Coast FIRE (Financial Independence, Retire Early) is a strategy where an individual stops contributing to their retirement accounts but still achieves financial independence by a certain age, typically 65, due to the compounding of existing investments. This strategy relies on the 4% rule (withdraw 4% of your portfolio per year, indexed to inflation), which suggests that a retirement portfolio can sustainably support withdrawals of about 4% of its initial value each year, adjusted for inflation.
Math Behind Coast FIRE
To calculate the Coast FIRE number by age, we use the 25x rule (save 25 times your annual expenses) and consider the growth of investments over time. Assuming an average annual real return (return after inflation) of 5%, we can calculate the required investment amounts by different ages to achieve Coast FIRE.
Let's consider an example where the desired annual retirement expenses are $50,000. Using the 25x rule, the total amount needed by age 65 would be $1,250,000 (25 times $50,000). To find the required investment amount by a certain age, we can work backwards using the formula for compound interest: A = P(1 + r)^n, where A is the future value, P is the principal amount (initial investment), r is the annual real return, and n is the number of years.
For instance, to calculate the required investment amount by age 35, we can use the following values: A = $1,250,000, r = 0.05, and n = 30 (65 - 35 = 30 years). Rearranging the formula to solve for P, we get: P = A / (1 + r)^n. Plugging in the values, we get: P = $1,250,000 / (1 + 0.05)^30 ≈ $250,000.
Using this approach, we can calculate the required investment amounts by different ages:
- Age 25: $1,250,000 / (1 + 0.05)^40 ≈ $50,000
- Age 30: $1,250,000 / (1 + 0.05)^35 ≈ $80,000
- Age 35: $1,250,000 / (1 + 0.05)^30 ≈ $250,000
- Age 40: $1,250,000 / (1 + 0.05)^25 ≈ $450,000
To find your specific Coast FIRE number, consider using tools like the Freedom Calculator to assess your current financial situation, desired retirement age, and expected expenses.
Example Scenarios
For instance, if you aim to retire with $50,000 in annual expenses, you would need $1,250,000 (25 times $50,000) by age 65. Using the Coast FIRE strategy, if you have $250,000 invested by age 35 and contribute nothing further, assuming a 5% real return, your portfolio could grow to over $1,300,000 by age 65, exceeding your retirement needs.
Here's a year-by-year breakdown of the portfolio growth, assuming a 5% real return:
- Age 35: $250,000
- Age 36: $250,000 * 1.05 = $262,500
- Age 37: $262,500 * 1.05 = $275,625
- Age 38: $275,625 * 1.05 = $289,406.25
- ...
- Age 65: $1,300,000
Understanding and calculating your Coast FIRE number provides a clear pathway to achieving financial independence, emphasizing the importance of early investment and strategic planning.
New to FIRE? See our primer at https://freedomcalc.app/what-is-fire.
The Coast FIRE strategy relies on the power of compound interest to grow your investments over time, allowing you to achieve financial independence without further contributions.
Tools worth looking at
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- Empower — Free net worth tracking, portfolio analysis, and retirement planner. The dashboard serious FIRE chasers actually use.
- Acorns — Round-ups that invest your spare change automatically. The lowest-friction way to start investing if you have been putting it off.
- Wealthfront — Tax-loss harvesting, a 5% cash account, and direct indexing once you cross $100k. Solid robo for the set-and-forget crowd.