You want to ditch your job as soon as possible, but there's just one problem: money. Retirement could easily cost you $1 million or more, especially if you hope to leave the workforce early. Coming up with that kind of money by your 40s or even your 50s may require an aggressive saving strategy.
That's exactly what members of the Financial Independence, Retire Early (FIRE) movement aim to do, with many setting aside at least half their annual incomes for retirement. But this comes with its own set of challenges, including a real risk of burnout.
If you like the idea of FIRE but you're worried about its potential downsides, there's another option. It's a subset of FIRE that aims to give you the best of both worlds.
Image source: Getty Images.
The problems with FIRE
The FIRE movement aims to help you retire in your 50s or even earlier, but requires aggressive savings until then. Here are some of the drawbacks you might encounter with this strategy:
Burnout
Saving half of your income for retirement usually means saying no to many things in the present. You may not be able to take that vacation with your friends. You might even need a roommate so you can save more money each month. And that kind of lifestyle can be tough to maintain over the long term.
Running out of money in retirement
Draining your savings faster than expected is a risk everyone carries into retirement, but it's more serious for those who retire early. You'll have to stretch your dollars over a much longer time frame, and you'll have more years of unexpected expenses to worry about. If you find you're spending money too quickly, you might have to come out of retirement when you're older.
Coming out of retirement isn't always easy
If you do have to come out of retirement, you may find it tough to land a well-paying job, especially if you previously worked in an industry that has undergone a lot of changes since you retired. That means you could have to settle for working a low-paying job or a job that doesn't interest you.
Penalties for early access to retirement accounts
There's generally a 10% early withdrawal penalty on retirement accounts when you're under age 59 1/2. There are ways around this, like the Rule of 55 for 401(k)s or Substantially Equal Periodic Payments (SEPPs). But you'll need to plan carefully if you hope to avoid giving Uncle Sam more of your savings than you need to.
Coast FIRE could be a happy medium
If you're thinking FIRE isn't for you because of one of the above issues, you might like coast FIRE instead. This is a subset of FIRE that involves a similar aggressive saving strategy but not retiring early.
You decide when you want to retire and figure out your FIRE number: how much you'll need to save to cover your estimated retirement expenses. Then, you save aggressively until you've set aside enough that you can sit back and let your existing savings grow until retirement. Basically, you save a large chunk early on in your career and then let investment earnings do the rest.
To pull this off, you'll have to make some assumptions about your retirement costs and your investment rate of return over time. For the latter, it's probably best to use a 6% annual return to be safe. If your investments grow faster than that, great. If they don't, at least you'll still be on track for your goal. Online coast FIRE calculators can help you get started if you're not sure how much you need to save.
Once you have reached your target savings amount, you continue to work, but you're free to either improve your standard of living or reduce your hours in the workforce until you're making just enough to cover your current living expenses.
You'll reduce many FIRE risks
This doesn't completely eliminate the FIRE risks mentioned above, but it may mitigate them for some people. Since you aren't retiring early, you'll have fewer years of unplanned expenses to worry about. And if your investments don't do as well as you expected over the next several decades, you can start putting aside money again. Plus, since you're not retiring early, you won't have to worry about early withdrawal penalties or re-entering the workforce.
Burnout remains a challenge, especially if you're saving 50% or more of your income. But since you're not trying to meet an early retirement target, you have a little more flexibility. If 50% is too much, you can reduce it to 40%. You might have to save a little bit longer before you reach the "coasting" phase of coast FIRE, but you probably won't have to worry about pushing back your retirement date.
If coast FIRE still doesn't sound like the right fit for you, there's nothing wrong with taking it slower. You can still enjoy a comfortable retirement by saving 15% to 20% of your income annually. And if doing that makes you less stressed today, it could be a better strategy for you.
