You might have noticed, if your social media feed is filled with personal finance tips, a concept floating around called “Coast FIRE.” It’s a unique approach to retirement planning—it lets you enjoy some financial freedom a bit before the actual retirement phase without the pressure of following a strict savings plan for early retirement.
Essentially, the idea is to save and invest firmly during your early working years. If you do it right, you’ll accumulate enough savings to let compounding do its thing for you, helping you reach your retirement goal without needing to save extensively later on.
To illustrate, let’s say you aim for $2 million in retirement savings by age 65, factoring in today’s dollars and an estimated annual 3% inflation rate. You’d need to have about $278,000 invested by the time you’re 35. Historically, a 7% annual return, adjusted for inflation, should grow your savings to that $2 million goal. In nominal terms, with an average return of 10%, your portfolio could even balloon to nearly $5 million.
This concept essentially rewards those who make early sacrifices and benefit from long-term compounding. Once your retirement savings are secured, you can either spend your earnings more freely or even choose a job that pays less but is more fulfilling—provided it meets your current financial needs.
However, experts warn that there are risks involved with this strategy, and the assumptions that underpin it may not be as solid as those promoting Coast FIRE might believe.
Risks to the Coast FIRE strategy
Let’s start with the expected returns.
Historically, stocks have shown an average annual return of about 10%. Recently, returns have been impressive, but can we really expect that trend to continue?
If you’re in it for the long haul, yes, maybe—though many analysts suggest that the current high stock valuations could mean lower returns over the next decade. Just imagine the unfortunate scenario where you’re set to retire right as the market takes a hit.
This situation, known as sequencing of returns, could negatively impact your ability to withdraw or spend during retirement, shares Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth.
“A significant stock market downturn just as you’re nearing retirement can really change the financial landscape,” Pappalardo explains. “Also, if you stop saving early, you miss out on buying opportunities when prices dip, which typically leads to better long-term gains.”
Then there’s the inflation assumption set at 3% annually. Although that’s above the Fed’s long-term target of 2%, it fails to account for sharp swings in inflation. Right now, for instance, we’re seeing inflation around 3.4%, and back in 2022, it spiked to 9.1%—definitely something to consider.
Periods of unexpectedly high inflation can diminish real returns, Pappalardo notes, and the longer you wait between halting your savings and actually retiring, the greater the potential risk of inflation surges.
Additionally, there’s the possibility of unexpected expenses cropping up during retirement, as Nilay Gandhi, a senior wealth advisor at Vanguard, highlights. These could be related to healthcare or caregiving needs. Plus, it’s not uncommon to discover you’ve developed more expensive tastes in retirement or that you earn a higher income post-retirement than anticipated.
Practical ways to lessen risk
To manage these risks, Gandhi suggests taking a proactive approach toward your Coast FIRE strategy, reassessing your plan regularly instead of adopting a ‘set it and forget it’ mentality.
A good rule of thumb is to save a little more beyond your initial goal for some added financial cushion, while also keeping flexibility in mind later down the line, whether that involves working longer or cutting back on spending.
Investors might also consider resuming their retirement contributions during market downturns, though Pappalardo acknowledges this approach runs counter to the Coast FIRE philosophy.
“In my opinion, there’s a real advantage to contributing in those down years. That’s often how you boost returns, whether from fresh investments or rebalancing into riskier assets after a sell-off,” Pappalardo notes.
But then again, if that’s your plan for Coast FIRE, you might find yourself contradicting that foundational philosophy right off the bat.
Perhaps there’s a new niche waiting to emerge within the financial independence and early retirement framework. How does “Flex-Coast FIRE” sound?
