The beauty of the Financial Independence movement is that it represents a wide swath of people, with different experiences, different strategies, and different goals. What we share is the common pursuit of a financially independent existence, and the principles of FI allow us to achieve this goal.
I really appreciate the many different approaches people take to the same basic problem. Some find ways to earn more, through entrepreneurship and side hustles. Some save more by finding clever ways to shed expenses and subsidize costs. And others delve into novel investment strategies to boost their returns.
Generally, I have no gripe with the way that people manipulate this equation. As long as you’re growing your savings gap, and investing those savings (relatively) wisely, who am I to complain?
A Disturbing New Trend
People often post on personal finance forums to detail their financial situation and ask for advice on early retirement. This is often done anonymously, and is especially common on some PF subreddits including r/CoastFIRE.
Lately I’ve been seeing a lot of posts with a similar setup, and it’s frankly disturbing. It gives me concerns about these folks’ understanding of FI, and the potential mistakes they could be making.
The posts go something like this:
Hey everyone. 26M here. I’ve been working hard and saving for a few years now, and my net worth just hit $90k. I also just got a raise, and I make $65,000 a year now. I share an apartment with 3 other people and eat cat food, so my yearly expenses are about $14,000. Should I Coast FI now, or wait a year?
This example might be a bit hyperbolic, but not by much. Just last week, a twenty-something with a $40k net worth suggested that he/she should cut their hours and take the Coast FI plunge. Are you shitting me?!?
Again, I normally try not to criticize others’ plans, and everyone has a unique set of circumstances that define their path. But clearly some of the more recent “FIRE followers” are a little misguided on how this thing works.
I don’t claim to be an expert, but I’ve researched and written a fair amount on the Coast FI method. Some people even thought I coined the term (I didn’t). Others have called the approach partial FI, Barista FI, or Slow FI.
Here’s a brief refresher on the subject.
What Coast FI is
In my first post on this topic, I defined Coast FIRE like this:
Coast FIRE :
1. The point at which you can stop making retirement contributions and still expect to have enough saved for a comfortable retirement.
Then I further clarified my definition:
2. The point at which you can reduce your savings rate to 0% and still reach FIRE within a reasonable time period.
Obviously, this is not etched in stone. I’m sure many would argue that they can coast without reducing their savings rate to zero, which makes sense to me. My point with definition #2 was to say your Coast Number is the point where you don’t need to save any more for retirement. If you can continue to save, even better.
Coast FI should be viewed as a milestone on the path to financial independence. It’s a checkpoint we all reach at some time that tells us that we can think about slowing down and relaxing a bit. For some, that means reducing work hours or switching to a more fulfilling job. For some families, it may mean dropping down to a single income.
The core feature of the Coast FI milestone is that the heavy lifting has been done. The nest egg has been sufficiently built up so that it will continue to grow, even in the absence of additional contributions.
What Coast FI is not
The numerous questionable interpretations of Coast FI that I’ve encountered lately seem to have some misconceptions in common. Here is how I would characterize and address these misconceptions.
Coast FI is not a multi-decade strategy
By my definition, someone who has begun to coast is no longer saving for retirement. If they’ve already accumulated a 7-figure net worth, then this is perfectly fine in most circumstances. However, if they’ve only just hit the $100,000 mark, and they need to get to $500-600k in order to ensure a safe withdrawal rate in retirement, we might have a problem.
The most recurrent issue I see in these forums is people contemplating coasting too early. It might work, but it might not. If you’re only 10% to your FI savings goal, it can be a long and very bumpy ride to retirement. And you’re almost ensuring that you will need to work multiple decades in your (albeit reduced) work arrangement. If I had to work full-time for 10 years, or part-time for 40, I would probably opt for the former.
I won’t even get into how impossible it is to predict what will happen in the coming 10, 20, or 30 years. Who knows what the job market, interest rates, and the general economy will look like over this timeframe. Will you get married? Divorced? Have kids? Twins? Get sick, or have to care for a family member who gets sick?
In sum: it’s a pretty terrible idea to expect that 30 years of the Barista FI lifestyle turns out exactly how you planned.
Coast FI is not a substitution for a high savings rate
Here’s another fallacy I keep encountering: the idea that Coast FI is a retirement strategy in and of itself. In other words, the notion that you can coast your way through life instead of pursuing that more traditional FI path.
If you’ve read Mr. Money Mustache’s seminal post, the Shockingly Simple Math Behind Early Retirement, you already know the secret. Your savings rate is the single most important metric for determining how quickly you’ll reach your FI goal. Full stop.
If you can save and invest roughly 50% of your take-home pay, you can expect to retire in 15 years from a starting point of no savings. Get more aggressive with your savings rate, and you might get there even faster.
On the other hand, this means that a lower savings rate of 5-10% could extend your working phase by decades. And, as we’ve already covered, Coast FI involves a reduction of your savings rate, often a complete reduction to zero. This means that coasting cannot work unless you’ve already amassed significant savings. Ergo, you can’t skip the “earn and save” part of the journey.
Coast FI was never posited as an alternative for the real thing. It’s not Coke Zero.
Coast FI is not a shortcut
Which brings me to my final point. Coast FI is not a shortcut, or a workaround of any sort.
I’ve been thinking a lot about these bad takes on Coast FI, and wondering why they seem to be getting more common lately. I have a theory.
I think a lot of the premature FIRE-ing comes from a warped sense of investing after living through the previous 12-15 months. Specifically, we’ve seen a decade’s worth of market action and returns in the space of a year. I think that the appearance of easy, fast, multi-bagger returns is distorting especially young investors’ minds. Add in shitcoins, NFTs and meme stocks, and you’ve got a perfect storm for unreasonable expectations.
A lot of people just started investing last year. They rolled a stimmy or two into Robinhood, and turned $1,400 into $5,000 with an unresearched (but well-timed) bet on GameStop or AMC.
If all you’ve ever known is 10X returns on bankrupt companies, Dogecoin, or the speculative play du jour, you probably think index investors are Luddites.
The obvious problem with this thinking is that this is not how the world works. You can’t gamify FIRE to the point where you skip the part of the process where you actually save and invest. It’s only a matter of time before the inevitable reversion to the mean.
The bottom line: there are no free lunches in life. You can’t live off your savings and investments unless you actually take the time to save and grow your investments. If you don’t put in the work on the front end, you won’t be able to enjoy it on the back end.
Some Coast FI Guidelines
I assure you that the purpose of this post was not just to trash-talk Redditors and novice FIRE hopefuls. I have a new proposal for a couple more guidelines to further define what it means to Coast FI.
Think of these rules not as constraints, but rather like bumpers on a bowling alley. If you adopt these tenets while pursuing FI, you’re much more likely to stay in your lane and hit your target.
OK, here we go. You are ready to Coast FI if…
#1: You are 10 years or less from reaching FI, based on reasonable expectation of market returns
In the analogy from my original post, this is the point where you can stop peddling and expect your momentum to carry you through to FIRE. Any earlier, and you need to rely on exceptional returns or luck. Any later, and you could significantly overshoot your FI target (which is OK).
A 10 year horizon to financial independence translates to being roughly 60% of the way to your FI savings goal, if you expect the market to return at least 5% per annum.
Sixty percent of a FI investment target of 25x expenses would mean you’ve already accumulated 15x of your yearly spending goal. Once you’ve made it 60% of the way, it shouldn’t take you longer than 10 years to reach your retirement savings goal, and you might even get there much sooner.
#2 You can maintain a savings rate of 20% during your Coast period
I just made up this 20% figure, but here’s the logic: Even if you’re too early for standard Coast FI, that doesn’t mean you shouldn’t pursue a better quality of life. If you can cut back your hours and still save, then I’m all for it.
It’s hard to judge exactly what your savings rate needs to be, because it depends on how big your nest egg is already. But if you’re 20% to your FI goal (eg. 5x annual expenses saved), and you maintain a 20% savings rate, then you’ll most likely reach your goal in less than 10 years.
In other words, you can start coasting a bit early if you combine a decent savings rate with a modest net worth already accumulated.
#3 You have some solid contingency plans
There’s no way around it: there will always be some risk associated with quitting and/or reducing your earning potential before your nest egg is fully funded. Therefore, everyone who considers the Coast FI path should do a personal risk assessment prior to taking the leap.
Think about the most common things that could go wrong, and how you would deal with those hypothetical situations. The more solid your fall-back plans, the higher your appetite for risk can be.
Some examples of solid contingency plans:
- Your Coast FI strategy is to stay with your current employer, but to reduce your hours. You still collect benefits. Your boss has told you that you can increase your hours whenever you want.
- You have a unique set of skills that assure demand for your services. If you ever needed to increase your income, it would be easy to score some work.
- You’ve created a side hustle that can cover any shortfall in your plans. Or maybe the purpose of ‘coasting’ is to focus on growing this project.
- You’ve thought about the ways your life can get sidetracked or your plans could change (divorce, sickness, children), and you have a plan for dealing with those situations.
The idea here is that you wouldn’t be completely blindsided if things don’t pan out the way you think they will. Because, they never do.
In my case, I was prepared to leave my job when we decided to move to VA last year. I subsequently rejected an undesirable job offer from my company before settling into my current position. I was able to make these moves because we are already very close to our FI target, and my wife will continue to work for the next few years. If we weren’t in such a strong financial position, I wouldn’t have risked losing my job.
It’s exciting to see so many people take agency over their situations and embrace financial independence. I applaud anyone who thinks critically about their life and finds ways to establish a better balance.
I think the only issue is that some people are getting out over their skis. The eagerness to set FI plans in motion, combined with unreasonable expectations of market returns, is pushing some people to consider Coast FI a bit prematurely.
Like so many things in life, patience is key. The early years are a grind, and there’s really no way around it.
Financial independence, and all of its variants (including Coast FI), depend on the engine of compounding returns. You save up a sum of money, invest regularly, and at some point the returns on those investments will outweigh your contributions. This is the point where you can think about coasting.
What’s your take on Coast FI? Do we spend too much time defining abstract concepts? Is everyone just too impatient for regular FI? Let me know in the comments.