The Coast FI Retirement Formula and Its Shortcomings

On Monday, The Wall Street Journal reported that a retirement-savings formula offering a single target has been catching the attention of Generation Z and millennial investors. The formula is Coast FI.

The Coast FI, meaning “coast to financial independence,” number is the estimated amount of retirement savings required to be able to stop contributing to those savings. An influencer, travelingtoretirement, posted a video on Instagram in July with the intro, “I’m 33, and I am done saving for retirement.” This declaration was based on the influencer’s Coast FI number. The video received 61,400 likes and is not the only such post.

The basic formula for Coast FI calculates how much you need now to have a specific amount of savings in the future. It considers how much you think you will need to cover expenses in retirement, the rate of return you expect to realize on your savings and the number of years until your planned retirement date. The Coast FI number you are trying to achieve is simply the amount you need to have saved to provide a sustainable stream of portfolio withdrawals throughout retirement.

The formula is:
Coast FI = Target retirement savings ÷ (1 + Rate of return)^Years until retirement
Where: Target retirement savings = Annual withdrawals ÷ Safe withdrawal rate

Here is a simple example. Let’s say Jack, who is in his late 20s, wants to have more financial flexibility by age 35. He also thinks he will be able to live on savings withdrawals of $72,000 per year in today’s dollars when he retires at age 65. He will achieve that goal if he has $236,000 in savings by age 35, realizes an inflation-adjusted return of 7% and assumes an initial withdrawal rate of 4%. Combined, these factors should lead Jack to have $1.8 million in retirement savings at age 65. (We created a spreadsheet you can use to calculate your Coast FI number, or that of your relatives. Download it here.)

There are several assumptions built into this projection. First is Jack’s feasibility to save that much by age 35 after considering student loans, early career salaries, etc. Second, the potential for a below-average period of returns—and when those bad returns might occur—is ignored. Third, Jack is assumed to remain steadily invested regardless of how much volatility he faces or what personal financial challenges he incurs (unemployment, medical issues, etc.).

Forecasting retirement spending also brings its own challenges. Younger adults and even those entering middle age are unlikely to be familiar with required minimum distributions (RMDs), Medicare income-related monthly adjustment amounts (IRMAA) or the taxation of Social Security benefits.

Beyond the aforementioned issues, there are downsides to ceasing contributions to retirement savings. Future employer matching contributions end, along with the compounded returns on those contributions. The opportunity to use tax-advantaged vehicles becomes harder too. Roth accounts grow tax-free, while tax-deferred savings provide a tax deduction now. Even more important is the risk of a savings shortfall, which you may not realize until it becomes too late to make up for with portfolio returns alone.

The Coast FI number does have the benefit of providing an estimated savings amount a person can target. This number can serve as a useful initial goal to use in a wealth-building plan, such as our PRISM Wealth-Building Process. However, it is a target, not a singular point at which you can stop saving for retirement. You are always better off oversaving when you are young than trying to make up for a shortfall as you approach or live in retirement.