Reader Question: Should I Coast FI?

 I had a reader send me a nice email with some lengthy questions.  This individual was doing well, including maximizing all retirement accounts, had money saved outside of retirement accounts, and worked in a volatile industry and lives in an area where the local economy is boom or bust.   He is 33 and has already worked for eleven years and is a homeowner.  I’m assuming he and his wife are good savers based on the details provided, but he didn’t disclose the exact amount saved.  His final question was “What would you have considered doing differently?”  (Hint: I would have considered Coast FI)

Shirt’s Response:

What is your Coast FI number?  

The purpose of my response was to get the reader to think about Coast FI.   I define Coast FI number is the amount saved to fully fund a retirement without needing to make any additional contributions.   This is something burnt out professionals need to consider:  At what point can you scale back your earnings to the point of only earning current living expenses but still be financial secure in retirement?

Here are two basic examples of Coast FI.  We are providing a $48,000/year retirement budget and a $60,000/year retirement budget at age 65.  The underlying assumptions are conservative with an 8% annualized return and a 3% annual inflation factor.  The goal is to have a portfolio that can generate this income in today’s dollars.

Coast FI:  $48,000/year budget.   Required Dollars Invested

Age 25:  $162,400

Age 30:  $207,268

Age 35: $264,532

Age 40: $337,618

Age 45: $430,896

Coast FI:  $60,000/year budget.   Required Dollars Invested

Age 25:  $203,000

Age 30: $259,085

Age 35: $330,666

Age 40:  $422,022

Age 45:  $538,619

I ran this analysis for a friend of mine considering leaving her career in finance.  She wanted to move into a profession that closer aligned with her sense of purpose and came with the perk of life flexibility.    The annual budget she was accustomed to was roughly $60,000 and she had diligently saved into her retirement accounts.   We ran the numbers through a similar illustration and she had exceeded the Coast FI threshold for her age.  She pushed the eject button from corporate life and hasn’t looked back.

This Math Is Just As Important for the FIRE movement.

Early retirees face this same decision.  Do they work to hit the fail safe number, or should they scale back years before and downsize how much they work?  The following are common considerations:

• You can’t get back time.  Are you sacrificing relationships today to hit one large number?
• What damage are you doing to yourself?  You only have one body and mind, it must be taken care of since damage could be cumulative over time.
• Do you want to sacrifice two, three, four, or five years of pain trudging through a job you don’t like to hit a “never work again” number?
• Will you earn money in early retirement?  Many people back into money and end up with more.  I’ve occasionally run across the an early retiree who said they worked too long.  
• Your investments will likely perform much better than the 4% rule.   A 6% sustainable withdraw rate is around 50% successful in various simulations (not recommended, but pointing out why you’ll probably have more money)

So lets get back to this reader’s situation:  

Working Assumptions:  33 Years Old, $750,000 Saved, $60,000 Projected Annual Expenses.   Based on the email and the geographic location of his work, we’re going to assume the reader doesn’t exactly love his job or current location.  Because of this we’ll title scenario #1 Death March to FI:

Option #1:  Death March FI:

Target Financial Independence Number:  $1,500,000

Amount Saved/Yr $70,000

In this scenario using a basic 8% return, the reader will reach the target number in five years, between his 37th and 38th birthday.  It sounds simple, but those next 4+ years will be grueling.  

Option #2:  Coast FI

In Option #2, we assume the reader decides to make a change into Coast FI.  This assumption consists of earning enough money to cover living expenses with a small amount saved per year (unknown new employer is probably nice and offers a 401k match).

Target Financial Independence Number:  $1,500,000

Amount Saved/Year:  $6,000

A simple compound interest calculator with the same return and invested dollars estimates it’ll take nine years to reach the $1,500,000 target number.   This delays full financial independence for five years, so the decision comes down to the quality difference between death march job and unknown replacement job.   

One thing of note, in either scenario the investment earnings start becoming a more impactful portion of the annual returns than the amount saved.  

Geoarbitrage:  Great in theory, tough in action

I want to touch on one final point in this reader’s question:  Geoarbitrage.  They likely plan on moving after they quit their jobs.  They live in an area where almost no one would voluntarily choose to live but has great incomes for certain industries.  We’re going through a similar situation and looking at moving post retirement.  Here are some issues and thoughts that have come up for us and others may not think about:

• When/how do you buy your “retirement” home?  I’m a fan of taking a (sub 4%) mortgage into early retirement.  Its tough to get a mortgage once you no longer have income.
• You will have to go through disassociating yourself with your professional identity.  How much more change is reasonable to take on at the same time?
• What is your social circle?  Moving means a new set of friends, neighbors, acquaintances.  Who will these people be and how will you find them since many adult friendships are developed through work?
• What does your routine look like? Don’t discount the loss of everything else familiar, your gym, your grocery store, your local running path.
• What about health care?  Changing doctors and dentists is added pain.
• Changing states?  More irritations with the joy of dealing with state governments.   Add in the fun of a multistate tax return!
• There’s also no “perfect” destination.  Every area we’ve looked at and I’ve analyzed to exhaustion come with trade-offs.   Some places are hot, others are cold.  Do you like the beaches and the mountains?  Want them both?  Maybe the low cost of living goes out the window.

With taking all of the above into consideration, I’d recommend the reader identify their potential final destination and move there in advance of hitting their FI number.  There’s a longer runway to figure this out while still working and enjoy Coast FI. 

I want to give credit for some of the inspirations to this post and my understanding of the concepts of Barista FI, Coast FI, Fully Funded Lifestyle Change, and F*** It FI.  Tread Lightly Retire Early even writes about pursuing financial independence while in a job she loves.  I’m impressed by all of these writers in the personal finance space who spend hundreds of hours of their time helping educate others with minimal to no monetary gain in return.