What are we buying with all those retirement contributions?
Today I share my motivation to increase our family’s savings rate. And an important calculation to help you stay motivated on your journey. Coast FI.
My Whys
I don’t know how long I have
Work is hard. And stressful. There are responsibilities and requirements to my job that I would rather do without. But unless you’re self-employed you don’t get to determine the complete scope of your job. I accept this. I also know that as the weeks, months and years pile up, my mental stamina will decline. Like professional athletes whose ability to perform depends on their body. The body declines and so does our mental stamina.
Work environments have changed a lot over the last century. Many people work sedentary jobs, connected to computers for much of the day. How long can you maintain peak performance in your field? Is it 20, 30, 40, 50 years? I assume it’s different everyone. And the choice of when we must stop might be outside our control. Our physical or mental stamina may decline sooner than anticipated. This is one reason for my aggressive savings rate.
Time with Family
When working, we focus our energy on the work. Sometimes at the expense of our families or close friends. Many work demanding schedules of 40-50 hours a week. By the time I get back to those I care about, my best hours of the day are gone. My family gets what’s left. On weekends and during time off I am more present with them during the best part of my day. As long as I’m not mentally cycling through work concerns. Today, many people’s work demands carry on through the weekend. And it can be difficult to disconnect mentally from work concerns. Everyone has a breaking point where the pace is unsustainable. We just don’t know exactly where our breaking point is.
What are we buying with all those retirement contributions?
Freedom of choice is what I’m buying
With each passing month, we get closer. In 10 years, my goal is to have the choice to continue a corporate career or pursue other opportunities. To be able to consider opportunities for only the work and not the pay. And the option to choose part-time, seasonal or full-time work.
From the FI Milestones post, let’s take a deeper dive into our current position on our journey: Coast FI.
What is Coast FI?
You have already saved and invested enough so if you stopped contributing today, you will reach your standard retirement ok.
Why is it a milestone?
At each milestone you gain stability and flexibility.
Stability
At Coast FI you gain peace of mind. If you had to end your contributions, you will reach standard retirement ok. For most, standard retirement is age 65 or 67. I use 67 because that’s my age for full Social Security benefits. What could force you to stop contributions? Job loss, underemployment, disability, spousal income reduction etc.
Flexibility
You could choose to take a fork in the road. Maybe you choose to move abroad, earn less and gain travel experiences. Or you choose a career with less pay but it’s your passion.
Reaching this milestone provides peace of mind that if you stopped contributing or you chose a different way, your older self will be ok.
How is it calculated?
I found a couple Coast FI calculators online and ran our numbers. I found them to be consistent. Here is what you’ll need to calculate your Coast FI number.
- Current age
- Standard retirement age (I’m using 67)
- Annual expenses
- Annual passive cashflow (if applicable) – rental real estate, side hustle, royalties, pension
Big asterisk here that will affect your Coast FI number. What to do about anticipated social security benefits? For my FI number I don’t use Social Security benefits. Because I plan to reach FI long before my social security age. For a Coast FI calculation I could see including it especially if you’re over age 50. It would go in the Annual Passive cashflow category.
The calculator uses assumptions for these last 2 variables, but they are adjustable:
- Safe Withdrawal Rate – calculator baseline uses 3.5%. Going more conservative than the 4% rule of thumb.
- Inflation Adjusted growth rate – anticipated annual growth rate for your portfolio after inflation. Calculator baseline is 5% (8% annual return minus 3% annual inflation rate).
With those 6 variables, the Fioneers’ calculator provides your FI number and Coast FI numbers. I encourage you to run a few different scenarios to see variations. A few ideas:
- Change your Standard retirement age – to see the effect of delaying or retiring early
- Get your Social Security estimate on ssa.gov. Add this in to see the effect of passive income. Consider other passive income streams you can start building today for the future
- Adjust your safe withdrawal rate. I am comfortable with 4%. Others may be more or less conservative
We don’t know exactly how all the future variables will play out. But we can use this calculator for planning purposes to get an estimate under various assumptions. And as you get closer to FI, it is more accurate.
Next milestones
Things are picking up speed now along the Milestones of FI. Coast FI is a tipping point on the timeline. You have confidence at this point. You’ve done enough to reach a standard retirement, even if you had to stop saving for retirement. In my experience, this is where you notice your portfolio doing heavy lifting. By this point you’ve seen a year in which your portfolio gains exceeded contributions.
Half FI
The point at which you’ve reached half your needed portfolio amount. It is way past halfway on the timeline. It takes much longer to reach Half FI from $0, than to get from Half FI to full FI. Through the power of compounding interest. You will find it a common occurrence that portfolio gains exceed contributions. And you might also experience your portfolio gains exceeding your annual income. What a powerful realization. You worked all those hours last year (approx. 2,000 of them) and your portfolio, through no effort on your part, earned more than you.
Read more about the tipping point in Is Your Money Working for You?
Stay encouraged and keep going.
For more info on the Milestones of FI.