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I came to a sudden and exciting realization this week that our household is “Coast financial independent”.
It won’t change my current plans, but does offer options should a change in circumstance come about.
What is Financial Independence?
Financial independence is defined as being able to fully support your cost of living with income from investments. We all need to reach financial independence by the time we reach our desired retirement age. Whether you want to retire at 30, 50, or 70, financial independence should be your goal as a high income professional.
The 4% rule of thumb is considered to be a safe withdrawal rate in the vast majority of scenarios. Therefore, to reach full financial independence a household needs ~ 25 times their annual living expenses invested.
FI Number $2.5 Million = $100,000 in passive income annually
What is Coast Financial Independence?
It’s a long road to financial independence. Some become obsessed with saving and investing for financial independence, at the expense of everything else.
Many more are looking for ways to find more balance. Yes, they want to get ahead financially, have emergency cash and options to take time off work. But they also want to travel and see the world, go out for dinner and not scrimp and save all the time. Others simply want a few mileposts along the way to encourage them to keep at it, and reassure them they are progressing towards becoming a self-sufficient millionaire.
There are many variations of financial independence that have been cooked up in the imaginations of those that want their financial cake and eat it too.
Coast financial independence takes advantage of the power of compounding interest over long periods of time by front-loading retirement savings.
No matter what age you are currently, money invested now is going to get you far better returns than those in 10 or more years time. With coast financial independence, the aim is to get as much money invested as early as possible.
Instead of continuing perpetually until the saver is financially independent 10-15 years later, they watch out for the time where their current investments are sufficient to to achieve full financial independence by the time the saver reaches traditional retirement age.
At 41, I would like the option to retire (or not) at 55. But our household have just reached the point where, if I invested no further funds in super, shares or property, we would be financially independent by the time I reach a “traditional” retirement age of 60.
How do you Calculate Coast Financial Independence?
The easiest way is to calculate coast FI is with this brilliant calculator at WalletBurst.
Of course, the trickiest part of this is the assumptions. With any financial planning, we have to make an assumption about returns and inflation. If the assumption ends up being way off, our planning is fairly meaningless. To combat this risk, extremely conservative assumptions are often made. This can result in over saving, but will often result in reaching goals sooner than you had anticipated!
In my example, I have assumed an inflation-adjusted return of 10% which is optimistic. However, it is also very unlikely I will never contribute another dollar to investments!
I don’t plan to quit medicine, no matter my financial situation. Unless you are self-employed, you will at least invest compulsory employer superannuation contributions of 10% of base salary annually.
If you are self-employed or plan to become so after reaching Coast FI, it is probably sensible to make more conservative assumptions, such as 4-5% inflation-adjusted returns. If you will receive compulsory super contributions despite being Coast FI I reckon you can be optimistic.
What are the Options Available after Reaching Coast Financial Independence?
This is the big positive above coast FI. Options. The freedom to choose even if you don’t actually change anything. It’s a huge psychological boost. But could also mean you finally have the confidence to make the big move you’ve been dying to move. Options include:
1. Reducing Hours Worked.
After reaching Coast FI, you no longer have to save for retirement.
If your assumptions are correct, your current investments will grow to provide a fully stocked retirement fund by the “traditional retirement age”. If you are making compulsory super contributions or your assumptions turn out to be too conservative, you may be able to retire earlier.
You now need to earn enough to support your current living expenses. This is so strange, as this is what many of your friends, family and colleagues do anyway. You can live pay cheque to pay cheque!
Except you have investments growing in the background. And hopefully an emergency fund. If you would love to reduce your hours worked to spend more time with kids or are obsessed with your new hobby, this is now an option. Those that have been saving aggressively will have plenty of time / income to spare once reaching coast Financial independence.
2. Make that Career Change.
Perhaps you have been keen on a career change, but discouraged by the associated pay drop.
When you go to being an expert in an area to a learner, there is inevitably a resulting decrease in compensation. Which makes a mid-career transition for those that feel they have achieved everything they wanted to in their area of expertise challenging.
Once you are Coast FI, you no longer need to save for retirement. If you have been saving 30-50% of your income towards retirement, this is a big buffer to absorb a drop in income . It is a great time to make the leap to your new dream job.
3. Keep Coast FI a “Get out of jail free card”.
Those without an urgent need to reduce hours or change jobs still get to benefit a lot from realising they have hit Coast financial independence.
Does anyone else likes to keep a couple of weeks of paid leave always available? The availability of the leave means if I really need a break, it’s an option. I find it more beneficial to have the leave available than to actually take the extra couple of weeks off!
With Coast FI, there is a lot more freedom on offer.
It’s generally your work environment and colleagues that make or break a job. These can change pretty quick. If your work environment becomes toxic, being coast FI means you can change jobs or reduce hours without worrying about a drop in income.
Earning more than you “need” (or get used to spending) provides so much freedom. If you continue investing the extra until you need it, you are less and less reliant on employment income. Financial freedom comes long before full financial independence
What Age Can you Reach Coast Financial Independence?
Coast FI can be reached surprisingly quickly. The longer you have before traditional retirement age (I’m counting this as 60 in Australia) the less you need saved. Because of the magic of compound interest.
At 7% post inflation return, a 20 year old needs $100,000 invested to be coast FI. Now obviously this is pretty hard for most 20-year-olds. At what age do you think you could hit coast FI?
What Are the Issues with Coast FI?
Nothing is guaranteed, inflation and investment return least of all. So you obviously can’t take your Coast FI date as set in stone. Most will continue to make a small contribution to investments (eg compulsory super) or accept their retirement age may change depending on actual investment returns.
As you continue to advance in your career, cost of living does tend to creep up. Our expected standard of living increases for most. For doctors and other high-income professionals, lifestyle inflation can be pretty extreme. Most seniors in these professions wouldn’t think it was possible to live on $60,000 per year.
It’s easy to see luxuries as essentials.
Even if you do a good job resisting lifestyle inflation, most will want to upgrade their lifestyles a bit. So if you hit Coast FI at 30, but then significantly increase your cost of living through house and car upgrades, having children and paying for private school you will not be Coast FI anymore.
Once coast FI, if you increase your cost of living, work out how much you need to contribute to investments to maintain this lifestyle after retirement.
Are You Nearing Coast FI?
Coast FI is a powerful step along the long to financial independence. Being aware of when you cross over into Coast financial independence can provide psychological and practical lifestyle benefits. Are you nearly there yet?
Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.