Coast FIRE: The Most Important Level of FIRE
When you’re first getting started, your financial goals might seem really overwhelming. I’m a big advocate for following the 4% rule when planning to reach financial independence, meaning that you should be able to safely withdraw 4% of your nest egg each year without depleting it. Based on this, I was really discouraged when I first decided that I needed to escape the rat race and gain the financial security I needed to give my family the life they deserved. We live in Southern California which is one of the most expensive areas of the country. To cover my living expenses without having to work, I was going to need nearly $3 million! I believe my exact words were “what the fuck?”.
Seeing your FIRE number for the first time will likely make you feel the same way. It’s really hard to fathom having that much money when you are currently trying to keep your head above water financially. One thing that changed my perspective was discovering that there were many different ways to approach the FIRE methodology. While the 4% rule is most commonly quoted, there are other FIRE milestones that are significantly more achievable. In fact, I would argue that the easiest FIRE level — Coast FIRE — is the single more important target when you are on your financial journey.
The Five Levels of FIRE
Part of the reason why personal finance is so complex is that each person has a unique situation. Their careers are different, they face different hardships than others, and they will experience different setbacks or windfalls. Not only that, some people are more motivated to get their finances in order, while others slack off for years until they finally realize that they aren’t getting any younger and need to start planning for the future. The good news is that this also means there are numerous ways that you can approach financial independence. Some people want to build a huge nest egg so they can live a plush and luxurious life. Some people are good with living a modest, comfortable life if it means they can quit their bullshit job as soon as possible so they can start getting the most out of life. Some absolutely love their careers and have no interest in calling it quits anytime soon but want the security knowing they can handle any financial challenge.
When it comes to FIRE, there are many ways to approach reaching financial independence. I recognize five individual levels to the FIRE methodology:
Coast FIRE
Coast FIRE is the easiest level of FIRE to achieve. Coast FIRE is defined by having enough money invested that you will reach your ultimate retirement number without adding another penny. If you are young and have plenty of years to invest, this can be accomplished with relatively little effort because of compound interest and exponential growth.
Let’s look at an example. Let’s assume that you’re 28 years old and believe you’ll need $1.5 million in retirement. You currently have $50,000 in your retirement savings. Congrats! You’ve already there! Don’t believe me? Because of compound interest, this money will continue to grow over the years. Assuming the market returns 10% annually (the historical average of the S&P 500), by the time you are 65 years old, you’ll have just shy of $2 million. Not only would you reach your goal, but you would technically reach it a few years ahead of schedule allowing you to retire a little early.
Barista FIRE
Barista FIRE is the next level on the FIRE ladder. Reaching Barista FIRE involves having enough savings and investments to cover a portion of your living expenses (with a 4% withdraw), so you could switch from full time to part time employment. For example, let’s say you need $40,000 a year to live. Instead of waiting to hit your $1 million FIRE number, you could quit your full time job when your nest egg reaches $500,000 and work part time to cover the remainder. Barista FIRE is useful for people who still enjoy work but want to have enough free time to enjoy life and family.
The only downside to Barista FIRE is that it probably isn’t a good strategy long term because it requires you to stay in the workforces partially. You could find yourself in a predicament if you are unable to work at some point due to illness or age. While I don’t recommend it long term, Barista FIRE is a great option for people who want to take a few years off to travel, care for children or elderly parents, or focus on another big life event (like going back to school).
Lean FIRE
Lean FIRE is the first level of FIRE where you fully retire. However, as the name suggests, you’ll be living on a strict budget with tightly controlled expenses. You may even have to cut your cost of living in order to live under Lean FIRE. For example, if you have a 4 bedroom house, you might downgrade to a smaller condo. This might mean cutting back on new cars, eating out, and fewer vacations.
While Lean FIRE is technically possible, it probably won’t be as enjoyable as reaching Regular FIRE. There is also some risks because it’s difficult to anticipate how much your living expenses will be in the future. Since you have little to no wiggle room, a sharp increase in inflation could send you back to the workforce.
Regular FIRE
Regular FIRE is pretty straightforward. Based on your current living expenses, you’ve reached Regular FIRE when 4% of your total portfolio would be sufficient to cover your cost of living without having to make any major sacrifices. For most people, this is the ultimate goal of financial independence.
Fat FIRE
Fat FIRE is a step above Regular FIRE. Not only do you have enough to cover your regular living expenses, but you have plenty left over to splurge on luxuries like brand new cars, your dream home, and nice vacations every year. Many financial gurus consider Fat FIRE to be any number that allows you to withdraw a minimum of $100,000 a year or more. I don’t agree. This is completely relative and depends on where you live. For someone living in a small town in the Midwest, this might be a lot of money. But it might barely be enough for people that live in high cost areas. Instead, I consider Fat FIRE to be reached when you can cover at least 120% of your annual expenses.
Why Coast FIRE is the Most Important Level of FIRE
If you know what your Coast FIRE number is this can be very motivating to hit this much smaller number. To calculate this, you need to first figure out your Regular FIRE target. All you have to do is multiply your current living expenses by 25. For example, if your annual expenses add up to $73,000, your FIRE number is about $1.83 million. Next, you’ll need to use an online investment calculator (Dave Ramsey’s Investment Calculator is the best one I’ve seen online). With this calculator, you enter your current age and future retirement age (I recommend using 65 as a placeholder), your current savings and investments, and your anticipated interest rate. When calculating your Coast FIRE number, you always want to set the additional contributions at $0 because you want to know how your finances will look as they “coast” to the finish line. The great thing about this specific calculator is that it will show you a bar chart with the totals for each year.
All you have to do is find the year where you hit or exceed your Regular FIRE number. How does it look? If your anticipated retirement savings hits your FIRE number before 65, you’re officially in Coast FIRE territory. If it doesn’t, feel free to play around with the total amount invested to see how much additional you need to reach Coast FIRE.
Here is why Coast FIRE is the most important level of FIRE:
Your Coast FIRE number is going to be significantly smaller than your Regular FIRE number, especially if you are still younger. This gives you a more manageable target that doesn’t feel overwhelming. Reaching $100,000 by the age of 30 feels much easier that trying to reach $2 million by the age of 60. Making progress toward this smaller number will help you stay motivated which is really important in the beginning of your journey when you feel like you aren’t moving the needle much.
Once you hit your Coast FIRE number, it only gets better from here. Knowing that you are “guaranteed” (there are no guarantees in life) to hit your retirement number, you can start to look into investments that have the potential for higher rewards without the risk of sabotaging your ability to reach financial independence. These higher reward (and higher risk) categories include starting a business, speculating in volatile asset classes (like cryptocurrency), or buying rental properties. This is where you can see your wealth explode if done successfully.
Coast FIRE improves your chances of hitting the R-E in FIRE (retire early). If you’re on track to coast to your retirement target by the age of 60 without adding any more money, every dollar you add will accelerate this date. You can set a goal to shave an additional 5, 10, or even 20 years off this target retirement date.
Reaching Coast FIRE is a very rewarding milestone on your journey to financial independence. Once you reach Coast FIRE, I usually recommend that people keep the pressure on to improve their retirement target date or add extra financial security (and ultimately more peace of mind). However, you may decide that you are happy with your Coast FIRE results. Maybe you have enough saved to allow you to retire in your early 50s and are perfectly fine with that. If that’s the case, this can help validate that you can (relatively) safely start spending a little more money to enjoy life in the moment.
At the end of the day, the game completely changes when you reach Coast FIRE. There is a sense of calm that comes from knowing that, short of a major crisis or life altering event, you’re going to be successful in your pursuit of financial freedom.
