Here's A Quick Formula To Calculate Your Coast FI Number
Grab your calculator and let's nerd out.
At the beginning of any journey, it’s essential to figure out where you’re headed.
And your coast FI journey is no different. So, I recommend that you start by calculating your Coast FI number using this simple formula.
Let’s dive in.
Here’s how to calculate your Coast FI number:
First, we need to start with your FIRE number. That’s the amount of money you need saved and invested to be fully financially independent—AKA ‘work optional.’
FIRE number = 25 X Annual Expenses
So, if your annual expenses are $60,000 per year, times 25, equals $1,500,000. So, to reach a point where you never have to work again, you need to save $1.5 million. Then, you can confidently withdraw 4% per year ($60,000) without running out of money during retirement.
Now, using that as a base, we can calculate your Coast FI number:
Coast FI Number = FIRE number / (1 + annual rate of return)^(Time)
This is the amount of money you need to have saved to take your foot off the gas and work to cover living expenses while you let your assets grow. AKA: ‘work-flexible.’
Your annual rate of return is the ‘real’ return (adjusted for inflation) that you expect to receive each year from your investments. So, if you think that your portfolio will earn 9% per year on average and that inflation will be 3% per year on average, then your rate of return would be 9 - 3 = 6% real rate of return.
And ‘time’ is how many years your money will grow and compound before you retire. So, if you want to start coasting at 35, and retire fully at 60, then ‘time’ would be 60 - 35 = 25 years.
Here’s an example:
Assuming you’re 30 years old, want to retire at age 60, have a real return of 5%, and spend $60,000 per year from your portfolio (FIRE number of $1.5 million), then your Coast FI number would be:
Coast FI number = $1,500,000 / (1 + .05)^30
Coast FI number = $1,500,000 / 4.32
Coast FI number = $347,222
In other words, at age 30, you would need to have $347,222 invested to reach your goal of retiring with $1.5 million at age 60.
Then, you're free to work flexibly while covering your living expenses and letting your assets do the heavy lifting in the background.
Let’s check out one more example:
FIRE number = $1,000,000 ($40,000 spending per year X 25)
Coast FI Age = 40
Retirement Age = 65
Real rate of return = 6%
Coast FI number = $1,000,000 / (1 + .06)^25
Coast FI number = $1,000,000 / 4.29
Coast FI number = $233,100
So, if you can get $233,100 saved and invested by age 40 and let it bake for 25 years, you’ll have $1 million dollars (adjusted for inflation) and can retire and confidently spend $40,000 per year from your portfolio. And that $40,000 would be on top of whatever Social Security benefits that you and your spouse might have.
Have any questions or want me to help calculate your Coast FI number?
Drop a comment below with your Coast FI age (or current age), desired retirement age, annual spending, and assumed real rate of return.