Coasting to FI
This is a guest post by FIwith2kids. You can find more great articles by him at his website. I asked FIwith2kids to submit a guest post because he consistently posts knowledgeable and relevant PF articles and he is an all-around awesome guy!
As I previously discussed in Time Now or Time Later, I have been mulling over the idea of downshifting in my career. There are many reasons for this, but predominantly this would be to spend more time with my wife and two young children. I have recently felt that the 60+ hours I typically spend at work each week are not conducive to the life I want. This internal struggle has led me to develop a two phase career plan that anyone can employ. The phases in my plan are:
Phase 1: Accelerating
Phase 2: Coasting
This strategy is ideally suited to individuals who dislike their good paying job and can’t imagine doing it until they reach full Financial Independence. This is also a good strategy for people who want more freedom now for an immediate need (kids, aging parent, etc.), but are willing to stay in the workforce longer than a strict pursuit of FI at all costs might require.
In the Accelerating Phase, all facets of income and savings are set to maximum speed. On the income side, every tool available should be employed to maximize career growth, progression and earnings. Some of the obvious items to consider are:
- Earning an internal promotion
- Switching Employers
- Moving to a Better Labor Market
- Working Overtime
- Picking up a 2nd Job
- Starting a Side Hustle
The idea is to accelerate your earning as quickly as possible by creating multiple large income streams. If I could recommend only one income maximizing item to focus on it would be Switching Employers. As I illustrated in (Financial Independence Debate: Save More or Make More) this can easily and significantly increase your income in a short period of time. Speed is key in this phase as the quicker you can grow your income the quicker you can convert it to savings and move on to the next phase of the strategy.
In conjunction with maximum income, an extreme savings plan needs to be employed. All of the extra earnings should be saved to create the central concept in my plan which is: Critical Mass Savings.
Critical Mass Savings is the amount of savings needed today to grow to a desired amount at a specific future date based on a reasonable return on investment. It can also be looked at in question form: If I want X amount when I’m Y years old, how much do I need saved today? The following is a simple example:
Savings Goal: $1,000,000
Goal Date: 5 years from now
Return on Investment: 7%
Critical Mass Savings=$1,000,0001.075 = $712,986
In this situation, you would need $712,986 saved today for it to grow to $1,000,000 in a 5 year period. This calculation can be done for any desired amount, timeframe and investment return. The table below shows the amounts needed at different ages to retire as a millionaire at various ages. I will concede that $1 million is likely not enough for many to retire on, however it is much higher than the average & median retirement savings and it is a well understood target for illustration purposes.
The main take away from the table should be that there is an inverse relationship between time and Critical Mass Savings. This means that the more time you have until your goal date, the less amount of savings you need to reach Critical Mass. This is why speed and a sense of urgency are so important in the Accelerating Phase. The sooner you reach your determined Critical Mass Savings, the sooner you can transition to Phase 2 of the career plan which is Coasting.
In the Coasting Phase, your Critical Mass Savings are left alone to grow into the future when you need them for retirement. Since you have already reached this savings milestone, no additional savings are required (i.e. 0% Savings Rate). I know that this concept is blasphemy in the FIRE crowd, but in this case it offers a significant payback. In my case, transitioning to Coasting will allow me the freedom to move out of my high stress and long hours job into a less demanding role a full 14 years before I would reach full Financial Independence.
This strategy does come with the compromise that you ultimately stay in the workforce longer than if you stayed in the Accelerating Phase until reaching full FI. However, I personally feel this is completely worth it to significantly improve my quality of life along the way. I have spent the first decade of my work life with career/money as my main priorities to the detriment of all other things. Now with a wife and kids I can’t imagine continuing on that path for another decade plus.
I like to look at this method as creating “No Thanks Money” where work/life balance and personal happiness are prioritized over income from employment. This is similar but slightly different than the popular term of “FU Money”. I like “No Thanks Money” because you will still need employment to cover your living costs and shouldn’t be looking to burn bridges (such as FU) during the Coasting Phase. If anything the connections developed during the Accelerating Phase provide opportunities for continuing to generate income during the Coasting Phase.
This method is much more about “Financial Freedom” than “Financial Independence”. By Financial Freedom I mean removing the burden of money. This alleviates stress and creates the freedom to pursue alternative employment options.
In most cases, the income needed in the Coasting Phase will be less than half what was being earned at the end of the Accelerating Phase (sometimes even less). This significantly lower threshold of required income vastly increases the options available. Some of these options include:
- Shifting your current role from Full-time to Part-time
- Becoming a Consultant
- Freelancing or other “Gig Economy” Projects
- Pursuing your Side Hustle Full-time
- Allowing One Parent to Stay at Home
- Taking Mini Retirement Breaks
All of these options allow for more flexibility in employment and the ability to mold work into something more desirable. This changes the paradigm from fitting your life around work to fitting work around your life.
In totality this Coasting to FI method is about rapid accumulation of income and Critical Mass Savings which generates Financial Freedom and optionality of income. This lays the groundwork for Financial Independence at a future date while offering improved lifestyle by design along the journey. This lifestyle design is essential as today will always be the best day to enjoy your life and to pursue happiness. As Dale Carnegie said, “Success is getting what you want. Happiness is wanting what you get.”