What is Coasting Financial Independence?

What is Coasting Financial Independence

What is Coasting Financial Independence?

Coasting financial independence is when one’s investments will passively grow to cover one’s future retirement without that person needing to add any more additional capital. Meanwhile, the person can scale back on his or her job and “coast” to financial independence.

In the quest for financial independence, many people choose to suffer through long hours at a job they do not like just so they can squeeze out a few extra dollars.

Those same people often try to achieve total financial independence before they ever scale back on anything.

Total financial independence is where someone’s investments completely cover his or her expenses. That person could retire today and not have a problem.

But achieving total financial independence often takes decades. Is there a less abrasive path to financial freedom?

This is where coasting financial independence comes in.

Coasting financial independence asks the question: how much will my existing investments grow by the time I plan on retiring?

The Benefits of Coasting Financial Independence

With a well-executed plan, someone can dramatically scale back on his or her job while still achieving financial freedom by a target date.

Coasting financial independence does require you to make financial projections and savvy investments early in your career. It then takes advantage of compound interest while you enjoy the benefits of a freer lifestyle with less taxing work.

It’s a lifestyle-oriented strategy at its core.

So, how does it work?

Spreading Out the Stress

Let’s say you want to have $1 million by the time you retire, and you’re currently in your twenties. You’re in a job you absolutely hate, and would rather work in a less taxing job, even if it pays less.

To reach financial independence by 65, you’d need $100,000 parked in an asset that returns 7% per year. Then you can simply let compound interest do its thing. By 65, you’d have a $1 million nest egg.

Coasting Financial Independence

And you didn’t contribute a dime after you turned 30.

Instead of funding your retirement steadily over decades, time would do it for you. You’d have to put in effort and sacrifice in the early years of your career. But, after hitting your investment target, you’d be able to sit back, and, well, coast.

In other words, you’d be able to scale back your career, which is probably the greatest benefit of this strategy.

You Can Scale Back in Your Career

So long as you could cover your daily expenses with your earned income, your investments would be building your retirement nest egg at the same time.

Some of us are hyper-conscientious: we can’t imagine life without our super high-stakes, high-stress career. 

And some of us, well, aren’t. And that’s OK!

If you cringed at the phrase “high-stress career,” you’re not alone. Plenty of Americans would rather work to live than live to work

With coasting financial independence, you can scale back your work obligations. You only have to subsist in the meantime, knowing that your retirement is being funded with compound interest.

So maybe you can leave that grueling $90,000 per year job and work something with half the hours for $30,000 per year.

You don’t have to worry about saving extra for retirement, since time and compound interest are doing that for you.

The Drawbacks of Coasting Financial Independence

Every financial decision comes with risks and drawbacks.

A coasting financial independence strategy can’t guarantee success.

Here are some of the drawbacks:

You Still Need to Work

Remember, you still need to work to cover your expenses until you reach total financial independence.

This financial strategy is not a get out of jail free card. It requires sacrificing your time early on in exchange for the possibility of future rewards. 

To be successful, you’re going to need to invest a significant amount of money up front. In our example above, you’re going to need to be diligent with saving – socking away an amount like $100,000 isn’t easy.

For a strategy that appeals to people who view work as an obstacle to them enjoying their lives, coasting financial independence still requires hard work up front.

And you’ll have to continue working to at least some level to cover your expenses while you wait for your nest egg to grow.

Your Investments Might Not Pan Out

There are no guarantees in investing (or life, more generally, for that matter).

It’s possible that your investment funds won’t perform as well as you expect them to. It’s also possible that you might underfund your retirement by not supplementing it along the way.

Putting more funds into your retirement nest egg is always less risky than not doing so. And coasting financial independence, by definition, aims to save the minimum amount required to meet your retirement goals.

Therefore, you run a greater risk of coming up short.

Hence the reason, with any financial strategy, you should try to be more conservative in your assumptions. Bring more money to the table, and give yourself room to make up for potentially major losses.

How to know if coasting financial independence is right for you

The secret to coasting financial independence is early planning and compound interest.

Coasting financial independence is only right for a certain type of person.

If you lose sleep over the idea of spending any more time grinding away at your current job, then coasting financial independence can be a faster ticket out of your current situation. You won’t have to wait until your hit total financial independence first, and your future still will look bright.

But you have to remain disciplined in any event.

The risks need to be worth it for you, too.

You might fall short of your retirement goals because of poorly timed market volatility or a major life event you’re not ready for. You have to be prepared to face the consequences of a strategy like this.

But, for many, the risks with something like coasting financial independence are far outweighed by the benefit of scaling back work sooner, even if it might not be the most mathematically optimal decision.

This website, and any communication stemming from it, while hopefully informative, should not be taken as financial or legal advice. Assume all links are affiliate links. I am an Amazon affiliate.

Jack Duffley

Jack Duffley is a real estate investor and attorney based in Houston, TX.

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