There is a relatively new article on Financial Planning blog Kitces.com on trying to help clients understand about saving enough for a Coast FIRE lifestyle.
Think it is a pretty good article and brings up some Coast FI planning points to think about.
I would like to share what I think.
On How They Calculate the Coast FIRE Number
The article says that to compute your coast FI number is simple:
This equation kind of looks simple but it is not super intuitive always so maybe I explain a bit.
You need to work out the Portfolio Balance Needed to Support Income Needs in Retirement. This means that you need to work out how much you need in a traditional retirement.
How do you do that?
Well that is why I say it might not be so complicated. Firstly, you need to know when you want to fully retire but you can work on a 65 year old target.
If the number then is $2 million.
You divide $2 million by (1 + Real Rate of Return)number of years.
You need to know the rate of growth to that age… and the inflation rate…
There are still a few bits of variable so I don’t think it is that simple at all.
I came up with a calculator in the past when I wrote my Coast FI article 8 years ago (fxxk time really flies)
It is a Google Spreadsheet which is available for folks to try. You can vary the age of retirement, the income you need then, but today, and it is based on a Safe Withdrawal Rate spending method.
Go to the middle section or you can access the sheet here.
The Financial Assumptions are Important in Your Coast FIRE Plan.
The article points out that your plan is as realistic as the assumptions that you put into the plan and it is easy to see why.
You are making a few assumptions here:
- What you will spend on in a traditional retirement in terms of the line items.
- How much the line items cost today.
- How you assume the inflation will be like today and in the future.
- What kind of income strategy you will use to generate the cash flow for spending in retirement.
- How flexible or inflexible is your future spending. This will affect the income strategy and the capital to provision for.
- What your tax rates will be like in the future.
- Would you still work in some capacity?
- How likely will your preference for work and not work change?
- How certain is social security?
If what you came up with is close to the eventual situation, your plan should work better but many of us know that it is easier said than done.
I will tell you that dealing with these assumptions is not unique to Coast FI or FIRE.
You have to consider the same thing for traditional retirement!
The main difference you may feel different is some of the planners are closer to their traditional retirement than far away. So they kind of felt they know the lifestyle better.
Potential Psychological Challenges of Coasting
The article gives some potential psychological challenges to think about:
- You may not find it easy to ‘switch’ from deep saving mode and suddenly not saving any money in Coast FIRE
- Your identity may be challenge because you tie your self worth to the ability to earn that significant salary before coasting.
- Tensions with your spouse. You are ready to downshift but your spouse isn’t. Your spouse may not deal with carrying the financial burden that well.
Better Coast FI Advice from Kyith Can Add Value to Your Plan
I say this part in jest but the article list out same areas where a financial planner can add value.
I think firstly a financial planner needs to understand what is the appeal of Coasting. If the planner doesn’t , then he or she won’t actively sell this concept as well.
I do find coasting appealing personally for the few reasons:
- There are hardworking people who could be in lucrative but tiring careers. They themselves know this cannot go on forever.
- They might be so tired that they want a full FIRE but realistically the money needed is so much more. They also faced the emotional struggle if it makes sense to fully retire at 40 years old.
- Innately, most of us want to work but in our own terms.
- We want to do responsible things. If we have the opportunity to earn a lot and okay to do it for a period we want to save up enough. But how do we size up what is enough?
Coast FI or FIRE is to save up for the biggest capital need while we have a lucrative career, which is our traditional retirement. Psychologically, this reduces the stress of trying to find a demanding job, only for the income, to save up for something like that.
I think if advisers understand this, they listen more actively to who they speak to and see if this lifestyle is more ideal for them.
I do think that more and more, the value may also be helping clients size up a sum that may help their children reach not a full retirement, but part of the retirement. This needs technical expertise that the advisers can help with.
If the assumptions can make or break the plan, then someone with more technical expertise could also add value.
And I think there is a lot of value here because… you are leaving a lot of opportunity cost on the table by leaving your job and you are buying the peace of mind that what you have considered is:
- The plan matches the true idea you have in mind.
- The plan is realistic.
- The plan has enough conservatism that you are comfortable with.
Value goes on beyond the numbers because you got to believe enough that you are doing the right things.
The article did bring out certain nuances:
When estimating the real rate of return, advisors might begin with historical inflation data and the expected performance returns of the client’s asset allocation. However, advisors could go a step further by using Monte Carlo simulations to model a variety of outcomes, including scenarios with higher inflation or lower-than-expected market returns.
What I learn from my colleagues is that some people think too linearly and binary. Then there are others that came up with too many scenarios.
There should usually be a sweet spot there where we don’t look at one situation but also not so many situations that you are paralyzed after that. The value is figuring out whether we are roughly ready, very ready or not ready at all.
Finally, there is a lot of value in the ongoing advise:
- Out of all the future financial goals, are there new goals identified only during coasting?
- Is the sum you sized up for traditional retirement still sensible?
This turns out a good article for us to reflect and ponder about.
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