How many of you have heard of coasting to financial independence once you’ve hit a pre-determined target for your investment portfolio?
It’s a concept known as Coast FI. I first learned about it in a post from Military Dollar. Essentially, Coast FI means that you can stop contributing money toward your goal of financial independence once you’ve accumulated a certain amount of money in your investment portfolio, i.e. your Coast FI amount. Your Coast FI amount will increase via compounding returns until it’s the amount of money needed to sustain your life’s expenses without you having to earn an income. Once you’ve obtained the prescribed amount of money, then you need not ever add another penny to your investment portfolio because compounding will do the work of growing it to the right amount of money to cover for your future spending needs. Keep in mind that if your spending needs increase, then your required Coast FI amount will also increase proportionally.
I was most intruiged! Coast FI is a great idea and I admire those who have faith that they will get the annual returns that they need to make this work. Obviously, higher annual returns mean that you’ll need a lower amount in your investment portfolio. The opposite is also true – if the anticipated annual returns are going to be lower, then you’ll need a higher initial amount in your investment portfolio before you can start coasting. The real trick, of course, is reliably predicting what your future returns will be in order to accurately determine your personalized Coast FI number.
Based on the Rule of 72, you can figure out when your money will double by dividing 72 by the your investment return. For example, if you earn a 9% annualized return, then your money will double every 8 years. If you earn a 10% return, then your money will double every 7.2 years. If you earn a 3% return, then your money will double every 24 years.
The other neat thing I like about this concept is that once you’ve saved your Coast FI number in your investment account, then you can stop contributing to your investments because compounding will take over and you’ll reach your financial independence number without adding another nickel!!! This is where faith comes in. There are people out there who will stop contributing to their investment portfolio once they’ve hit their Coast FI number. They will trust in the long-term returns of the stock market to deliver unto them the money that they will need in order to retire when they want.
For the record, I’m not a person who would stop making contributions without a signed guarantee from God that I’d have enough money in place to stop working. Others may feel differently. I have a feeling that I’ll keep adding to my investment portfolio forever. My reasons are as follows:
One – I actually feel better when I set aside a little bit of money. Psychologically, I know that I’m saving for a rainy day. I get great comfort knowing that there’s a little pot of money set aside in case I need it. Saving money also makes me feel responsible and in control of my destiny. It’s my way of telling myself that I’m doing the right thing with my money. I’ve been a saver since I was a little girl and I’ve lived by the spend some, save some philosophy for my entire life so I doubt that this aspect of my personality is going to change just because I’ve reached the point of Coast FI.
Two – Saving a portion of my paycheque helps me with budgeting. For the past 18 years, I’ve been using percentages to divvy up my money. Right now, 40% of my net income goes to investing. There may come a time when I drop that allocation down to 25% but that’s pretty far away. If I were to start adding more fixed expenses to my budget now, then I’d have to figure out where to cut them later just in case I wasn’t getting the annualized returns that I would need for the Coast FI method to work for me. So instead of having 15% more expenses, I simply invest that money and live on whatever’s leftover. So far, this method has worked beautifully for me.
Three – Even if I do get the returns that I need to coast to financial independence, adding extra money to my investment account would mean that I could retire from work even sooner! Pretend for a moment that relying on Coast FI means I can retire at 56. If I keep adding to my investment account in addition to relying on Coast FI then I’m creating the option to possibly retire even sooner at 52 or 53. Nothing wrong with that!
Finally, when it comes to money, I’ve always believed that it’s better to have it and not need it than to need it and not have it. In the unlikely event that I wind up with “too much money” – a concept I find as foreign as the idea of “leftover wine” – I will have done myself a huge favour by creating a financial cushion that weathered the storms of my life. Whatever money remains after I’ve departed this mortal coil will be used to better the lives of my beneficiaries. Make no mistake – I am not depriving myself during my lifetime and I’m going to continue doing the things that I want to do. The reality is that my wants are few: time with family and friends, travel to new places, money for dining out, theatre and concert tickets, renovations to my home. My income is sufficient to satisfy these desires and I see no reason to find new ways to spend my money simply because I have it. I’ve found that delicate financial balance between living for today and saving for tomorrow. Coast FI is simply another layer of icing on my already super-delicious cake!