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Is Coasting a Good Retirement Strategy?
Most advice for saving for retirement encourages people to save a reasonable percentage of their income all the way throughout their career. For example, if you start your first significant job at age 25 and save 10% of your income each year in some form of retirement savings, you’ll find yourself in great shape at age 65.
The problem with this approach is that it assumes that you’ll always have a life situation where you can easily afford to put aside 10% of your salary. That isn’t always true for everyone.
Let’s say that Sharon graduates from college at 22, and she’s still single. She gets her first good job out of college and lives in an inexpensive apartment. Her living expenses are extremely low. However, 10 years later, Sharon finds the right person, settles down, buys a house, and perhaps even has children. At that point, Sharon’s living expenses are far higher than they were before, likely growing much faster than her income has grown over 10 years.
How can we solve this problem? One powerful solution is coasting.
What is coasting in retirement?
Coasting simply means that you save a large amount for retirement as early as possible in life until you reach a point where your investments will likely grow fast enough on their own to meet your needs when you reach full retirement age.
Take a look at Sharon’s story from above. In that story, Sharon at age 22 could have aimed to save much more than 10% of her income for retirement. In fact, she could have aimed to save so much that, by age 30, she could literally stop saving for retirement and just coast for the rest of her adult life, with compound investment growth doing the rest of the work.
Ideally, this means that you can enjoy the ability to spend all of your income without worrying at all about retirement savings during the decades leading up to your retirement date. For many people, this means enjoying middle age with the ability to spend quite freely, knowing that retirement is secure. If you so choose, it also provides a springboard for retiring early if you keep up the strong savings pace.
Does coasting mean saving a lot of money?
It does, but probably not as much as you think. Many people who take this approach right at the start of their career can save 20%–30% per year for the next five to 10 years and then completely stop, as that will provide enough supplemental money in retirement to live a wonderful life.
Others might reach that point and choose to continue to save at a high rate, transitioning into a plan for early retirement that has them leaving the workforce after only 20 years.
What do you need to coast to retirement?
There are some life situations that lend themselves very well to coasting.
The younger you are, the easier it is to pull off coasting. That’s because there are more years separating you from retirement, which means there are more years for compounding to work its magic. Aggressive investing means your savings will grow much faster than inflation, and thus the more time you give this process, the better.
The smaller your debt load and living expenses, the easier it is to contribute a significant portion of your income. Someone who manages to graduate from college without student loans and is in a life situation where they can keep their expenses very low for a while is in a prime situation for coasting.
A lucrative career also helps, but it’s not essential. This enables you to save even more, but you can pull this off, even with a salary below the average American income, provided you keep your costs low and don’t have significant debt.
How to determine if coasting to retirement is the right strategy
Calculate how much money you need in retirement savings when you retire
Find your target number; there’s actually a straightforward way to calculate how much you need to retire. In short, you have to figure out how much money you’ll need on the day you intend to retire.
This also includes determining how many years are between you and retirement. If you intend to retire at 65, just subtract your current age from that number.
Here’s how to do the math for coasting retirement
First take the amount that you’ll need to retire then, divide that by 1.07 to the power of the number of years until retirement.
Replace TARGET with the amount you’ll need to retire on, and replace YEARS with the number of years until retirement, to find out how much you’ll need to coast to retirement. That number will of course change over time — it’ll grow slowly larger the closer you get to retirement.
The 1.07 is the expected investment growth at an average annual rate of return of 7%. Using 7% as the average annual rate of return for long-term retirement investments is based on Warren Buffett’s recommendations regarding the long-term future of the U.S. stock market. If you feel more optimistic than that, you can adjust it upward. A prediction of 8% average annual growth just means you change the 1.07 to 1.08.
So, let’s say you’re 30 years old and you intend to retire at age 65. That means you have 35 years until retirement. You’ve decided that you’ll need $2 million in retirement savings when you retire. That looks like:
And it will tell you that you’d need $187,000 in retirement savings to start coasting.
Of course, those numbers will change over time. Your target number will hold approximately true, but the clock is ticking. At age 35, that same person would run that calculation…
… and find that they now need $262,000 in retirement savings to start coasting.
What about inflation?
Inflation is cooked into the target number that you’re aiming for. In my description of how to calculate your retirement number, one element is to include inflation (which I estimate at 3%, though you can adjust that as you’d like).
How fast can I get there?
Once you know how much you need to save to coast, it’s all about getting there as fast as possible. Increase your retirement savings to as high as you can and keep recalculating your coast target, as it will gradually shift over time. Once you’ve got a retirement balance that matches your coast target, you’re there. You can slow your retirement savings down as much as you’d like and coast to retirement.
You may want to check up on it occasionally, though
The biggest enemy of coasting is that your spending habits or living costs may increase with your income. It’s a good idea to either save a little more than your target before you start coasting or else to expect that you may have to kick in more savings if your target goes up too much.
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