Frugality Magazine - Frugal Living Tips for Financial Freedom

What is Coast FI?

Contents

CoastFI is a phrase used to describe someone who isn’t yet financially independent (i.e. no longer needs to work) but has already put in the necessary effort to almost inevitably achieve that goal.

They don’t need to save any more money to achieve their goals of financial freedom – instead they just need to “coast” through time, allowing compound interest and stock market gains to increase their nest-egg to the point of never having to work again.

Example of CoastFI

Let’s assume that Tony is 30 years old and wants to retire early at the age of 50. By then, he expects to have paid off his mortgage, so reckons he’ll only need $20,000 a year coming in from investments to never have to work again. 

Using these assumptions, Tony will need roughly $500,000 by age fifty. The interest this produces should be enough to meet his annual spending, leaving the principal alone to keep producing for next year.

We know that, on average, the stock market returns somewhere in the region of 5-8% interest per year, so with all the political turmoil at the moment let’s assume a conservative 6% growth per annum.

Using a “reverse interest calculator” or a “present value calculator” like this one we can see that Tony needs $156,000 in his account. 

If he’s able to accrue this money and simply leave it passively in an index fund then by the time he hits his target retirement date he should have the half a million dollars he needs to draw a comfortable $20,000 a year, pretty much forever more. 

In theory, therefore, once Tony hits this figure he could be considered “CoastFI” as he’s done the work and just needs to let the market and the passing of time do it’s thing.   

CoastFI Versus More Traditional Journeys

When you first hear about CoastFI it can be difficult to see how this concept really differs from more traditional retirement routes. After all, Tony is going to have to knuckle down, live frugally, and put money aside to invest each month, just like anyone else. 

The key difference here is that Tony has already put the graft in. He’s done the work and built a suitably-sized nest-egg.

Only when he’s achieved this would he be considered Coast FI. In other words you could see Coast FI as a marker on the way to retirement. 

In theory, once Tony hits the point of CoastFI, he could stop contributing to his retirement fund entirely – and that increased disposable income can have all kinds of positive ramifications. 

Benefits of CoastFI

Now you understand the concept behind CoastFI, the next obvious question is why you might want to try and achieve this impressive goal?

Focuses the Mind on Front-Loading Retirement Planning

CoastFI depends on long term investing to see your money grow enough. This means that the more you can save, and the sooner, the bigger the impact of compound interest is going to be. 

For many people, saving for retirement is a marathon – it’s something they do slowly and gently throughout their entire working life.

CoastFI really encourages you to “go for it” as soon as possible. It’s a sprint. Go hard, hit that target investment pot as early as possible, and then just forget about it while it naturally grows. 

This focus can be a powerful force, encouraging good financial discipline early on, which can reap rewards for years into the future.

Removes Pressure to Plan for Retirement

It seems that every week some scary new statistics about retirement are published. Statistics on how a growing proportion of the population says they’ll never be able to retire. They didn’t save enough, or didn’t start early enough. Then suddenly they realise how many years have passed and they have to work their fingers to the bone trying to make up for lost time.

Not so for the CoastFI individual.

They’ve already done the work.

They don’t need to worry as their nest-egg is constantly growing and appreciating in value.

They also know their target retirement date and investment value, so there are far fewer potential “nasty surprises” to worry about. 

Allows for a Better Quality of Life Later On

If you woke up tomorrow morning and suddenly realized that didn’t need to put any more money aside from the future, it would make a massive difference to your lifestyle. 

All that money you’re shovelling into your pension, savings and investments can suddenly become “fun money”.

Nice vacations. Upgrades to your home. Meals out in top restaurants. You name it.

Even better, you can enjoy all this guilt-free, rather than worrying that you really should be doing something more “grown up” with your cash.

Permits a Change in Work Schedule

If being able to spend all this extra money doesn’t positively impact your lifestyle then there is an alternative; you could choose to work less.

All you really need is enough money coming in to make ends meet on a monthly basis. You don’t need “extra” to save for retirement. In this case, you might choose to change gears and only work part-time.

That could mean more time spent with family and friends, or more time on your hobbies and doing the things you love.

Weaknesses of CoastFI

So what are the downsides to CoastFI – what should you be wary of before you start your journey to this impressive target?

Requires Considerable Upfront Effort

Hitting that CoastFI number requires hard work, dedication and self discipline. The sooner you can hit it, the better. So be prepared to knuckle down and get to work. 

For some people this just isn’t realistic.

Maybe you don’t earn enough, so it’ll take you so long to hit that coastFI number that it’s almost worthless. Maybe you’d rather take a steadier and more measured approach to retirement, enjoying life more on the journey. 

Whatever the case, unless you earn a lot of money (or have a lot of luck) and possess a decent amount of self-discipline then hitting coast FI could be one of the biggest challenges of your life.

The Constantly Moving Target

When we calculated our example earlier, the obvious “blip” is that Tony would need to put that money away today. If it takes him a few years to save that money up then it has less time to accrue interest. And that means he won’t hit his goal of financial independence by the age of 50.

He’ll either need to save more than that target to make up for lost interest at the beginning, remain working for a few more years, or accept a lower income in retirement.

While coastFI is a useful and exciting concept, if you’re just reading about it for the first time then this probably isn’t a number you’ll calculate just once and forget about.

As you’re nearing that initial target you’ll want to recalculate things every so often and “course correct” as necessary.

Long-Term Assumptions May Not Hold True

In our example we assumed growth of 6%. But what if that doesn’t happen? What if Tony’s spending needs to go up because his elderly parents need care? What if he gets divorced and has to pay out a settlement? 

The truth is, long-term assumptions may not hold true. We hope they will, and we need to have some kind of a plan, but the end result might not be exactly what you expected.

To counteract this, you may well decide to actually increase your coastFI target, or keep working hard for a few more years after hitting your goal, to give you some additional “buffer” for these curveballs life can throw at us. 

Is CoastFI Right For You?

Personally speaking, I’m a huge fan of the concept of coastFI. I like the idea of going all-in for a few years, really putting in the effort, then being able to ease off the gas and coast through later life. 

What a feeling to already have a plan for retirement that virtually guarantees not only financial security, but also probably a much earlier retirement than your friends and work colleagues. 

That said, there are obviously a few potential weaknesses here that you should bear in mind before starting your journey. In truth, only you can decide if this is the right financial plan for your circumstances. 

Financial independence and early retirement are dreams for many of us, but how can you cut short the journey? Coast FI is a solution that could help to transform your personal finances if only you follow the proven process.

Richard

Sun-worshipper and obsessive frugality blogger. For loads more money-saving advice come and join us on Facebook.

Add comment