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Many of us dream of one day being free to spend our days as we please, but are unsure how to financially get there. One potential strategy involves the idea of “coast to FI” (short for “coast to financial independence“). With this, you save enough money to cover your future retirement needs early, generally by making more sacrifices earlier in life and taking greater advantage of compound interest, and then live out the rest of your working years only having to worry about paying the bills.
How do you know when you no longer need to save? When your retirement savings, without further contributions, are projected to be worth the amount you believe you’ll need to retire on by your targeted retirement date.
Key Takeaways
- Coast to FI is when you reach the point where your current retirement savings will grow to meet your needs without additional contributions, allowing you to pursue lower-paying but more fulfilling work.
- The strategy works best for diligent savers or those who’ve received windfalls, but requires careful planning around variables like inflation, investment returns, and changing expenses that could derail your projections.
Calculating Your Coast To FI Number
Your coast to FI number is the minimum amount you need invested so that time and compound interest do the heavy lifting for the rest of your working years.
Here’s how to figure it out in three simple steps:
Step 1: Estimate Your Retirement Needs
Take your expected annual retirement expenses and multiply by 25. (This follows the popular rule that you can safely withdraw 4% of your savings each year in retirement.) So if you think you’ll spend $40,000 annually in retirement, you’d need $1 million total.
Step 2: Count the Years Until Your Expected Retirement
Subtract your current age from when you plan to retire. If you’re 35 and want to retire at 65, that’s 30 years.
Step 3: Calculate the Formula
You can use a free online coast to FI calculator, such as the one at WalletBurst. You can also apply this formula:
Coast to FI Number = Retirement Goal ÷ (1 + Growth Rate)Years to Retirement
Example
Don’t let the formula intimidate you—it’s just showing how much less you need today because your money will grow over time. For example, let’s say you’re 35, expect to need $1 million for retirement at 65 (30 years from now), and anticipate an average of 7% annual returns for your portfolio. Using an online calculator or the formula—$1,000,000 ÷ (1 + 0.07)30 = $131,367—you would find out that if you already had $150,000 saved, you’re there—you could theoretically stop retirement contributions and focus on just covering your living expenses.
Tip
The key insight offered by coast to FI is that, thanks to compound growth, you might need far less money saved today than you might think to secure your future retirement.
How To Avoid Hitting Your Coast Date
Setting a coast date is certainly easier than hitting your savings target. Some of the main reasons people miss their coast to FI date include the following:
- Underestimating lifestyle inflation: Don’t be too conservative with your estimates for annual expenses. Yes, the mortgage may be paid off by then, but you’ll also likely spend more on healthcare and enjoying your free time.
- Setting and forgetting: Sometimes projections need revising, especially after significant life events, such as having kids, divorce, losing your job, or other career changes.
- Overestimating investment returns: You might assume an average yearly return that just doesn’t pan out given changes in the market.
- Not accounting for inflation: Prices rise considerably over 30 or 40 years, and you must adjust your estimated investment return lower to account for this.
- Delaying or raiding investments: Coast to FI depends on early, consistent investing. If you start late, pause contributions, or make withdrawals, you will find it harder to reach your coast to FI target.
Tip
Rather than an all-or-nothing approach, coast to FI exists on a spectrum—you might continue modest contributions for safety while gaining the freedom to take career risks or extended breaks.
What To Do After Reaching Coast To FI
Reaching coast to FI means, in theory, you no longer need to save for retirement.
For many people, this could mean a newfound freedom. You could take this opportunity to work fewer hours; take a lower-paying but more fulfilling job; or set up your own business. Just make sure you earn enough to cover your expenses and don’t dip into your emergency fund or retirement funds to stay afloat.
Alternatively, if you like your job and aren’t feeling burned out, you can carry on as usual and continue saving, giving yourself funds to live more lavishly, help others, or leave behind a bigger legacy.
The Bottom Line
Are you the type of person who prefers making sacrifices now to live better later? If so, coast to FI could work for you. Just make sure to consider your estimates carefully, revise the numbers when necessary, and don’t assume hitting the sweet spot means you won’t need to work and earn money to cover your everyday expenses.
