Wouldn’t it be great to spend all your income without thinking about saving for tomorrow? So many of us feel guilty to spend money. We have big goals which may include buying a house, paying off student loans, or retiring early. What if you could achieve financial independence without saving an extra penny? That’s the concept of Coast FIRE.
How can this work? There’s no tricks or gimmicks, only math. You don’t have to feel guilty about spending money because you’ve already taken care of saving.
Coast FIRE is a type of financial independence that means you’re finished saving but are not yet able to live off your investment income. Even though you don’t have enough income to retire yet, you’ve created the means for your assets to grow to that level in the future.
Basically, Coast FIRE is the phase before financial independence.
What should I do to achieve Coast FIRE?
Like the other forms of financial independence, Coast FIRE means working, saving, and investing your money in a way that in the future, you could live off the proceeds.
There’s no one formula to do this. Here are a few.
Financial freedom formula #1: Conservative real estate
Here’s one way: Buy a house, then buy another one. Both houses cost $500,000. Instead of saving in the stock market in the next 7 years, you choose instead to pay off both houses. You’ve dropped $1,000,000 into real estate.
If you get at least a 10% return after expenses like taxes and insurance, which is equivalent to receiving $4166 on each home, you’ll net $100,000 per year.
if you achieve an 8% return after expenses, that’s equivalent to $3333 per home. That’s $80,000 per year earned in a tax-advantaged (but maybe not tax free). That’s financial freedom. It’s not Fat FIRE, but it’s not Barista FIRE. It’s traditional FIRE, but ignores the 4% rule that would have you earn $40,000 per year from $1,000,000 nest egg.
Where does Coast FIRE fit in? Imagine the investor spent six and a half years paying off one of the houses. They applied $4000 of personal savings monthly toward that goal.
Once the first home is paid off, the investor has $3333 additional cashflow. This is when they’ve hit Coast FIRE in seven years. Let me explain.
Paying off the first house
They’ve built their money machine so much that the money machine (the investment house) will set them free. If they apply the $3,333 cashflow from the house toward the mortgage on their second house, they can pay it off in a little over seven years. They don’t need to apply any of their own personal savings any more.
Here’s how that mortgage payoff appears, using modern mortgage rates.
This investor has achieved Coast FIRE. If she doesn’t want to save a penny towards financial independence any more, she will still become financially independent in seven years. What’s more, she will live on ALL of her income, rather than saving a large proportion of it as she did in the first six years of her journey.
Should she stop saving?
If she saves LESS than she was in the early days – let’s say she put $2000 aside rather than $4000, she’ll be applying $5333 toward the mortgage.
And she will be truly financially free in five years.
What if she doesn’t take her foot off the gas? What if she continues to apply $4000 of her take-home pay towards financial freedom? That’s $7333 extra monthly.
And she’s achieved financial freedom in less than four years after the first house is paid off, if she’s aggressive. That’s ten and a half years to financial freedom, taking home $80,000 per year.
If she decides to go the Coast FIRE way, she’ll take 13 and a half years to achieve the same goal. But she’ll enjoy the entirety of her wage income for the last seven years. That’s $4000 extra monthly to spend as she likes.
The Bottom Line: Coast FIRE is a slower but no less sure way to achieve financial independence.
Financial freedom formula #2: Index fund investing in the stock market
Investing in the stock market is far easier than buying real estate. Many of us enjoy tax-advantaged accounts like 401k through our employers. We may have been saving for retirement without fully understanding that we are doing it for years!
To mirror the situation above, this investor starts from nothing and begins saving $4000 monthly into her taxable brokerage. Assuming compound growth of 8%, she will have a tidy nest egg of $435,000 after seven years of savings.
If she stops contributing altogether and allows this to grow, after another six years (13 years total), Coast FIRE style, she will have saved nearly $700,000.
How much income could she withdraw from a $700,000 nest egg? Using the 4% rule, her monthly income would be $2800.
Seven years of aggressive saving isn’t enough to achieve a comfortable financial independence through stock market investing alone. How long would it take to take home $8,333 the coast fire way? In other words, how long would it take her to save $2 million?
If she saves $4,000 monthly for ten years, she’ll have a $700,000 nest egg at the end. And then if she allows this to compound for another fourteen years, she’ll have her $2 million nest egg. That’s 24 years until financial independence, and ten years of aggressive saving, doing it the Coast FIRE way.
What if she doesn’t stop investing? How long will it take to achieve a $2 million nest egg?
The answer: 19 years!
Compared to investing in real estate, she’ll have to save far more over more time to achieve the same income.
Take aways about Coast FIRE
When thinking of financial independence, I consider Coast FIRE an early milestone.
For real estate investors, Coast FIRE may be interchangeable with Barista FIRE. In Barista FIRE, investment income that is insufficient to stop working, but enough to cut back and choose a less lucrative position. Coast FIRE allows the same flexibility.
If you know what you’re doing, real estate investing is the fastest way to achieve financial independence. Even if you don’t know what you’re doing, companies like Doorvest can help investors buy homes that are already renovated and professionally managed.
In my opinion, Coast FIRE is not the way to early financial independence through stock market investing unless you invest very aggressively (more than $4000 monthly), assume higher returns, or are willing to wait a long time.
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