What Is Your Coast FIRE for Retirement?

·5 min read
Person jumping with "FIRE" spelled out
Person jumping with "FIRE" spelled out

Adherents of the Financial Independence/Retire Early (FIRE) movement aim to reach a point where they don’t need ongoing income to retire and to get to that point before – sometimes well before – reaching age 65. Not surprisingly it requires rigorous savings and a frugal mentality. However, there’s a sub-genre of this movement known as Coast FIRE. It promises financial independence in retirement for the average person but without saying goodbye to your career. Here’s what you should know about Coast FIRE and how it differs from regular FIRE. Work with a financial advisor to construct a retirement plan that fits your goals, lifestyle and timeline.

Coast FIRE, Definition

There are different forms of the FIRE movement adjacent to the regular version. One of them is Coast FIRE. This version calls for having enough invested or saved so that without further contributions your portfolio will grow to fully support retiring at a traditional retirement age. Your nest egg, in other words, has reached a tipping point so that it will “coast” to the target amount needed for retirement. People who have successfully achieved their Coast FIRE still need to work, but they only work to cover current living expenses – not to build up their savings or investments for a future retirement.

Coast FIRE is not something to begin right before retirement. That’s because with this approach you need a so-called runway, enough years so that through both compounding interest and capital appreciation your nest egg will reach the critical mass needed to support you once you stop earning money.

Coast FIRE vs. Regular FIRE

Young woman holding a FIRE sign
Young woman holding a FIRE sign

Generally speaking, with traditional FIRE people are aiming to save at least 50% of their paychecks. Where they invest their money is up to the saver. Typically, though, passively managed index funds and exchange-traded funds are favored over actively managed investments. The idea, after all, is to free your days so you can do what you love – not so you can manage your portfolio (unless that is what you love).

That’s a contrast to Coast FIRE, which aims to get an adherent’s nest egg to the size that it can grow to the point that it generates enough interest to support retirement. Once that nest egg reaches critical mass, Coast FIRE requires zero savings and zero contributions.

Coast FIRE, Example

While the general idea of Coast FIRE is straight forward, the specific formula someone follows to implement it depends on several estimates.

Rate of growth – In the absence of infallible projections of how an investment portfolio, savings account or combination of both will grow, adherents must estimate the rate at which their nest egg will increase. That will determine how long until one’s money reaches an amount that allows retirement. Taking into account inflation, common estimates of the long-term growth rate of a nest egg range from 5% to 7%.

Rate of withdrawal – A second key variable that must be estimated is how much can be safely withdrawn in retirement. Often 4% is mentioned as a reasonable withdrawal rate. This is based on a 1998 study by three finance professors at Trinity University. They argue that a portfolio of 50% equities and 50% fixed income securities should allow the owner to withdraw 3% to 4% of the principal per year and still maintain a reliable source of passive income for decades.

A Coast FIRE formula for determining how large one’s nest egg must grow would begin with a regular FIRE number (estimated in the example below at 25 times annual spending of $50,000). In the formula below, note that “Years to grow” is an exponent.

25 x $50,000 / (1 + annual growth rate)Years to grow = Coast FIRE number

Suppose someone estimates they need 30 years to reach their Coast FIRE number and an average annual growth rate over those 30 years of 7%. The calculation would then be:

$1,250,000 / (1 + 0.07)30 years = $164,209

In this example, the Coast FIRE number would be $164,209, which would grow over 30 years (given the above-stated estimates) to the target figure (or regular FIRE number) of $1,250,000.

The Takeaway

FIRE written on paper and a cup of coffee
FIRE written on paper and a cup of coffee

The term “Coast FIRE” could be somewhat misleading in that it doesn’t typically entail a “Retire Early” scenario. It entails building up a nest egg that will cover all retirement expenses, and once that nest egg is built up only working enough to cover current pre-retirement expenses. It’s less rigorous than the requirements of the regular FIRE movement. Generally, Coast FIRE is a financial point anyone should work towards and even want to surpass. Moreover, it recommends practices that anyone can take into their financial strategy, such as early saving.

Tips on Saving for Retirement

  • Calculating how much you’ll need to retire without worry is an important step in securing that goal. If you want to find ways to build up your savings, consider participating in an employer-sponsored 401(k) matching program.

  • Working with a qualified financial advisor can help you avoid missteps and miscalculations as you prepare for retirement. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s matching tool pairs you with professionals in your area, in just minutes, who best suit your needs based on your answers to a few simple questions. It adds a personal touch with profiles that allow you to get a sense of your options before moving forward. If you’re ready, get started now.

Photo credit: ©iStock.com/Joaquin Corbalan, ©iStock.com/Oleksandra Troian, ©iStock.com/marekuliasz

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