New Year, New You. So CoastFIRE and FU.

It’s the beginning of a new year. That means it’s New Year’s resolution season. The time when the self-improvement obsessed do an evaluation on areas they want to improve on in the new year. Typically going to the gym, losing weight, or saving money are all the “easy” options people say but rarely follow through with. But regarding saving money, we can lay out a plan for how to get richer in the coming year. Here, we’ll talk about following a plan for CoastFIRE. This entails calculating your FIRE number, calculating your FU number and ultimately starting a path for CoastFIRE in the new year. 

What are your expenses?

First things first, let’s understand what your expenses are. It’s best to focus on expenses first. So much discussion is based around income or what you make. But the real way to calculate financial freedom is understanding how you spend money.

Let’s get a baseline for what your lifestyle costs. For instance, maybe you say you need $100,000 per year to happily live off of. What encompasses that $100k? Is it all living expenses? Is it living expenses plus discretionary spending? Or is that number pulled out of thin air because it sounds like a good, round number. Think about it. For me, I like to think about lifestyle cost in 3 different ways:

1. Living Expenses (how much do I need to live)
2. Discretionary spending (How much fun money do I need to be happy)
3. Savings/Investing (How much do I need to save in an emergency fund and for retirement)

My numbers looks something like this:

• Living expenses: ~$4k/month
• Discretionary spending: ~$2.5k/month
• Savings/Investing: All my leftover income

Therefore, we can live on ~$80k per year and live a happy, fulfilled life. Once we reach CoastFIRE, as long as the income from our jobs can equal $80k/year, we can continue our lifestyle while having confidence our retirement is taken care of. 

These numbers are important to calculate your FIRE number and FU money number. Based off my expenses, these are my numbers:

• FIRE Number – $2,000,000
• FU Number – $160,000

Now you might ask, how did you calculate those numbers?

How to calculate FIRE number?

Your FIRE number is super easy to calculate. Add up your annual living expenses and discretionary spending numbers, multiply by 25 and that is pretty much your FIRE number. 

The FIRE number is derived from the 4% rule, which means that if you have a sum of money and every year you take 4% of that, as long as its invested in a diversified portfolio that can return an inflation adjusted return of 7%, which matches the long term U.S. stock market historical average, the money will replenish that 4% and essentially you’ll never run out of money. This is the basis for retirement savings and spending. 

When I reach FIRE, I should be able to take $80k from my $2 million dollar portfolio. Through the power of compound growth, if my portfolio grows at least 4% the following, I will have $2 million back in the portfolio. That’s financial independence!

How to calculate FU number?

I define the FU number differently than most. 

For some, the FU number is synonymous with the FIRE number. Technically, that’s true. Once you reach financial independence, you can say “F U” to work for the rest of your life! But I don’t think you should limit the FU number to be the FIRE number. 

FU doesn’t have to mean “F U forever”. I think it’s most effective when you can say FU much sooner, to a bad boss or a job that isn’t a good fit. With this definition of FU money, you can take chances sooner than later. 

I believe having 2 years of all expenses is the right amount of capital that will keep the lights on, the family fed for a long time while you find the right job or career endeavor. FU money should be readily available too. That means the money in a retirement account or home equity does not count. This is cash in a savings account and/or investments in an after-tax brokerage account. 

Based off my situation of $80k as my expenses, I think the ideal ratios is something like this:

• High yield Savings account: $50k
• Brokerage account: $110k; in a low fee index fund

How to calculate the CoastFIRE number?

CoastFIRE is when you no longer have to save another dollar to your retirement and your retirement accounts will continue to grow via compound interest and equal your FIRE number at your desired retirement age. 

CoastFIRE is not as easy to calculate as FIRE and FU money. But, fortunately there are a lot of great calculators to help with this!

I like using walletburst’s CoastFIRE calculator the best. Using my numbers, I’m in my mid-30s and with my $80k/year expenses the calculator shows that if I want to retire in 30 years, my CoastFIRE number is $348,220. Simply said – if I have 348,220 in my retirement accounts today, I am CoastFIRE and this would grow into $2 million in 30 years when I want to retire. 

Digging a little closer into the numbers. I assume:

• 9% investment growth rate – on average, the stock market returns 10%, but I’m a bit more risk averse and use 9%. If reality is closer to 10%, then I reach FIRE faster than expected!
• 3% inflation rate – this is the average US inflation that gets reported. Your mileage may vary on actual US inflation rates, this seems fine to me. 
• 4% safe withdrawal rate –  This is the withdrawal rate we talked about in how to calculate the FIRE number.

Here, if I could make enough income where I invested the same amount as my living expenses, I could CoastFIRE by the time I’m 45. So when I’m 45, I would no longer need to contribute to retirement accounts to hit that FIRE number when I’m 65. 

It’s probably not realistic to assume everyone is starting from $0 in retirement. In the above screenshot, (assuming a $80,000/year income) let’s say I have Fidelity’s recommended 1.5x my salary in a retirement account. If I still wanted to CoastFIRE by 45, I would need to save $2,600/month in retirement accounts until I’m 45 to hit my CoastFIRE number. That’s better than $4,000!

However, if I wanted to retire at age 60 instead of 65, I could save $4,000/month until I’m 45 and coast from 45 to retirement age of 60.

There’s so many options and ways to calculate that using a CoastFIRE calculator like this can really help you find your path to CoastFIRE. 

If you reach CoastFIRE and continue to have a W2 job, instead of not investing altogether, even just reducing contributions to your employer match is a good idea because it’s free money and you’ll reach FIRE quicker! Taking your monthly savings from $4,000/month to something like $400/month to keep the employer match opens up so much more opportunity for living!

A point worth discussing in all of this is the balance of FU money and CoastFIRE. If you put all of your investing dollars into retirement accounts, you cannot access (nor should you) to leverage an FU money. After all, those dollars need to keep growing so you can coast. Therefore, once you reach CoastFIRE and get close, it’s worth considering prioritizing the brokerage account so that you can begin to stack up the FU money fund. I think it’s prudent to go in the order of:

• Save up for 3-6 month emergency fund
• Max out retirement accounts until CoastFIRE
• Prioritize brokerage account until FU money

The point of this post is to outline a plan for financial freedom. That includes knowing your expenses, knowing your FIRE number, knowing your FU number and knowing how much is needed to reach CoastFIRE.  With intentional planning and framing, you will change your life on a path to CoastFIRE.