How to Know When You Can Stop Saving So Aggressively

Understanding and Calculating Your Coast FIRE Number

In this episode of The Retire Early, Retire Now podcast, host Hunter Kelly, delves into the concept of Coast FIRE (Financial Independence Retire Early) and how to calculate your Coast FIRE number. The discussion covers the essentials of Coast FIRE, the importance of balancing immediate financial needs with long-term retirement goals, and the steps involved in reaching your Coast FIRE number. Hunter explains how to determine your retirement spending goal, apply the 4% rule, and calculate present and future values. Additionally, he emphasizes the need for periodic reassessment of goals, managing lifestyle inflation, automating savings, and mitigating risks such as market volatility and inflation. By the end of the episode, listeners will have a comprehensive understanding of Coast FIRE and actionable steps to achieve financial flexibility and independence.

00:00 Introduction to Coast Fire
01:53 Understanding Coast Fire
03:48 Calculating Your Coast Fire Number
04:11 Setting Retirement Spending Goals
06:46 Applying the 4% Rule
07:48 Present Value and Future Value
09:13 Reaching Your Coast Fire Number
12:11 When to Start Coasting
18:55 Steps to Achieve Coast Fire
23:43 Considerations and Risks
25:47 Conclusion and Final Thoughts

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast. I'm your host, hunter Kelly, certified financial planner and founder of Palm Valley Wealth Management. Today we're gonna dive into how to calculate your Coast fire number. We've been talking the last two weeks about what Coast Fire is. The idea of it, how it came about, the things that I've been thinking about, for me personally, but also, this is something common I talk about with my clients as well as they're working and saving for retirement. What's the best way to balance that here and now, but also be prepared for when that time does come that I want to retire or maybe even I have to retire, for whatever number of reasons, right? One of the main things is, hey, I wanna be financially independent. Where I want to have flexibility and freedom financially. how do I do that? But how do I balance some of these things that I want to do now? And I think the idea of Coast Fire kind of meets the best of both worlds there. And so we're gonna dive into more of the planning, more the mechanics of that today. like I said, check the previous two weeks out of my podcast episodes. they're more of the idea and the 10,000 foot view. And now we're gonna dive into. Hey, how do we calculate some of this stuff? What are some, red flags that we need to think about? and when do we know when we can start coasting, right? How do, how do we get there and when can we start doing that? so we'll talk about that today. So if you know someone that would love to, be set for retirement and have more financial flexibility and optionality. share this episode with a friend and if you've loved this podcast, leave me a five star review. This really helps the podcast out. I wanna be able to meet, reach more people, to help them get, more financially stable, have more financial freedom so that they can do the things that they want to do. But let's jump in. Let's recap real quick. If you did not listen to the previous two episodes, what Coast Fire is? What is Coast Fire? This is the point where your current savings, 4 0 1 Ks IRAs, brokerage accounts your savings investments. Can be left to grow and they will be enough to support your retirement at a traditional retirement age without any additional contributions. So let's say you're 45 and you hit your coast number, you theoretically would not have to put another dime in that those accounts. and they would grow and still be able to meet your retirement needs when you retire. or stop working at 8 65 or 70, whatever age you would want that to be. The key difference between fire, so financial independence and retire early, and coast fire is that fire is more of, Hey, we are retiring today. We're not gonna work anymore. maybe we have some passive income and things of that nature, but there are things that we want to do that maybe don't generate income. So we're gonna be financially independent. we don't, we don't necessarily need any more income, from our, work or, careers to be financially independent, but Coast Fire is a good blend. I think a good blend of you can stop saving today. You can let your investments work for you now, but still re retire comfortably at some point in the future. and that, that point in the future is gonna be different, for everyone. But, you are, ne not necessarily financial, financially independent today, but you have set yourself up for the future. So think of it as hitting your financial momentum. You don't need to keep pedaling uphill because the slope will carry you to the finish line, right? So you've done all the heavy lifting, you've peaked over that hill, and now you can just coast down, the hill. And let the momentum take you to the finish line or retirement in this case. And so the question becomes how do we calculate this Coast fire number? It's not the traditional, Hey, what do I need to stop working because I know I'm gonna continue working. Right? So what do I need in my retirement accounts that now I can start reducing my savings, maybe increasing my lifestyle a little bit, right? and still be able. To be set for retirement moving forward. And so first thing you really need to do is decide your retirement spending goal. And so you can do this one of two ways. You can get really granular and right. I'm, almost 35. if I took a traditional retirement age of 65, that's 30 years out, do I really know, what my retirement is gonna look like spending wise 30 years from now? Probably not. Right? so there's one or two ways you can, you can keep your baseline expenses right? you can adjust for things to drop off, like mortgages, commuting tuition, So anything to deal with kids going to school, whether that's private school or college, whatever that may be. Healthcare, traveling, whether you're traveling now or planning to travel later. Hobbies. So do your hobbies, have a significant cost to them? And so you can really get granular with that or, you can just say, Hey, this is my income now and what would I need in a future dollar amount to replace that income? Right? So if you make$300,000, you and your spouse make$300,000 a year, what do I need to make sure that I can replace that at some point in the future? Right? And so align your estimate with your lifestyle that you envision. Whether that's lean. So if you want to be a little bit more lean in retirement, or if you want to be a little bit more extravagant, whether that's traveling or expensive hobbies, whatever that may be, or shoot spoiling your grandkids or kids for that matter, right? So. We wanna go ahead and dec determine a number, right? And so I think the easiest way, especially if you're still in your thirties, maybe early forties, is just say, Hey, what do I need to replace my income? Now I like my, maybe I like my lifestyle, as it stands. Now what do I need to replace that income? Right? And so once you have that number, make sure that you are reassessing this periodically because your goals, your life may change over time, right? I always say this. Look at your life five years ago, look at it now, probably looks a bit different and it will probably look a little bit different five years, into the future. what is my baseline lifestyle cost today? What, will drop off if I, or what will drop off in the fu in, in the future or what will increase in the future in retirement or later on, that I have to account for? And so once we have this number, we can. Again, take some rule of thumb, logic here. And so you can use or apply what's called the 4% rule. Most of you listening probably have heard that before. so the 4% rule would be like, would be if I have a million dollars, I can safely withdraw 4% off of that portfolio value. and I will not dip into my principle, moving forward. Right. There's a lot of research behind this, and this is kind of like the rule of thumb, right? and so that being said, you can use that rule to say, okay, well if I need a hundred thousand dollars per year, I can divide by 4%, and that would give me$2.5 million. Need it in retirement. So now I know that I need$2.5 million. And so now we need to start working backwards. So let's again say you're 35. I'm 35, and you plan to retire at 65, right? You won't, you don't wanna have to work at 65. You wanna be financially independent, whatever that may be for you. So you have about 30 years of growth. In front of you. So this is where present value comes into play, present value. Some of you have maybe heard this term before. Maybe you know exactly what it is. Maybe a lot of you have never heard this term before, what is present value? How much money would I need today? Invest it at a certain growth rate to reach my future goal, right? So. If you determine that you need$2.5 million, you don't need$2.5 million right now. Right? Because you're gonna assume for some sort of growth moving forward because you have that money invested, right? And so think of it like this. Think of it like planting a tree. If you want a big oak tree in 30 years, you don't plant a full grown tree, right? One. That would be extremely difficult and stressful on the plant. And so what would you do? You would plant a seed or a very small oak tree with the potential to grow into a very large oak tree, right? So present value is that smaller tree or that seed, and then the future value is the retirement nest egg or the oak tree, right? And so with a 7% growth rate, the present value of$2.5 million in 30 years. Is about$330,000. So if you already had that, if I had, if I determined that I needed,$2.5 million right? And I already had$330,000 at age 35, I technically have already hit my coast buyer number, right? This is what we want to do to calculate for our number. We wanna assume a growth rate. I would say be more conservative, right? In case for whatever reason the market doesn't perform. I think it's very reasonable that you could probably get more than 7% using an equity based portfolio. But, always in these projections, I want to be a little bit more conservative, just in case there are muted returns for a period of time that really eat into whatever your projected growth rate rate was, right? Or is, and again, we wanna reassess this, every year or so. Again, whether our expenses are changing or maybe we're not getting the rate of growth that we want, or need. To reach our number, we can adjust accordingly. And so from there, once we have our number right, so in this case, the present value of this example was, is we need$339,000. And so now we can start working toward that number. And again, it's gonna change each year. So each year that you're not to that number, that number is going to get a little bit higher, right? Because you're gonna have less years for that money to compound and grow through those investments. So that's the other reason you want to make sure that you're reassessing every year, is to make sure that you're on track for that. maybe you have a goal to hit it in five years or 10 years. And then have 20 years of coast fire, right? whatever that may be for you. And so reassessing that, making sure that, okay, well for five years I'm gonna save 50% of my income so that I can hit this number, hit this number and be able to, net pull back my savings to zero if I want to, and be able to still feel good about retirement at 65. when. Do you know that you can decrease your savings and maybe increase your lifestyle, change your career, start a business, do some other things that you want to do because we're not just do, we're not just saving this money to say, ha, I have enough for retirement. There's motive, there's likely motivation behind. Why am I doing this right? It could be a job. I don't like it. And it doesn't even have to be that you, you could enjoy your job, but maybe there's something more fulfilling that you want to do, right? Maybe you want to turn your hobby, woodworking into some income, right? But, but your corporate job right now. just is at a point where it's just not feasible financially to leave that corporate job of 200 or$300,000, and go do woodworking, right? And maybe you're able to do that. if you don't have to save 50% of your income or, you feel good about having that nest egg ready to grow, and support your retirement later on down the road, right? when do we know that we can do this? Right? So, one. The obvious thing is you've reached that present value threshold, right? So you've reached your coast fire, your present value coast fire number in your investments. So your Roth IRAs. Your IRAs, your 4 0 1 Ks, 4 0 3 Bs four 50 sevens. If you add all of those accounts up, you may not have all of those accounts, but those are retirement accounts. If you add all those up in your brokerage accounts that you have, if you hit. That number. If you're at that number, uh, and you feel good about the rate of return that you can receive over the time period of when you would want to fully retire or become financially independent, then that's a good benchmark to say, mathematically I can, uh, start thinking about reducing my savings rate and doing some of these other things that I want to do. Right? Uh, maybe it's even having a spouse stop working, whatever that may be. Right? And so the next thing is. You have your foundation in place, obviously we wanna make sure that we have an emergency fund of three to six months, right? So these are kind of the basic things. We wanna have our debt under control, so making sure our high interest debt, is still or is being paid off. if we have credit cards or high interest auto loans, personal loans, home, e equity, line of credits, things of that nature, we wanna make sure that we're paying these things off because that is a. Huge indicator of not being able to retire when you want to retire is, is not, is having this, high interest rate debt. Right? Um, and then things that people don't think about, but certainly should think about is making sure you're properly insured because you can have. This coast fire number, you can have this NIST egg that it's likely gonna grow and be, be there for retirement and you're gonna be able to retire at that age. But if you become disabled and you're not able to work anymore and create that income that you need it along the way, or if you pass away and your family depends on that income, you need insurance to insure for those risks, right? whether that be life insurance or disability insurance. You need to make sure that you're secure. And so this is just another factor that you have to consider before reducing, that savings rate. your income, comfortably covers today's lifestyle. Obviously, if you're saving, if. 20 to 30 or 40% of your income to hit this number. hopefully your income is covering your lifestyle fairly comfortably, right? once you hit that number, that coast fire number, you're gonna be able to reduce that savings, which frees up your cash flow. and you shouldn't fill strapped at that point. Now you can take those extra vacations or spend more on your family or spend more on your hobbies, whatever that may be, right? And then the thing that, a lot of people also do not talk about, is, are you emotionally ready to reduce that savings rate? you see this a lot in traditional retirees. They spend their entire lives saving, is because that's what their, their parents told them to do. That's what they've been taught to do, and they get into retirement and they just can't spend money. Because, they feel like they're gonna run outta money and maybe they have two or$3 million more than they actually need to support their lifestyle. Right? And so you have to be emotionally and mentally ready to go, okay, I can reduce my savings. And I'm still okay. Right? and so that may take some time, right? And so maybe taking some baby steps. So if you're saving 30% of your income to hit this number and you hit that number, maybe you reduce it to 20%, right? Give yourself a 10% increase. And then the following year or five years later, whatever that may be, your your, your speed is gonna be your speed, right? and you can continue reducing that number, until you feel comfortable to do so. And so make sure you have a plan for that freed up money, redirecting it toward the things that you wanted to do. The motivation on why you're doing this into the first place. So whether that's travel, family experiences, maybe it's just reducing work so you can actually reduce your income because you don't need to save as much now, reduce your working hours. or maybe you just wanna start. Putting that money into an investible, taxable account, to give you a little bit more flexibility or save for something specific that's gonna cost, maybe more money than you're able to outlay right now, like a vacation home or a particular type of car maybe that you wanna buy, whatever that may be. Right. And so just to put an example on this, a 40-year-old couple making$250,000 has been saving 35% of their income. They've hit their coast fire number and they, they plan to scale their savings back to 10%. That extra 25%. Roughly$62,000 a year now can fund lifestyle upgrades, family trips, even a career pivot, while ensuring retirement success. And that's the point, right? So whatever's motivating you to do this. Which is what I like to have the conversation about with clients. what's the motivation behind this?'cause it helps me with my planning, it helps me, give them advice and, align those decisions with what they want. And so what is that motivation? So as we start to scale back this savings, as we basically get ahead of what we actually needed to hit, retirement at. A particular age, maybe that's 65. We're getting ahead of that so that we can coast, right? Whatever that motivation was, as we start to reduce the savings. What is that that you want to do? Is it upgrading your lifestyle? Is it, doing, major renovations to your home or taking family trips or working in some sort of completely different career, that, that you've always wanted to work in that? But, given your income and where your life circumstances have taken you, you felt maybe stuck in that career, right? And so this is what is going to allow you to do that. And so we wanna make sure that as we hit that number, we are doing those things that we have set out and we're motivated, motivated about initially. So. This podcast is a lot about, a lot about action steps, right? I don't wanna just give information, and you guys not be able to. Implement some of these things. Obviously, talk to a professional before you do this. Don't make decisions based off this podcast alone, right? I want you to be able to make the best decisions for yourself. but I also wanna give you the ed education to go out and research and do, this yourself. And so what are some steps that you can do to reach your coast buyer number? And that is. Save aggressively early. So the better, the earlier, the better. Most people know this about investing. The best day to start investing was yesterday. The best, next best day is today, right? And then the third best is tomorrow. the earlier you can get that money into investments, the more time you're gonna have to let that money start growing and compounding, for years and years and years. And so the longer you wait, the more you're going to need to save. And so the earlier you can front load these savings, the more compounding, You have, right? More compounding you have and the less heavy lifting you have to do later on. Second thing is to use your tax advantage accounts upfront, because this is geared towards savings, get. Your tax advantage or get your tax advantages, while doing this as well, or this is for retirement, right? So get those tax advantages so you utilizing your 4 0 1 Ks Roth IRAs, maybe even HSAs. All of those accounts first, right? we wanna make sure that we have our emergency funds and things of that nature. We don't wanna be retirement poor, but as far as allocating those dollars toward our coast fire number max, those out first. If this is something that, is calling you, and something that you wanna do, and then we would take on maybe a brokerage account and things of that nature. So if you're making three, four, or$500,000 a year. You may max out those retirement accounts fairly quickly, and that's where that brokerage account would come into play. Right? We would still designated, as a more long-term investment. So we would still be fairly aggressive with equities, whether that be ETFs, single holdings, whatever that may be, for you. and, but we would just not. Touch it. and you wouldn't get the tax advantages like you would in the 401k. but those are maxed out in this scenario, right? the next thing is to automate these contributions. Take the guesswork outta saving, Again, your employer does a good job of letting you do that through your paycheck as far as the 4 0 1 Ks and stuff. But even, even your, brokerage accounts, if you can automate that, as much as possible,'cause then it just becomes another bill that you're paying. and you'll again pick your head up in six months, a year, two years, five years, and that account will be much bigger than maybe you expected. Right. Control. This is the biggest thing. This is the hardest thing, especially for families and individuals that see their income grow rapidly, especially early on in their thirties and even in their forties as they start taking, managerial jobs and they start getting into those upper tier levels of, of corporations and things of that nature. Control your lifestyle inflation, or control your lifestyle creep. Don't let the higher income just mean you have higher spending. Keep the main thing. The main thing. Remember what the goal is, right? If you still want to hit, if the goal is to hit this Coast fire number it. All that means is as you make higher income, your percentage of savings should stay the same. So if it's 30% of your income or 40% of your income, as you make more money, the dollar amounts will increase. The percentage will stay the same, but the dollar amounts will increase. So you'll theoretically get a little bit more money towards your lifestyle, but you'll also stay on track for hitting, that goal. And as you make more income, you'll, you'll hit it quicker because, you're, you're saving more dollars. Right? And then lastly, track your progress. Check it at least once a year. if you're unsure about how to track it or what metrics you should be looking at. Or what even those metrics mean. I would highly suggest hiring a financial advisor to help you with this. not one of those financial advisors that just sell you products, annuities, and insurance and things of that nature, but. Financial advisors that are actually planning this, doing the projections with you. because this is a very specific goal, right? You know that you have a number that you need to hit. So the example that we talked about earlier, maybe it's$330,000, you should be able to track that. but also track how much insurance you need. If your investments are doing well, are we maximizing the, the tax saving strategies, things of that nature? being able to track your progress is the best way, to stay motivated and stay on track, right? Because sometimes you'll need to make adjustments. There'll be years where you spent too much, or maybe there's years where you didn't spend as much, and you can put more into savings that year. And so tracking your progress will allow you to make those adjustments along the way. And then some other considerations that you should think about. there always is that market risk, right? So you're talking, in the example of being 35, but 40, you're talking 25 to 30 years of market performance. And so there is a chance or a risk of lower than expected returns. This is another reason you should be checking your progress each year. And so maybe if you're experiencing those lower than expected returns, you'll, you'll have to add more money to these accounts to stay on track, right? Or vice versa. You could be experiencing higher than expected returns. maybe you reach that number quicker, whatever that may be. you just need to know that market risk is probably. Or is one of the risks that you'll endure over that time? inflation. One way to mitigate inflation is to invest heavily in equities, right? if you're invested in stocks, and not necessarily individual stocks, but just ETFs or mutual funds that have. Predominantly stocks. You should, theoretically be able to outpace inflation as time goes on. And so that's what you would want to make sure that you're doing. So setting yourself up for, a portfolio that would out, outpace inflation, right? and then the other things. Lifestyle changes or life changes. So kids health, career shifts may change or increase your expenses, whatever that may be. And so again, this is why we check our progress along the way and the psychological side of things. Some people thrive saving less. others feel uneasy about it. The example I used was, the retirees finally being able to. retire and spend their money, but they won't because they're, they've been in this habit of saving for 25, 30, maybe sometimes 40 years. it's hard to break that habit, because they're scared about running outta money when all actuality maybe they have way too much money to, to really spend it based off their lifestyle. So in closing, step one, define your retirement spending goals. Step two, calculate what that number looks like and present value. So what does that number need to be today so I can hit that number? later on in the future. Step three, once you hit that number, you can decide whether to scale back or, and start, or start enjoying more life. Now, again, this is all about that balance right there, the balance of retiring later versus doing the, the traditional, financial independence retire. Now, this is kind of that middle ground, right? So you can balance a little bit of now versus later. And then don't forget, always check for red flags before you start to coast or pulling back on that safe, savings. If you like, help, if you'd like help running these numbers for your own situation, feel free to reach out to me through my website, palm Valley wm.com. you can schedule a free call. We can talk through these numbers. and hopefully help you get a vision of where you are and where you want to be, and move forward from there. But, I appreciate everyone li listening, and until next time, keep planning with a purpose. This podcast is for educational purpose. It's only, it is not meant to be financial or investment advice. Please do not make decisions solely based on this podcast alone. Please seek professional help when making decisions about your specific situation.