My previous article on financial independence discussed a broad overview of the primary concepts behind financial independence (FI) and what I’ve taken away from them. In general, FI is having enough money invested that the returns can pay for your lifestyle indefinitely, so you never need to work for money again.
I will call the strategy where you work to earn full financial independence as quickly as possible, “traditional FI.” Now let’s build off of that foundation and discuss its potential downsides, as well as a few more frameworks and how they’ve affected my current personal finance mindset.
Disadvantages of Traditional FI
Eliminating the need to work for money well before traditional retirement age sounds great, but it’s probably obvious that pursuing that goal can come with a few downsides.
1. Memorable Experiences and Free Time
I’m a firm believer that spending more money on unnecessary stuff, whether it’s a big house, nice cars, or new technology, won’t lead to lasting happiness (not that I don’t do this). However, I have come across plenty of literature that claims spending money on experiences (The Happiness Advantage), and on time saving services (Time Smart) has a good “happiness return on investment”.
The book Die With Zero was one of my favorites that I read last year, and it thoroughly explores the concept of “investing in experiences.” He claims that experiences pay a “memory dividend”, and much like financial investments, experiences early in life have the time to compound into a large total amount of happiness. So even though you probably don’t have the most money when you’re young, you should still invest in remarkable experiences if possible.
Many in the FI community would respond that it’s possible to create experiences such that you get the same amount of fun and happiness for a fraction of the price. For example you could have a potluck with friends rather than go to the bar, or travel tactically on credit card point rewards.
They also might say that the best solution to time abundance issues is to create yourself a simple life, where you have enough free time that you don’t need to spend money on time saving services. I think these are excellent strategies that should be considered. But even so, it’s easy to imagine that aggressively pursuing traditional FI might lead you to underinvest in experiences and time abundance.
2. Long Timeline
When working toward traditional FI, the less extreme your approach, the longer it will take. Most of us aren’t quite able to achieve the level of frugality-enlightenment where we are able to spend half the amount of the median American and still feel like we’re living our best life.
Most of us also don’t have a job we enjoy that pays incredibly well, or a side hustle that leads to large income increases. And while none of these are remotely necessary to attain traditional FI, one or more are probably needed to reach it in under a decade.
Unless you are one of the lucky few who fall into those descriptions (or eventually work your way into such a position), you’re going to be doing this a while.
3. Sudden Transition
The last potential disadvantage to traditional FI I will discuss is that people often don’t know what to do when they get there.
It can be jarring to go from working for most of your waking hours to quitting your job (or doing something else drastically different). Some of the bloggers I have read who became financially independent went through a disorienting period of figuring out what they wanted to do with their lives after no longer working.
Several of them also regretted buckling down quite as hard as they did on the way there. One post I know if is from Mr. 1500: My Death March to Financial Independence. They wish they’d chilled out a bit more, enjoyed life along the way, and perhaps worked a bit less.
We could also consider the fact that almost no “early retirees” decide to sit on the beach and do nothing for a long period of time. They usually end up doing work they enjoy on their own schedules, and make a nontrivial amount of money from it.
If they somehow could have incorporated those future earnings into their financial plans, they could have left jobs they didn’t enjoy much earlier. Or just pushed less hard along the way, taking more vacations and working less. Furthermore, why wait until full financial independence to make money doing something you enjoy?
It seems to me that, ideally, there would be more of a gradual transition between working years and full financial independence. A sort of downhill slope rather than a stark cliff. In that transition, you would slowly test the waters to figure out what you’d like to do with your free time (if it’s not the work you are doing now), and how much income that might make. And you shouldn’t need quite as much money as traditional FI to start this transition.
Coast FI: Live Your Ideal Life Sooner
The FIRE community has all kinds of nicknames for strategies related to financial independence. The one we’re going to cover now is called Coast FI. I first came across this concept on the Fioneers website, which has since become my favorite personal finance blog.
Coast FI asks the question “how much money do I need invested so that, if I don’t take away from it or add to it, it will grow to enough money to retire at traditional retirement age?” That’s a tough sentence to wrap your mind around, so I’ll say the same thing in a few different ways, and then we’ll work through an example with numbers.
In this framework, you need to save and invest a certain amount of money, set it aside and never touch it, but after you do that, you theoretically never need to save money again. You just need to make enough to cover your living expenses. So instead of “never need to earn another cent”, you achieve “never need to save another cent.”
For example, let’s say a family makes $100,000 after taxes, and spends $60,000 per year. Their “full FI” number needed to never work again, assuming a 4% safe withdrawal rate (SWR, see financial independence overview) is $1,500,000. Not exactly chump change. We know from the previous article that it would take about 22 years to get there.
But let’s say they don’t want to fully retire until age 65 and are currently 30 years old. How much money do they need in the bank right now to cover their retirement at 65? Let’s calculate it assuming a 5% investment return after inflation. I will use the “future worth (F) given present value (P)” equation from my Engineering Economics textbook, but it can easily be found online.
\[F = P(1+i)^n \\[0.5em]
P = F/(1+i)^n \\[0.5em]
F = Spending/SWR = \$60,000/4\% = \$1,500,000 \\[0.5em]
n = 65-30 = 35yrs \\[0.5em]
P = \$1,500,000/(1+5\%)^{35} = \$272,000\]
With only $272,000 invested, their future retirement is already funded! This makes them Coast FI, because now they can “coast” the rest of the way to retirement. With retirement taken care of, they only need to earn $60,000 per year until age 65 rather than the $100,000 they are currently earning.
The ability to downshift to making 60% as much money could potentially allow one or both partners to go part-time, go into slightly lower paying fields that they find more interesting, or even save up money for a sabbatical (often called a mini-retirement). Knowing you are still “on track”, even if you make less money, feels a lot more positive than pursuing full FI and fretting over a few months off of work adding 3 years to your timeline.
Coast FI Advantages
The first advantage to this strategy is the time it takes till you have major options for lifestyle design. This hypothetical family above with a 40% savings rate should take approximately 6 years to save the $272,000 dollars needed to reach Coast FI, as compared to the 22 years to reach traditional FI. Note that this assumes they started the process at age 24.
Another pro I can think of is timing, and in particular, timing around having kids. It’s possible to reach traditional FI in your early 30’s and wait until then to have kids, but it’s extremely tough. And for many of us, that ship has sailed. Reaching Coast FI while your kids are still young is a much more achievable feat, and it leaves you with the option to work less or take a less stressful job so you can spend time with children while they’re young.
The last benefit I’ll discuss about Coast FI is that it harnesses the power of compound interest more than traditional FI does. In books such as The Psychology of Money I’m always hearing how “time in the market” is the greatest variable for wealth accumulation. The book uses Warren Buffet as an example, showing that a huge portion of Buffet’s success is due to his long career: “Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday.”
Frankly, I always found this focus on time to be discouraging. I’m not particularly motivated by the goal of being extremely wealthy when I’m old. I want to use my money to make my life as interesting as possible throughout, while making sure I have “enough” in retirement.
In traditional FI, you generally want to amass your nest egg in 10-20 years, and most of the money you put in doesn’t have much time to compound. In the Coast FI strategy, we put a smaller nest egg in the market and leave it there without touching it for as long as possible. Hopefully letting it double three or four times. I like that idea.
Conclusions
I found this idea of Coast FI to be appealing, and even relieving. I had been experimenting with a Microsoft Excel freelancing side hustle, purchased and fixed up my first rental house, and was trying to optimize our expenses. I was doing this while my wife and I had our first kid and my wife went part-time at work. I quickly learned that these activities, while profitable, were sometimes too much in our current stage of life.
This stressed me out a bit because I was intent on reaching FI in a foreseeable timeline. However, when I discovered Coast FI, I realized we were barely already there! This was a new and much more positive way to look at things for me. I could:
- Quit worrying about whether my activities in my dwindling free time were profitable, so I started some cool projects like this website.
- Be grateful our earnings are greater than our expenses as we take on one-time expenses like home renovation.
- Feel even happier with our family’s decision for my wife to work part-time.
- Rest easy it when we spend far more than usual on restaurants while crunched for time and stressed out due to some temporary circumstance.
This mindset of making life enjoyable now also carried into my career. I started asking Palmer for more work of the type that gets me most excited, and I proposed doing some of the jobs I was already on in a way I thought would be cooler and more effective. As you might guess from my other articles, this often involves analysis problems that make use of Excel VBA. Since then, I’ve been enjoying work even more.
I’m feeling more excited about our future than ever, and plan to keep doing loads of fun things, such traveling and skiing, while keeping an eye on our spending to make sure our money is going where we want it to. I’m excited to see our family grow and live life to the fullest now, while still setting ourselves up well for the future.