Hey Gen Z, Let’s Coast to Financial Independence.
Coasting to financial independence may be Gen Z’s hidden superpower.
Born between 1997 and 2012, Gen Z’ers or Zoomers are coming of age and setting the stage to become a dominant force in the workplace over the next decade.
They’ll soon replace millennials as the most studied generation of all time as they bring an entirely new level of diversity, digital nativism, and progressive views to the mainstream.
With everything they have going for them, from a financial perspective, Gen Z has the most significant money advantage of any generation in the workforce right now: Time. At the time of writing, the oldest Zoomers are just twenty-five years old, meaning their money has at least four decades to compound between now and the traditional retirement age.
But given what we know about Gen Z so far, that they are on track to become the most educated generation of all time and the most racially and ethnically diverse, it’s safe to assume they aren’t going to be interested in the “traditional” American retirement. One that requires decades in corporate America, building someone else’s company, in exchange for a 3% 401(k) match and five days of paid vacation per year.
No, my guess is Zoomers are going to blaze their own path. One that involves aligning their time, money, and passions from day one. Maybe even one that involves Coasting to Financial Independence.
What is coasting to financial independence?
Coasting to financial independence (Coast FI) means that you‘ve achieved your investment goals and are now letting the power of time and compounding do the work for you. It means that you don’t need to save another dime, and you will still be on track to reach your financial independence goals in the future.
When you reach Coast FI, you are now free to work part-time or flexibly to cover your living expenses while spending more time doing the things that light you up. This gives you the option to pursue meaningful work over higher-paying work or even consider setting up your own small business as a freelancer, artist, independent contractor, or consultant.
It’s the ultimate reframe of the traditional American dream as you unlock control over your most precious non-renewable resource: your time.
So, how can Gen Z tap into Coast FI?
Like I said before, Zoomer’s unique money advantage is time. By investing in your late teens and early twenties, you can unlock decades upon decades of compounding, leading to the possibility of exponential investment returns.
Let’s look at a simple example of a twenty-three-year-old who has just graduated from college and landed a pretty sweet job making $55,000 per year as a business analyst. Let’s call her Zoe.
Imagine that Zoe’s job offers a 401(k) with a 5% match. Let’s also imagine that Zoe is frugal, maintaining her same college lifestyle for another few years to optimize her financial situation. This allows her to save a whopping 20% of her income into her 401(k), which means she will put in $11,000 per year, and her employer will put in $2,750.
Zoe is saving $13,750 per year, and let’s say she keeps this up for five years. Assuming a 9% annual rate of return, Zoe will have saved just over $84k in 5 years at 28. Pretty dope, Zoe, but here is where the power of compounding breaks most people’s brains.
Now let’s say Zoe decides she wants to take her foot off the gas—she’s put in a solid five years of her life into corporate America, is feeling a bit burned out, and would like to try something else. This means she will take a pay cut and won’t be able to save for retirement for a while. Let’s look at what will happen to the initial savings she set aside over the next 37 years till Zoe is 65.
Starting with $82k, assuming the same 9% per year growth and 37 years of compounding, Zoe will have a staggering 1.99 million dollars at 65. Not bad, Zoe! Before we get too pumped, I need to tamp down our expectations by factoring in the effect of inflation—the gradual increase in costs of goods and services over time.
Let’s assume prices for things go up 3% per year—Zoe’s initial $82k will actually be worth just over $700k in today's dollars when she turns 65. So, probably not enough to retire completely depending on Zoe’s future retirement expenses and Social Security income, but a great start.
What if Zoe wants to coast to financial independence?
Let’s take a look at what it would take for Zoe to coast to financial independence, reaching a point where she is fully set for her future retirement and can work flexibly to cover living expenses in the meantime.
Here’s the pitch: Let’s say Zoe wants to begin coasting at age 30, never needing to save for retirement again. Let’s also assume she wants to be completely set up to spend $60k per year in retirement, starting at age 65.
What does she need to do to get there?
First, let’s assume that Zoe will collect the average Social Security check in retirement starting at age 65, roughly $1,600 per month, or about $20k per year. Of course, this is a rough and conservative assumption, and her actual Social Security check may be more or less, depending on her highest 35 years of earnings, but this assumption will work for our purposes.
This means that Zoe will need to figure out another $40k of income per year in retirement to cover her retirement expenses. Using the 4% rule, which states that you can withdraw 4% from an investment portfolio each year and expect it to last 30 years or more, she will need a cool $1 million, adjusted for inflation, at age 65.
She’s 23 right now and wants to start coasting in 7 years. Here is what she needs to do:
Save $130k by the time she is 30.
That’s it—once she hits $130k, assuming 9% returns and 3% inflation, she will have the million she needs, combined with SS at age 65, to provide the retirement lifestyle she is looking for.
So how can Zoe save $130k by the time she is 30?
She will need to set aside $15,500 per year from age 23 to age 30, and she’ll have her $130k.
She’s already contributing 20% to her 401(k) and getting a 5% match for a total of 13,750 per year. So if she bumps her 401(k) contributions up to 23% instead of 20%, she will be coasting by age 30. Voila!
Is coasting worth it?
The answer to this question depends on what you’re going for. As you can see from the example above, Zoe has to put in the work during her 20’s, saving far more than the average Gen Z’er and likely delaying some fun purchases along the way. That said, Zoe put in the effort upfront, and the payoff is massive.
She doesn't need to save another dime after age 30 and will still hit her comfortable retirement goals by age 65. That gives her a tremendous sense of freedom for the next three and a half decades, allowing her to pursue more meaningful work, even if it pays less. In addition, Zoe can focus all of her income on enjoying life now, choosing to travel, give, and spend as she chooses. Her options are limitless at this point, all because she harnessed her unique money advantage: her time.