
We still want to be productive and generate income. At the same time, we want to live a location independent lifestyle. We’d use our ample free time to focus on our passions and building strong relationships.
I had a vision that one day we could start generating income on the side through our blog and my coaching business. I thought $20K/year would be a great goal. Since we would truly enjoy generating this income, we could theoretically “retire” from our day jobs with less than a full-FIRE stash.
I got really excited about this idea. I created milestones for our financial independence journey. These milestones, like others I’d seen before, didn’t focus on the amount of money we’d need to fully retire early. Our milestones focused on how much active income we’d still need to generate for a semi-retired lifestyle.
These milestones would tell us when we’d need to generate $40K, $30K, $20K, $10K of active income. Then, we could live a semi-retired lifestyle while only pulling some money from our investments.
I was so focused on semi-retirement that I backed into my understanding of Coast FI.
I realized that there was also a point where I would have enough saved for retirement that I’d only need to cover my actual costs.
This was a completely new idea for me! Instead of continuing to save 40%, 50%, or even 60% of our income, we could choose to just cover our costs. We could, then, “coast” to retirement and focus on building an awesome life in the meantime.
This idea was transformational for me, and I wondered why I’d never heard about it before. I looked it up and realized that only a few people in the FI community were talking about it. When they did, they called it Coast FI.
I knew I needed to dig in and learn more.
What is Coast FI?
Coast FI is the point at which you no longer need to save any money to have a comfortable traditional retirement.
To say it in another way, Coast FI is when you already have enough saved in your retirement accounts that, if left to grow until the traditional retirement age, you will have enough to live on comfortably.
Each person’s Coast FI number is unique because it takes into account:
- Your current age
- The time horizon you have until you would like to fully retire
- Your current expenses
How do I calculate my Coast FI number?
To calculate your Coast FI number you can use a basic compound interest formula.
Coast FI # = FI # / (1+Expected Growth Rate)^# of years until retirement
First, I will explain this in layman’s terms, and then I’ll share how you get each number.
In this formula, the goal is to calculate your Coast FI number. You do this by taking your Full FI target and dividing it by 1 plus the expected growth rate to the power of the number of years you have until retirement. This means that you will multiply 1 plus the expected growth rate by itself that number of times.
Looking at this formula may seem very confusing. You might be wondering a few things:
- What is my FI number?
- What is the expected growth rate?
- What is my time horizon? How many years do I have until retirement?
Let’s walk through each variable.
Your Financial Independence Number
Your FI number is the amount that you will eventually need to lead a comfortable traditional retirement. You need to reach this number by the time that you choose to no longer work or generate income to keep your expenses the same.
To calculate your FI number, you need two pieces of information:
- Your current expenses (or your expected expenses at retirement if you expect that they’ll be very different than your current expenses)
- A safe withdrawal rate (SWR) that you are comfortable with. Many people are comfortable with a 4% SWR. This is the percentage recommended by the Trinity Study. They found that if people withdrew only 4% of their portfolio, they are very likely to not run out of money for a 30-year retirement. If you expect your retirement to be longer than 30 years, you may want to go with a safer withdrawal rate of 3.5%.
FI # = Current (or Expected Expenses) x (1/SWR)
Let’s work through an example. Julia currently spends $45,000/year. She expects her expenses to stay around the same amount throughout her life.
She enjoys her work and runs a business on the side. She doesn’t expect to fully retire until she reaches age 65, so she’s comfortable using a SWR of 4%.
So, let’s calculate Julia’s FI number:
FI # = 45,000 x (1/.04) = $1,125,000
Julia’s full FI number if $1,125,000. This is the amount that she would need by the age of 65 when she wants to retire.
Expected Growth Rate
There is a lot of debate about the expected growth rate of the stock market. Depending on how many years we take into account, this number could be anywhere from 8-15%. Because of market volatility, we encourage you to use the lower number 8% and then account for 2-3% inflation each year. This would bring your expected growth rate to a very conservative 5%.
As a quick note, this rate assumes two things:
- That you are investing in broad-based index funds
- That you are buying and holding the money in the accounts for many years/decades. The market is volatile, so it’s likely that a single year will not align with this growth rate.
You might see higher returns than 8% on average during the time that you are investing. At the same time, I think it’s better to plan using conservative assumptions.
Let’s go back to the example. Julia decides she wants to plan conservatively, so she also chooses a 5% expected growth rate for the stock market.
Time Horizon Until Retirement
You can calculate the time horizon until retirement simply by subtracting your current age from the age at which you’d like to retire.
Time horizon = Your desired traditional retirement age – Your Current age
Julia is 37. She’d like to be able to fully retire by 65. This means that her time horizon until retirement is 28 years.
Using all this information, we can calculate Julia’s Coast FI number.
Coast FI # = 1,125,000 / (1+.05)^28
By doing this calculation, we can see that the amount of money that Julie would need to be Coast FI at the age of 37 is $286,980.
This means that if she has this amount in her retirement accounts, she could decide to scale back her work and only cover her costs of living.
Download our Coast FI Calculator
You are probably thinking that this calculation requires a lot of work! Luckily, we don’t expect you to do it all yourself. I explained it so that you could have an understanding of the math behind the number.
If you download this template, you can add your information and determine your Coast FI number. With a few more items (such as current net income and current investment balance), this spreadsheet template will also calculate your timeline to reach Coast FI or Full FI.
What Can I Do After I Reach Coast FI?
We are big believers that you don’t need to wait until you retire early to design a life that you love. Financial Independence is not all or nothing. We gain a lot of freedom along the way to FI that we can use to improve our lives.
Once you reach Coast FI, you have three options:
- You can scale back income-generating activities and only cover your actual costs of living. You can stop saving for retirement!
- You can continue to save for retirement, but you can take your foot off the gas. You can save at a slower rate and make incremental lifestyle changes.
- You can continue pushing hard toward financial independence. If you are in a job you hate (or even don’t like a little bit), I’d encourage you to rethink this one.
If you decide to go with option 1 or 2, there are so many ways you can design your life along the way to financial independence.
Find a Job You Actually Enjoy
Last week, I published a Slow interview with David from City Frugal. David used the freedom that Coast FI provided to him by seeking out a new career that he would enjoy more.
He knew he was taking a risk by trying to switch career tracks in his current company. He knew that if he was turned down for the job, he could use the financial freedom he’s already built to take some time off to figure out what was next for him.
Sometimes a job you enjoy more will actually pay more, and you just need the confidence to go after it. Sometimes a better job will pay less, and that’s okay if you’ve already achieved Coast FI and/or can cover your expenses.
Negotiate Flexibility at Work
As you gain financial freedom, the relationship with your employer shifts. I used to feel like my employer held all the power. They would make a request, and I would acquiesce. Now, I see that it’s a two-way street. I also have power in the relationship. They need to provide me with a good work environment and interesting work, or I can leave.
One thing that you can do as you gain financial freedom is to set clearer boundaries around your work hours. You may even be able to negotiate to work a few days/week from home (even after COVID) or full-time remote work if that’s something you are interested in.
For example, my friend Mel, who writes at Modest Millionaires, negotiated a full-time remote working position long before COVID hit.
Reduce Your Work Hours
You may even be in a situation where you can reduce your hours with your current employer or find a part-time job with a new employer. A reduction in hours is usually accompanied by a pay reduction.
If you have reached Coast FI, this is okay as long as you can still cover your expenses. If you haven’t yet reached Coast FI, you still can do this as long as you can cover your expenses and save a little bit.
Angela Rozmyn, who writes Tread Lightly Retire early, was able to negotiate a reduction in work hours with her employer of many years.
I quit a full-time job in late 2018 and started a part-time job with a new organization in early 2019.
Once you reach Coast FI, you may not need to work all year round.
For example, I recently interviewed a woman named Kat. Now that she’s reached Coast FI, she works seasonally in her city’s public works department and does a few other odd jobs over the course of the year. From the seasonal work and odd jobs, she covers her actual costs.
Michelle, from Frugality and Freedom, would work short-term contracts in the arts industry each year. The money earned from these short-term contracts would cover her costs, and she’d travel nomadically for the rest of the year.
Freelance Work or Entrepreneurship
There are so many people who have taken a leap to work for themselves. They do this through freelance or consulting contracts or by building their own businesses.
Lance, who writes at Money Manifesto, became self-employed several years ago. He now works on both his freelance writing and his own business.
Lauren and Steven, who write at Trip of a Lifestyle, were able to pursue long-term travel arrangements because of Freelance work.
What will you do when you reach Coast FI?
Sometimes, it’s hard to imagine actually having financial freedom. For me, that was definitely the case. I started out with a very low income. Even after I grew my career over the next 10 years, I still had a feeling that I could lose everything at any given moment.
Over the last couple of years, I’ve been able to rid myself of this scarcity mindset.
Beyond this, I’ve also learned that financial freedom isn’t all or nothing. I used to think that you were either fully financially independent or you weren’t. There wasn’t any in-between.
When I was first faced with the possibility of using financial freedom to improve my life, I had a hard time figuring out what I’d want to do with it. I was on autopilot because I didn’t think I could actually choose what I actually wanted.
Fast forward to today, here is how I plan to use the freedom that Coast FI provides:
- Build the blog and my coaching business on the side of my part-time job
- If these income streams can cover our full expenses, we can quit our jobs and become location independent.
- If these income streams don’t cover our full expenses, we have a few options. We can work to build up additional income streams like investing in rental properties, or we could do contract work on a short-term basis. Or, we could continue our work until we have increased our investments to the point where we could semi-retire.
If you are struggling to figure out what you’d want instead, that’s okay! It took us years to figure out what we’d actually want if we could choose. In reality, we’re still defining our ideal lives.
If you want to get started, I’d encourage you to read my recent post about how to get off autopilot. It will provide you with a holistic framework to start defining what you really want.