What Is Coast FI and How Does It Work?

Financial independence (FI) means investments generate enough income to cover living expenses. Coast FI is an approach where initial investments are sufficient to grow into a full retirement nest egg without requiring further contributions. This strategy shifts focus from aggressive saving to maintaining present-day expenses, with long-term financial security handled by compounding. Coast FI offers a pathway to future financial security that does not necessarily involve early retirement.

Core Principles of Coast FI

Coast FI involves front-loading retirement savings early in one’s career, allowing investments to grow over time through compound interest. Once a savings milestone is reached, typically in one’s 30s or 40s, additional contributions become optional. The existing portfolio is left untouched, relying on market growth to reach the desired retirement sum by a traditional retirement age, such as 60 or 65.

This approach differs from traditional Financial Independence, Retire Early (FIRE), which often involves aggressive saving rates, sometimes 50% or more of income, to accumulate a large enough portfolio for immediate retirement well before typical retirement age. In contrast, Coast FI practitioners continue working to cover their current living expenses, but without the pressure of needing to save further for future retirement. This flexibility can allow individuals to pursue lower-paying, more fulfilling work, or even reduce their working hours. The underlying assumption for this strategy is consistent long-term market growth and managing the impact of inflation on future purchasing power.

Determining Your Coast FI Target

Calculating a Coast FI target involves projecting future expenses. The initial step is to estimate annual expenses desired in retirement, considering inflation will increase costs over decades. For instance, the long-term average inflation rate in the United States has been around 3% annually.

Once annual retirement expenses are estimated, the “Rule of 25” can determine the total nest egg needed. This rule suggests multiplying desired annual expenses by 25, implying a 4% withdrawal rate. For example, if $50,000 per year is needed, the target nest egg is $1,250,000. To calculate the current Coast FI number, divide this target nest egg by a factor representing future growth, derived from expected investment return and years until retirement.

A long-term average investment growth rate for a diversified portfolio is often 7% before inflation, or 5% after inflation. To find your Coast FI number, you calculate the present value needed to reach your future nest egg goal. For example, if $1,250,000 is desired in 30 years with a 5% inflation-adjusted growth rate, the current Coast FI number would be approximately $290,000. This calculation reveals the amount needed today to grow for future retirement.

Steps to Achieve Coast FI

Reaching the Coast FI target requires financial actions, particularly early in one’s working life. Maximizing early contributions to investment accounts leverages compound interest over a longer period. Aggressive saving in initial years allows a smaller sum to grow into a larger amount due to the extended time horizon.

Individuals commonly utilize tax-advantaged retirement accounts to accelerate this growth. Employer-sponsored plans like 401(k)s and 403(b)s allow pre-tax contributions to grow tax-deferred, reducing current taxable income. Individual Retirement Accounts (IRAs), including Traditional and Roth options, also offer tax benefits such as tax-deductible contributions or tax-free withdrawals in retirement. Health Savings Accounts (HSAs) provide a triple tax advantage, allowing tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Beyond maximizing contributions, a sound investment strategy involves diversifying investments, often through low-cost index funds, to capture broad market returns. Managing current expenses can free up capital for early investment, involving tracking spending, budgeting, and reducing discretionary outlays. Optimizing income through seeking raises, developing new skills, or pursuing side ventures can accelerate the initial savings phase. Regularly reviewing and adjusting the financial plan ensures alignment with changing life circumstances and market conditions.