How to Calculate If You’ve Already Saved Enough for Retirement—and If It’s Time to Slow Down

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It’s possible you might already have enough saved up for retirement, thanks to the power of compounding—a phenomenon in the FIRE community known as Coast FI. We cover how to calculate that number, if it’s a reliable safety net, and what else to keep in mind.

Rich Girl Roundup is Money with Katie’s weekly segment where Katie and her Executive Producer Henah answer your burning money questions. Each month, we’ll put out a call for questions on her Instagram (@moneywithkatie). New episodes every week.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• Sample compound interest calculator from IRS.gov

• The Money with Katie Show episode on the 4% Rule with Bill Bengen

• Baby FI blog post

• The Money with Katie Show episode on estates, inheritances, and aging parents (with a checklist)

• Rich Girl Roundup on how to talk money with aging parents

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Katie:

Welcome back, Rich People, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. As always, I’m your host, Katie Gatti Tassin, and every Monday Henah and I talk about everything, listener questions, interesting money stories, casual financial topics. Last week I blacked out ranting about childcare, but yeah, so we’re going to do all of that right after a quick break.

Before we get into it, this week’s upcoming full episode is about predatory life insurance policies. So cue the scary movie music. What kind of policies are out there, what’s the difference between the good and bad kinds of insurance? You know the drill, but we will be addressing possibly the most popular inquiry that we get, but in the full episode format because there is a lot there. Okay, onto the roundup Henah. What are we chatting about today?

Henah:

This week’s question came from two different people, but they’re pretty related. The first came from Britt V. who said, what are your thoughts on Coast FI? Some say it’s great, others say it’s fake FI. And FI, for example, is financial independence. And then there’s a follow up from someone on IG—their name is SLE, sorry, I don’t know your first name—but they said I’ve hit Coast FI, but I don’t know if I should slow down or just keep going hard because I might need more than I think I do. And so this is again, another really popular question we get sometimes and somewhat similar to the should I go really hard in my twenties and then let off the gas pedal a bit? But for the beginner who’s listening, let’s define Coast FI.

Katie:

Cool. Yes. Do you want to do the honors?

Henah:

Sure. So Coast Financial Independence is essentially when you have reached a point in your investments in the long term that you don’t need to continue saving for retirement, although you obviously can. But that the money that it will create for you over the years thanks to compounding in returns is enough for you to retire on a traditional retirement age. Most of the time. I guess you could use this for any number.

But how you calculate Coast FI is you plug your current invested assets into a compounding returns calculator. We’ll put one in the show notes. You assume 6% or 7% annual returns, which is the historical average. You could do 6% if you want to be conservative. I think Katie, you maybe do 6%, I’ve done six or seven, and then you plug in the number of years until you are hoping to retire. So for example, you could do traditional retirement age at 65, 67, or you could be like, nah, I’m out. I’m tap dancing out of the boardroom at 55.

And so then you’ll see what number is spit out of there, and then you’ll take 4% of that number, which is based on the 4% safe withdrawal rate by Bill Bengen, which we have an episode on that we will also link in the show notes. But you’ll basically decide if that is enough to live on based on your desired lifestyle. And so you’re going to ignore inflation because you are using a lower rate of return that 6% or 7%. But if you are at that number, then you are deemed Coast FI.

So for example, if you are married at 30 years old and you want to retire early at 55 and both of you already have $250,000 already invested, you plug that in with the 7% rate of return and you end up with $1.35 million. And so 25 years away, you’ll have $1.35m from what you have today, and then you take 4% of $1.35 million and that spits out $54,000. So could you and your partner down the road live on $54,000 a year or approximately $4,500 a month? If yes, you are at Coast FI, and if not, you will need to keep going.

So I did this for myself and I’m actually at Coast FI for traditional retirement age, which is really exciting, but your girl is not trying to work until she’s 67, 65, so I’m going to have to keep going a little. But remember that the longer your timeline is, the more time your money has to compound. So that’s why I will be able to retire at 65 and I’ll have a 4% safe withdrawal rate of $110,000, which is way more than when I would be 55 and I’d have $54,000, but I have 12 extra years that I’d have to be working.

Did I do a good job? I tried to use my best Katie explanation there.

Katie:

Yeah, I think you did. The other day I had a friend that listens to the show text me. They were like, “I’m excited to listen to the social security episode.” And I was like, great, let me know what you think. Then he texted me back a day later and was like, “Yeah, I think I would’ve preferred that one in written form. There was a lot of numbers and it was a little hard to follow,” and I was like, damn, I’m sorry, but I know it’s like a hard balance to strike because you want to share the numbers and you want to be detailed and specific, but then you’ve got people doing the math meme in their heads of where we’re trying to follow along.

But yeah, I think the best way to capture everything that you just shared, the general principle is like look at what you already have invested in the stock market. You can reasonably assume you’re probably going to get—assuming it’s invested in total stock market, US index funds and not Bitcoin. Not Bitcoin, because who knows what’s going to happen there—but you have it invested in total stock market ish or adjacent funds and history holds steady, then yeah, 6% to 7% real returns is probably what you’re going to get.

So you’re going to pop all that into a compounding returns calculator, enter the number of years and just figure out what are my existing assets going to mutate into on their own without me making any additional contributions.

And I think what’s interesting about Coast FI is that a couple of years ago I thought I was at Coast FI, but then as I earned more, I started spending more and my lifestyle changed, and now the number that would’ve been coast by back then no longer would be coast by now. Now, fortunately, I continued saving and investing aggressively. So I am Coast FI again. I did not stop saving, but I think that you mentioned inflation. I would also add that you almost can’t overstate the role of lifestyle changes in this calculation, too.

Henah:

Lifestyle creep. Yeah.

Katie:

Yeah. And to Henah’s point, by using the post inflation growth rate, you are kind of negating or controlling for inflation in your growth phase, such that if you take 4% of that number, it’s going to spit out what you can probably understand to be more or less what your purchasing power in the future will be. Like if you were to use 9% or 10% returns, you’re going to get a way bigger number, but the 4% number you get is going to look really high and really crazy like in, we’ll say, future dollars equivalence.

So generally speaking, yeah, I do like to use around 6% for my own calculations just to try to be conservative. Hopefully that’s conservative enough. Obviously we don’t know what the future holds, but so Henah, tell me, how do you think about this coast find number, why and how is this useful to you?

Henah:

Well, it gives me a sense of stability that I didn’t have two years ago, which was I didn’t even know the numbers of my life in the long run. I knew what my budget was every month, but I didn’t know when would I know if I could retire.

It also gives me a sense of, I could see the last two years of really hard work that I’ve put into this have supercharged me to get very close to that Coast FI number in a way that I wouldn’t have been able to. So it kind of shows me my effort now, showing me the purpose of that later, but I can also see why it feels really relative for somebody and why it kind of feels fake, because there’s so much that could happen between now and then that’s impossible to plan for. So stuff like a bear market, a continued bear market even, medical care that you might need and need to withdraw from your retirement funds, debts and loans, but you also have opportunities for things like future pensions, inheritances, and so it’s not all bad, but it can kind of feel like, well, how do I know?

How do I know if, right now I feel good, but 10 years down the line, if I have three kids and they all need money for medical care and I don’t have that kind of money, I have to pull it from somewhere? And so I do think that it becomes a nice safety net number, but it’s not something I’m a hundred percent banking on the same way that I am trying very hard not to bank on social security; the same way I’m trying very hard not to bank on pensions because pensions can fail.

But to the best of my knowledge today, it feels like a really helpful tool to kind of plan and figure out if I don’t inflate my lifestyle more over the years, I can retire at this age and not have to worry. What about you?

Katie:

It’s interesting because I think that proportionality comes into play a little bit to your point about if I don’t inflate my lifestyle, I would be able to retire at this time without saving additional money. But there’s kind of that negative space thing that happens where you go, well, okay, so if I am just continuing to have all my income and I’m not continuing to save it, what am I doing with it? I’m spending it and if I’m spending it, what does that mean about my lifestyle? It costs more.

I guess what I’m trying to get at is that I sometimes will think of the Coast FI number as useful because it’s kind of a psychological backstop, which I think is kind of what you’re getting at because it’s like it tells me even if you don’t contribute another dollar and you’re never able to save another penny, that if you can earn enough to support your current spending, that in 10 or 20 years you’re going to have X, Y, Z.

So it’s not that it’s fake, but it does typically signal that you can take your foot off the gas pedal if you want to. And to my earlier example of the number that used to be Coast FI, that as my lifestyle inflated, it was no longer Coast FI. So I’m glad that I didn’t stop saving when I once calculated in my mid twenties that $350K invested was the number that meant I would end up with what I needed at traditional retirement age.

Once I surpassed that benchmark, I had a lot of peace of mind that I could take career risks because it felt less crucial that I continue to prioritize earning as much as possible. I knew, okay, well even if this risk doesn’t pan out and it’s only giving me enough money, I’m not making as much as I am now or my current job that I give up to pursue this doesn’t really work out okay, well, at least I’ve already got enough invested that by the time I retire I’m going to be good. So I can make a lot less in the meantime and it’ll be fine.

The irony here is that the risks that I ended up taking led me to paths that paid way more, but at the time, that was not a guarantee. And I really wanted assurance that risk wasn’t stupid and that I had done enough saving and investing for retirement such that I could change course downshift, take a break, figure out what I really wanted to be doing with my life without putting my future at risk. And so I think that that’s kind of how Coast FI has been impactful for me, that it’s useful for being that psychological backstop, contextualizing your progress, understanding how much time your existing efforts have already bought for you, but it’s not foolproof in the sense that just like you said, life can change in ways that make things more expensive and maybe a lot more expensive than you anticipated.

So I mean, I think you saw that email we got the other day from that woman who said that her father was in memory care and he has Alzheimer’s.

Henah:

$9,000 a month?

Katie:

$9,000 a month, for this memory care center. And she’s like, we don’t know how long he’s going to live. He could be there for a long time. And so I don’t ever want to frame it as something that’s like, oh, no problem. Don’t worry about ever saving another penny, time to YOLO, rip the Band-Aid off, let it rip. But it is, I think sometimes a comforting notion if somebody is a little more risk averse.

Henah:

I think this gets at the tension that both Britt and the other person asked about, which is what if it’s not enough later? Because I think to your point about elder care, I mean also if you have a child for many years, you’re going to have less room in your own two person if you’re in a traditional household, two person budget. And so that’s coming to mind.

But the other piece of this that we also hear a lot is both people in a couple, a lot of the times are not always on the same page about when they want to retire. And so I would encourage people to have that conversation because Coast FI sounds great if you both are on the same page about what you want your spending to be in the long term and when you want to retire, but it doesn’t really apply if those things are different for both of you.

And I kind of err on the side of it’s never bad to have more savings, but I also don’t want people to sacrifice their today to potentially enjoy later. They may not get to experience, but that’s another piece of the equation. And so do you feel like your fine number, that $350k you were talking about, was that with your husband in mind or just for yourself?

Katie:

No, that was just me. That was both just my spending and both just my investments. And then, yeah, it absolutely changed. But fortunately when we got married, we were coming in with similar mindsets and also similar amounts of money, so we didn’t really have to, there wasn’t a lot of negotiation that had to happen. It was just kind of like, yeah, we’re now spending twice as much, but we now have twice as much in our jointly held pot.

So tell me if this makes sense. Okay. I think how I used to conceive of this question was very much saving versus spending, but income stagnant, assuming nothing else is changing, but it’s like, ooh, should I try to save more and spend less or should I have a lot more fun and spend more and save less? And it was kind of only ever touching those two levers.

But I think what I’m starting to think about, and maybe my previous point kind of alluded to this, so I’m just going to say it a little bit more explicitly, is the freedom and power to work less. What if you just earn less money? What if you work part-time? What if you take a couple months off every year and you’re not really worried about replacing the income? Maybe you are going to keep spending the same amount, but you’re going to be saving less by the function of you’re just not going to have as much money coming in, but the means by which you are enjoying your today isn’t in spending more money, it’s in. It’s just in having more free time. And so the time element, I think that’s where Coast FI can also come into play.

It kind of brings up, for me, it might actually signal to you that if you think you want to retire early, a good test run that you can give yourself is, I’m going to take a sabbatical or I’m going to start working. I’m going to see what more free time and less work in my life really feels like to make sure that early retirement is actually something that I want. And sometimes Coast FI can be kind of a nice mile marker that once you reach it, you go, okay, well are there any changes I want to make?

Henah:

You did a blog and a lesson I think in one of our courses about Baby FI too, which is allowing yourself to explore that. And I know some people call it like Barista FI is another one where you just need part-time work. So I agree with you. I also think, yeah, I want to retire early, but what am I going to do with all that time? And my mom who just recently retired was like, I never want to be someone who’s not doing something all the time because when you stop doing stuff that your body just starts to deteriorate.

Katie:

I’ve heard the same. And with your brain too, if you’re not using it.

Henah:

Right, you’re not using it as much in the same way. And so I know for me what a ideal lifestyle looks like, and I feel like I’m actually pretty close to it generally, which I feel like I do productive important work, but I also have flexibility where if I’m like, Katie, I didn’t sleep last night. I’m going to log in at 10, nobody’s like 9-5 hours. And so I feel like I have that and I’m able to find that standard and hold off if I don’t because I’ve reached a point of stability that does not require me to take the first thing that comes my way if I don’t need to. Yeah, I think that’s a really salient point.

Okay. Katie, anything you wanted to add before I move on to a money story?

Katie:

I don’t think so. I think we’re ready for a money story.

Henah:

Oh, great. Well, I have one. So this is from someone I personally know who had emailed us and said a money story for you. So they said, “My mother passed away suddenly when I was 19, and there were three of us biological kids and our parents were divorced. Lo and behold, as three college kids starting to navigate the financial ups and downs plus loss, we realized that my mother’s will was woefully out of date. When we did locate it, we discovered she hadn’t updated any of it since before we were born, so pre-1978. So we were lucky in the sense that in the state where she lived finalized, divorce effectively makes your ex-spouse deceased in the eyes of the state when it comes to things like wills. So the will was written to leave everything to her husband and any living descendants. So it automatically and equally came out to the three of us.

“But this is where things got tricky. When my parents divorced, my mother was awarded a portion of my father’s 401(k) and other retirement investments, and she had been a stay-at-home mom for 10 years, and they were married for 15 years. So despite everything being wrapped with a bow legally, the legal teams did not follow through and separate the stocks and other financial assets on the day that the agreement was signed. So upon her death as we were all grieving, we had to hire forensic accountants to uncover the value of the assets on the day the divorce was finalized and do all the separation of assets a decade later. It took in total nearly three years for my mom’s estate to close as a result. So just a cautionary tale from one 40 plus year old listener that if you haven’t talked to your parents about updating documentation and confirming things are in order, here’s a good reason to do so.

“And to make sure that any legal happenings like this that you go through individually should be handled promptly and don’t let it fester in the background comparatively. When my mom’s brother died eight years ago, his entire estate closed in less than six months because everything was neat and tidy. And I try not to think about how much we lost to fees and the first time around.”

And so my heart goes out to this person who’s a friend because I cannot imagine in my grief having to deal with all of this. But at the same time, I think it’s a really important thing to keep in mind because when we did that episode on aging parents and estates and wills and inheritances, we had that checklist of what to go with your parents through, and there’s so many more steps involved in that we didn’t even get to cover. And I think this is a perfect example of how complicated it could be in a way that you don’t even anticipate.

Katie:

Oh my goodness. Yeah, I’m so sorry that you went through that. That is really hard, and I don’t want to say, and good news, you’re not alone. Obviously, it’s not a good thing that happens to so many people, but you aren’t alone. That is a common occurrence because this is just stuff that we don’t really, and we haven’t really covered it that much on the show, to be fair. I mean, we did that one episode about it, or maybe we’ve talked about it twice.

But yeah, the kind of estate planning world can be really confusing. And I feel like we’ve gotten a couple submissions now from people who had a really complicated post death situation, and then sometimes it would be the amount in the account was like 10 bucks. They go through all of this and end up with, it’s like you’re not even really going through it for that much money, but it just becomes a total headache. So thanks for the reminder to talk to the parents.

Henah:

It was $1.25, no zeros removed. I remember that.

Katie:

That message was incredible. Okay, thank you for that reminder. We’ll link the, I forget, is it an estate planning? Is that what the episode’s called? We’ll find it. We link it in the notes.

Henah:

It’s called Aging Parents, Estates, and Inheritances, I think.

Katie:

Yeah. The checklist. Yeah. Okay. Incredible. Alright, that is all for this week’s Rich Girl Roundup, and we will see you on Wednesday to talk about the sexiest topic of all…life insurance.