Is Coast FI Riskier Than Traditional FI?

Coast Fi Defined [00:01:33]

• Coast Fi involves building a portfolio large enough to be projected to grow to traditional retirement age, allowing one to 'coast' into retirement.
• This differs from traditional Fi, which requires a portfolio sufficient to stop working immediately, typically 25 times annual spending.

• "Coast Fi is a little bit different. It's building a portfolio that is large enough such that it's projected to grow to when you reach traditional retirement age to sustain you in retirement."

Evan's Coast Fi Goal [00:02:17]

• Evan aims to invest $500,000 by age 30, projected to grow to over $5 million by age 65.
• This growth is expected to yield a $200,000 per year inflation-adjusted income.

• "For me, my goal is to invest $500,000 by age 30. That's projected to grow to over $5 million by age 65 using a 7% growth rate, which would yield me a $200,000 per year inflation-adjusted income."

The 7% Growth Rate Assumption [00:02:48]

• A 7% growth rate is historically derived but carries risk when projecting 30-40 years into the future.
• Evan has built margin into his spending to account for potentially lower growth rates.

• "I think that 7% is a historically derived number. It's something that we've seen in the past, but one of the risks that we'll get into today is that Coast Fi is projecting for 30, sometimes 40 years into the future."

Lifestyle Creep and Future Spending [00:03:28]

• Evan plans for his future spending to increase significantly from his current $36,000 annual spending.
• This contrasts with traditional Fi approaches where a lower current spending might set an unrealistic retirement income goal.

• "So, you're giving yourself quite the raise in the future. Yes. Yeah, exactly right. I think that's really important to note because a lot of people, when they start on this Fi journey, they have their Fi number, and they're like, okay, well, I'm spending $36,000 this year."

The Risk of Insufficient Funds in Coast Fi [00:05:17]

• A major risk is reaching the Coast Fi number and discovering it's insufficient upon reaching traditional retirement age, with limited time to build more.
• This is contrasted with traditional Fi, where one might continue working longer if the initial number proves inadequate.

• "That it's projected to grow to a million dollars to when you reach traditional retirement age. And then you get to traditional retirement age and you realize it's not enough. It's difficult in Coast Fire to be able to go back or continue."

Continued Saving Post-Coast Fi [00:06:58]

• It's unlikely that individuals pursuing Coast Fi will stop saving entirely after reaching their goal.
• Factors like company matches and Roth IRA contributions may encourage continued saving.

• "I think it's a great question. And I can speak from my own experience that I don't imagine that I would go down to 0% savings rate. It's just not ingrained in me."

Career Risk and Early Departure [00:10:10]

• Leaving a W-2 job too soon after reaching Coast Fi can be a significant risk if investments falter.
• Re-entering the job market after a prolonged absence, especially at a younger age (e.g., 30), can be challenging.

• "And so if things didn't go my way, my portfolio moved in a way I wasn't expecting, or if we saw conditions outside of the historic norms with inflation, like you mentioned, or portfolio performance, then it could be a huge risk that if I stepped away from a W2 too soon, then you're 35 years old with only five years of work experience."

Risks in Traditional Fi [00:16:23]

• Traditional Fi faces risks like underestimating retirement duration beyond the standard 30-year assumption for safe withdrawal rates.
• Sequence of returns risk (poor returns at retirement) and inflation are also significant threats.

• "In traditional Fire, the primary risk, I think, is that you make an assumption of a safe withdrawal rate for a 30-year retirement. But in reality, you might have a 40, 50, 60-year retirement, depending on when you achieve traditional financial independence."

Account Structure Considerations [00:28:14]

• Both Coast Fi and traditional Fi require careful consideration of account structures to ensure accessibility of funds before age 59.5.
• Strategies like 72(t) or Roth conversions are necessary but can be complex and have tax implications.

• "Account structure is risky for both traditional and Coast Fire because you don't want to have all of your money in your 401k, which is accessible, but then you have to do a 72T or Roth conversions."

Which is Riskier? [00:31:24]

• The consensus is that traditional Fi is riskier due to less flexibility for course correction once retirement begins.
• Coast Fi offers more time to adjust and adapt to changing financial circumstances before reaching traditional retirement age.

• "I'll say in my opinion, I think the traditional FI is riskier than Coast FI. I think Coast FI adds a lot of flexibility and gives you a long runway to correct any changes that you need to make between your Coast FI milestone and your traditional retirement age."