What Is Coast FIRE and How Does It Work?

Financial Independence, Retire Early (FIRE) is a movement focused on significant savings and investments to achieve financial freedom and potentially retire earlier than traditional ages. This pursuit often involves aggressive saving to build a substantial investment portfolio. Within this broader movement, various approaches exist, with Coast FIRE gaining considerable attention.

Understanding Coast FIRE

Coast FIRE is a financial strategy where individuals save and invest a sufficient sum early in their careers. This accumulated capital then grows passively through compounding interest until a traditional retirement age, without requiring further contributions. This approach differs from traditional FIRE, which typically involves saving enough to cover all living expenses from investments immediately, often leading to a complete exit from the workforce at a young age. Traditional FIRE demands a very high savings rate and a larger initial portfolio. Unlike Barista FIRE, where individuals work part-time to cover current expenses, Coast FIRE means investments are generally left untouched during the “coasting” phase. Once the Coast FIRE number is reached, the individual only needs to earn enough to cover current living expenses, as their future retirement is projected to be funded by the growth of their existing investments. The power of compounding interest is central to this strategy, allowing a relatively smaller sum saved early on to grow significantly over many years.

Determining Your Coast FIRE Target

Calculating your Coast FIRE target requires identifying key variables to project your future financial needs. First, estimate your desired annual spending in retirement. This figure should reflect your envisioned lifestyle, factoring in potential changes in expenses. This desired annual spending then helps determine your overall financial independence (FI) number, the total portfolio size needed at retirement.

A common guideline for calculating the FI number is the safe withdrawal rate (SWR), often cited as the “4% rule.” This rule suggests you can withdraw approximately 4% of your initial portfolio balance each year, adjusted for inflation, with a high probability of your funds lasting through retirement. To find your FI number, multiply your desired annual retirement spending by 25 (e.g., $40,000 annual expenses x 25 = $1,000,000 FI number).

Once your FI number is established, back-calculate your Coast FIRE number. This is the amount you need to save today to reach your FI number by your target retirement age. This calculation depends on your assumed annual investment growth rate and the number of years until your projected retirement. Using a conservative, inflation-adjusted growth rate, such as 5-7%, is prudent for these long-term projections.

Achieving Your Coast FIRE Goal

Accumulating the initial capital for your Coast FIRE goal involves strategic saving and investment choices during your early working years. Maximize your savings rate by directing a significant portion of your income toward investments. This aggressive savings phase is crucial because earlier funds benefit more from compounding growth.

Utilizing tax-advantaged retirement accounts is a foundational step. Employer-sponsored plans, such as 401(k)s, offer a powerful way to save, often including employer matching contributions. These plans offer tax benefits, such as pre-tax contributions reducing current taxable income or Roth contributions growing tax-free.

Individual Retirement Accounts (IRAs), including Traditional and Roth IRAs, provide another avenue for tax-advantaged savings. Health Savings Accounts (HSAs) also serve as a triple-tax-advantaged investment vehicle when paired with a high-deductible health plan. Contributions are tax-deductible, investments grow tax-free, and qualified withdrawals for medical expenses are tax-free.

Strategic investment choices during this phase primarily involve low-cost, diversified portfolios. Broad-market index funds or exchange-traded funds (ETFs) that track major market benchmarks like the S&P 500 are often recommended due to their low expense ratios and inherent diversification. These funds aim to replicate the performance of an entire market segment, providing exposure to many companies, which helps mitigate individual stock risk. Choosing investments with minimal fees allows a greater portion of your returns to compound over time, accelerating your progress toward your Coast FIRE number.

Managing Your Coast FIRE Journey

Once the initial Coast FIRE target is reached, the journey shifts from aggressive saving to allowing existing investments to grow. During this “coasting” phase, you are no longer required to make new contributions to your retirement accounts, as your current portfolio is projected to reach your full retirement goal through market appreciation. Your earned income primarily needs to cover current living expenses, providing significant financial flexibility.

This flexibility can translate into various lifestyle choices. Individuals might pursue less demanding or lower-paying jobs, reduce working hours, or take career breaks without jeopardizing long-term financial security. The reduced pressure to earn a high income for savings allows for a more balanced approach to work and life.

Periodic portfolio reviews remain important. Regularly check your investment performance against projections to ensure you remain on track for your retirement goals. Adjustments may be necessary if market conditions deviate from long-term averages or if personal circumstances change. Monitoring inflation is also important, as it impacts the purchasing power of your future retirement funds. Occasional rebalancing to maintain your desired asset allocation can help manage risk and optimize growth.