I have seen increasing interest in the concept of Coast FIRE lately, although people do not always call it by that name. Coast FIRE can produce many of the benefits of retirement (more free time, less burnout) while also providing many of the benefits of continuing to work (ongoing income, sense of purpose).
What Is Coast FIRE?
FIRE stands for Financial Independence Retire Early. It's the concept that retirement is not an age but a number. When you have enough money to live your desired lifestyle the rest of your life, you are “financially independent” and can retire at any point from then onward—whether you are 25, 35, 45, 55, 65, or 75. If you retire before traditional retirement age (65ish?), that's called “early retirement” or “Retire Early” (because it makes the acronym so much cooler). There's no requirement to actually retire just because you are financially independent, but many people make significant life changes, such as cutting back their hours, changing jobs, or simply doing volunteer work.
The amount needed to retire is generally defined as something like 25-33 times your annual spending (including taxes, charitable giving, and any advisory fees you pay). This number is the reverse of the 4% guideline that suggests, by analyzing historical and theoretical data, that you can spend something around 4% of your nest egg each year, adjusted upward with inflation, and expect your money to last at least 30 years with a high degree of probability. That 25-33X number is your “FIRE number,” or at least your “FI number.”
Your Coast FIRE number is something less than that FI number. However, it is a number that is anticipated to grow into that FI number by the time you wish to stop working, despite never contributing another dollar to the nest egg.
More information here:
Is FIRE Really Just an Empty Goal?
Why Does Coast FIRE Work?
Many people who have spent time playing around with a compound interest calculation, like the Future Value function of a spreadsheet, have noticed that early on, larger contributions seem to make the biggest difference, and later on, a higher rate of return seems to make a bigger difference. That is to say, early on, you and your work are the most important factor, and later in the process, your money and its work gradually become the most important factor in building wealth. Coast FIRE simply takes advantage of this idea by front-loading the saving part. Perhaps an example would explain this better.
Consider a 55-year-old investor who has been saving for the last 20 years. They now wish to stop saving (but not necessarily stop working) for a while. They have $2.5 million but figure their FI number is $3.5 million in today's dollars. If the investor expects 5% real from their portfolio, when can they retire?
=NPER(5%,0,-2500000,3500000) = 6.9 years
The investor can retire at age 55 + 7 = 62 years old, but they never have to save another dime so long as they are willing and able to work until age 62. The investor is Coast FIRE at 55 and FI at 62.
Why Might Someone Care About Coast FIRE?
Coast FIRE can be a useful strategy in many situations. Perhaps the most common is someone who simply wants to cut back at work and earn less. This is one of the best financial strategies for combating burnout in physicians. The first thing I tell a burned-out physician is, “Why don't you cut back to full-time?”
But if that isn't enough, perhaps part-time medicine is the way to go. I love practicing part-time. I work six eight-hour day shifts in the emergency department per month. Given that a full-time emergency physician works something like 15 eight-hour rotating shifts per month, it is awfully hard to become burned out working 40% of that and never being at work after 2pm. Even if I have a bad shift, I will probably have something like four days to recover before going back for another one.
The big downside of working less, of course, is that I get paid less. I'm the lowest-paid member of my partnership. Not only am I working fewer shifts than my partners, but I only work the most poorly reimbursed shift. A year or two ago, Box 1 of my physician partnership K-1 read $140,000. That's much less than most physicians earn. The average physician income the year I earned $140,000 was $363,000, more than 2.5 times as much money. Lots of doctors (about 50% in the surveys I do) would prefer to work part-time. Another 33% would prefer not to work at all. The only reason they don't is that they cannot afford to do so. But when you're Coast FIRE, you can. So, Coast FIRE allows for part-time work.
Cutting back isn't the only use for Coast FIRE, though. One can also change jobs to one that pays much less. Maybe you've always dreamed of being a writer, a rafting guide, a ski instructor, or a stay-at-home parent with your own home business. Most of the time, these sorts of “encore careers” pay a lot less than practicing medicine. But they might pay enough to cover your living expenses if you're also not having to save for retirement. Take away the need to save 20%+ for retirement while dropping into a significantly lower tax bracket, and you could possibly maintain your lifestyle on just 25%-50% of what you were earning before.
You don't have to change jobs or cut back to benefit from Coast FIRE, though. If you have the same income but you're done saving for retirement, those dollars can be directed elsewhere. Perhaps they can be used to pay for the education of your children. Maybe, given the housing crisis, you want to provide big down payments to your children in their 20s or 30s, long before you might leave a traditional inheritance. Perhaps those dollars can be given away to charity. Maybe you can just spend it. You can now live a big, expensive, awesome financial life with first-class trips to Europe, a boat, and a new car every couple of years.
More information here:
Lessons Learned from Achieving Financial Independence
Beyond Financial Independence: Money Irrelevancy
Life After Financial Independence: Two Perspectives
How Can Coast FIRE Go Wrong?
Some risk exists when you take your foot off the throttle before you're actually FI. Many people assume they can work another five or 10 years and then find out they can't. Maybe they become disabled. Maybe they get fired and then find out that age discrimination is real. Maybe they die, and their spouse is the one left with less than planned. Or perhaps most commonly, they discover that cutting back did not fix their burnout, and they still hate working even part-time. While you can (probably) insure against disability and death, government unemployment benefits don't work nearly as well, and there is no burnout insurance outside of the Physician Wellness and Financial Literacy Conference. You still have to earn enough to pay for that disability and life insurance, too.
There is also the risk that your planned returns don't materialize. What if your portfolio earns 0% real over the next 10 years instead of 5% real? Well, after 10 years, you still have the same amount, and you're still not FI when you want to retire completely.
You might also wish to start spending more money. What if you start coasting to see the world, and your spending level goes up 50%? If you wish to maintain that lifestyle in retirement, now you need a larger nest egg, one that may require additional contributions or much more time for compound interest to work. How bad would it be to stop saving at 50 only to find out you need to work more and start saving again at 60?
How Early Can One Coast FIRE?
This is all just math using your best assumptions. If you continue to use that 5% real number, you can calculate what Coast FIRE looks like at all kinds of ages. Let's say you're 35 and need $5 million in today's dollars at age 65 to provide for your retirement. What is your Coast FIRE number at various ages?
- At age 35 =PV(5%,30,0,5000000) = $1.2 million
- At age 40 =PV(5%,25,0,5000000) = $1.5 million
- At age 45 =PV(5%,20,0,5000000) = $1.9 million
- At age 50 =PV(5%,15,0,5000000) = $2.4 million
- At age 55 =PV(5%,10,0,5000000) = $3.1 million
- At age 60 =PV(5%,5,0,5000000) = $3.9 million
Coast FIRE is a useful concept to understand, no matter what your life financial plan may be. And it can allow for more flexibility and enjoyment along the way than the traditional career pathway.
What do you think? Do you plan to stop saving before you stop working? Why or why not?