Are you dreaming of the day work is an option? Are you on track for financial freedom or perhaps Coast Fire?
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Coast FIRE and financial freedom are both great goals to work towards. If you are just getting started, the main difference is how aggressively you need to be saving now. Continue reading as we outline what it takes to achieve financial freedom or Coast FIRE (financial independence, retire early).
Morgan Housel (bestselling author of Psychology of Money– a recommended read) defines the highest level of wealth as:
“You wake up every morning realizing that you can spend your time doing what you want, with whom you want, for as long as you want.”
What Is Financial Freedom?
Financial freedom is having accumulated enough wealth to generate sufficient income to cover your desired lifestyle without being dependent on working at a traditional job. Once you’ve achieved financial freedom, you have control over your finances, allowing you to make life decisions without constantly waiting for a paycheck to cover your living expenses. Your specific definition of financial freedom may vary based on your personal goals, values and circumstances.
This past year, I met the former CEO of a major corporation while on vacation. This person had accumulated more than enough wealth never to work again, but they were pursuing a second career that they were passionate about. While I could tell they are a very motivated person and will likely continue to make money while following their passion, they didn’t need to earn a paycheck in their new role. They also built their new career around not being in the 24/7 grind they had lived for years to become a CEO and stay one.
Some people simply want to know they’ve achieved financial freedom and can quit working at any time. Others are aggressively saving to retire early, sometimes ridiculously early, such as in their 20s or 30s. Not to be a negative Nancy, but many people I’ve known who retired in their 20s or 30s have gone back to work because they wanted to, not for financial reasons.
What Does It Take To Reach Financial Freedom?
Using some basic math, you will likely need somewhere between 25 and 29 times your annual spending. For example, if your household lives on $300,000 per year (I’m writing this post from West Hollywood, an expensive place to live), you would likely need between $7,500,000 and $8,700,000 to achieve financial freedom. This is assuming a 3.5-4% withdrawal rate. According to Kitces’ research, a 3.5% rule is a relatively safe withdrawal rate for those with a time horizon of 40 years or longer. The younger you start living your financial freedom life, the longer the money will likely need to last. Many financial advisors will use the 4% rule, which allow you to draw a bit more income from your life savings, which brings down the amount you need to reach financial freedom.
While the number required to reach financial freedom may seem daunting, there are ways to reduce it. Think of things like paying off your home, lowering your cost of living or even income from Social Security or pensions.
On the flip side, you may need even more assets if you live in a high-tax state (like California, New York or Oregon) or if most or all of your assets are in traditional retirement accounts.
FIRE= Financial Independence Retire Early
What Is Coast FIRE?
Unlike financial freedom, Coast FIRE is not about being able to quit working now. With Coast FIRE, you work to accumulate a level of wealth that will eventually grow to fund your future retirement without you continuing to save more for retirement. With this strategy, you will need to continue working to fund your current lifestyle. However, without the burden of saving for retirement, you may have more financial independence and the ability to spend more on travel or other things that could improve your current quality of life.
Achieving Coast FIRE is much easier to reach than financial freedom because you simply don’t need to save as much to secure your financial future.
- For example, if you need $7.5 million in assets by the time you’re 70, then we can calculate how much you’d need today to achieve that goal. Below are these amounts by age (assuming a 6% annual real return on your money thereafter):
- Age 30 = $729,000
- Age 40 = $1,305,000
Of course, if you want to retire earlier, these numbers will be larger.
As you can see, the number to be on track for Coast FIRE may be much more manageable for most people than what it takes to really reach financial freedom. For most of my financial-planning clients who are on the Coast FIRE path, we often still utilize some level of contributions to Roth IRAs or traditional 401(k) plans, essentially funding these contributions from their savings. Tax savings are tax savings. The less drag from taxes will allow assets to accumulate faster and also enable you to reach financial freedom or achieve Coast FIRE more quickly.
There are still risks with Coast FIRE; not everyone will be able to work until their desired retirement age. However, Coast FIRE does provide a lot of flexibility for the typical person who is looking to enjoy life now while still working and planning for the future. Personally, I love having reached financial freedom, but I don’t have any desire to not work at this point. I’m guessing many of you, like me, would be bored without working at this point in your lives. I’m in my 40s, and most of my friends are still working; I also love what I do.
If you’ve already reached Coast Fire or financial freedom, congratulations. You’ve reached a big milestone that many will never get. Continue to optimize your plan to make sure your investments are working for you and that you have strategies in place to minimize your lifetime tax bills. The recently passed OBBBA may require you to review your tax-planning strategy and how you are managing your income.
Wondering how to actually become a millionaire? Read this post:
