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Planning your way to Coast FIRE

Updated: Mar 11, 2023

Last week, I wrote an article on the importance of savings and emphasis that prioritizing savings is often a neglected topic. In that article, I explained the importance of savings especially in your early years on your eventual retirement sum.

I thought that this topic can be further elaborated or even illustrated with the example of planning for Coast FIRE.

For those who are not familiar with FIRE (Financially Independence, Retire Early), there are usually a few forms of FIRE- Fat FIRE, FIRE, Lean FIRE, Barista FIRE, Coast FIRE etc. For more information on them, check this article out.

In my opinion, the least "stressful" form of FIRE might be Coast FIRE. The whole essence of Coast FIRE is to quickly accumulate a certain amount of money and allow the power of compounding to aid you in accelerating the growth of this amount of money to be your retirement sum at the age when you want to retire. Upon reaching Coast FIRE, you then no longer need to actively contribute any amount (or savings) to your investment sum as your investment returns should already be sufficient to do the trick.

This might sound contradictory for most. A lot of us are brought up in a way that saving for retirement should be something one did in the last 10 or 15 years of their working years. For most of us, we observe this form of behaviour from our parents and have always thought that this is the norm. The whole idea of Coast FIRE is to reverse the trend. You save actively in your early years to quickly reach Coast FIRE. Once you reach Coast FIRE, you can then afford to spend more on your wants.

Let's look at the example below.

The above is quite a classic Singaporean scenario. A 30 year-old with $100,000 in invested assets (everyone always talks about reaching your first $100,000 by 30 year old in Singapore) and wants to retire at 63 (retirement age in Singapore). If the individual has a target to be able to have $50,000 to spend annually during retirement, able to contribute $3,000 monthly to his/her investment and has confidence that his/her investment can compound at 7% annually, he/she is just 8 years from Coast FIRE! This means that he just needs to go through 8 diligent years of savings and he's set for retirement. At the age of 38, he/she could then choose not to contribute any more to his/her retirement sum and spend more on his/her wants like getting a car or even taking a lower-paid job with less stress if the salary can at least cover his /her monthly expenses. Of course, if he/she chooses to continue to contribute $3,000 monthly beyond his/her Coast FIRE age, he/she will be looking at retiring at 49 years old instead of 63. By the way, the FIRE number of $1,250,000 is derived from a safe withdrawal rate of 4% and annual spending of $50,000 in retirement (100 divided by 4 multiplied by $50,000).

If one chooses to prioritise other goals such as getting a car in the early years and save less, the overall picture is a bit grimmer as shown below.

In this case, just dropping the monthly contribution from $3,000 to $1,500 will set the individual back by 12 more years to reach Coast FIRE. 12 years!! Even if he/she chooses to contribute $1,500 beyond his Coast FIRE age, he will still only reach FIRE at an age of 58 years old (which is 9 years more than the age he could have achieved FIRE if he contributes $3,000 instead).

These above examples are also done in the optimistic scenario of achieving a CAGR of 7% throughout the investment years (which is something that is not really within control). If the CAGR is to drop to 5%, the individual cannot even reach Coast FIRE before the age of 63 if he/she only contributes $1,500 monthly.

Another factor which can greatly affect the above results is your expectations of annual spending during your retirement years.

Given the same example as the original case with the only change made to the annual spending in retirement (from $50,000 to $40,000), you can notice the change below.

The individual is now just 6 years (instead of 8 years) from Coast FIRE. This is why it's important to avoid lifestyle creep as one achieves higher income during his/her 30s or 40s. If you allow lifestyle creep to come in, your annual spending in retirement will have to go up and it will be even harder for you to achieve any form of FIRE eventually.

In essence, planning for retirement is a tough exercise with multiple variables such as annual spending in retirement, investment growth rate, retirement age etc. There are some factors which we have very little control over like the investment growth rate. However, there are a few factors which we can control like monthly contribution rate and avoidance of lifestyle creep so as to prevent an ever increasing need to spend more in retirement. If we control these factors well, FIRE might not be a very difficult thing to do.

Hence, please save more.

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