Erika writes in:
23 years old, graduated last summer and finally got a good job in my field making $60K in a good cost of living area. I don’t know what my future holds but right now I am single and live in a tiny low-rent apartment that I am very happy with. I spend most of my time working, hiking, and building professional relationships. So, not many expenses at all.
I will probably save 50% of my income this year, not because I save like crazy, but because I don’t spend because I don’t have any need to do so. I am in firm control of my wants.
What I need help with is actually how to save that $30-35K this year and probably in the next few years. My goal is to either retire really early if I stay single or if I have kids or something else changes I can drastically cut my retirement savings and just coast to retirement.
Look forward to hearing from you!
Like many articles on Money360, this started off as a reader mailbag question in which the answer kept growing and growing as I kept adding ideas to it until I realized that it warranted a full answer in a devoted article. Erika’s question touches on a lot of interesting areas and points toward a retirement strategy that isn’t really talked about.
I call it the “coast” strategy.
The “coast” strategy is just a flavor of early retirement savings, except that it’s structured around starting as early as possible and saving as much as possible really early, ideally in a person’s twenties and thirties. This enables a person to have a wide variety of life choices in their mid-to-late thirties – they can make some challenging family and career choices at that point and still find themselves with more than adequate money for retirement when that comes around.
I like to think of it as being like a bicycle ride in which you choose to start at the bottom of a hill. It’s going to be some very hard work at first pedaling to the top of that hill, but when you finally reach the summit, you’re going to coast for a long, long time.
Is the ‘Coast’ Retirement Savings Strategy Right for You?
This plan is all about time. It requires that you have at least 30 years between now and your target retirement date. Every single year that you’re closer to retirement is one less year in which you can coast. This really is a plan for forward-thinking adults on the youthful side of middle age.
So, you’re young. What else is needed?
You have to be earning significantly more than you’re spending. This is the foundation of the “coast” retirement strategy. It’s centered around putting away a lot of money when you’re far away from a typical retirement age, and if you’re not earning a lot more than you’re spending, the whole thing becomes impossible.
You have to be willing (and even excited) to live a lifestyle significantly below your means. A key part of the “coast” strategy is that you’re living a lifestyle that’s substantially more frugal than what you could live if you spent all of your income. For example, in Erika’s case, she’s spending only about $25K of her $60K salary, so she’s doing this quite well. She could be living a lifestyle that costs $60K a year and not be building up any debt, but she’s choosing to live a more frugal lifestyle than that. That type of choice is vital for the “coast” strategy.
You likely need to have little or no debt; barring that, you need a large income. Having both is even better. If you come out of school with a lot of student loans, you either need to have a very high-paying job to pay down those loans while managing to also have your total expenses far below your income, or else this plan is essentially impossible. Let’s say Erika was living on $25K a year, but also had to make student loan payments that added up to another $15K a year. Suddenly, her total expenses aren’t too far below her income once you consider taxes and thus the “coast” strategy becomes quite difficult.
You should have some life goals that don’t revolve around spending a lot of money in your twenties. If your current desires and your personal ambitions for the next few years revolve around spending a lot of money on material goods, travel, and expensive “experiences,” then you’re going to find a “coast” strategy difficult to implement. Those personal goals are going to constantly gnaw at you and convince you to spend money on those things rather than your retirement plan.
That’s not a bad thing, however; people have different ideas of what they want out of life and, for some, it is very important to spend money on certain experiences and material things in their twenties before they’re married or tied down deep in a career.
The best situation to be in, in my opinion, is to simply have life goals and ambitions that aren’t centered around spending money. Perhaps your free time is centered around volunteering or community work. Maybe you enjoy free hobbies like hiking or playing disc golf or playing soccer using community resources, or reading books you’ve checked out from the library. For a bit of a quirky example, I have a friend who is deeply passionate about Bible study, and spends a few hours a day studying different Bible translations, most of which he borrowed from his pastor or was given as gifts. His expense is mostly in cheap notebooks that he fills up with his thoughts and notes.
Everyone’s different, but if the things you’re compelled to do and are excited about are low cost or free, you’re going to have a much easier time living far below your means and coasting to retirement.
Implementing the ‘Coast’ Retirement Strategy
So, you’ve checked most of those above boxes. You have a good paying job. You have the capacity to live below your means. You have goals and interests that support living that lifestyle.
How do you actually do it, then?
First, find a lifestyle that minimizes every possible expense without making you miserable. You need to consciously build a life where you feel content in your daily living and can still save a significant portion of your income.
How much is a significant portion? More is obviously better here, but if you’re incapable of saving an amount equal to at least half of your annual spending, then you’re probably not on a track that will lead to “coasting” later in life. Without that kind of number, you can’t truly reach the level needed to “coast” to retirement.
How much, exactly, is needed? Let’s say you want to “coast” starting at age 35. After that, you want to have children, go to Disney World, have a nice house, etc., and know that your retirement is secure. You’re starting at age 25. So, you have 10 years to save and 30 years to “coast.” How much do you need?
Let’s say you want to get $30,000 in today’s dollars out of retirement per year. You’ll probably have some form of basic income or Social Security to supplement that in your old age, so we’ll call that enough. If we assume an average of 3% inflation per year, that means you’ll need about $100,000 a year in retirement. You’ll need that to be only 3% of your retirement if you want to live “forever” on that money, so you’ll need about $3.3 million in 40 years.
Sounds like a lot? Maybe. But let’s assume also that you’ll be investing in the stock market with a 7% annual average rate of return for 40 years. How much do you need to save every year to get there, assuming you stop after the tenth year?
It turns out that the answer is about $31,500 per year. If you can save $31,500 per year for the first 10 years of your professional life, you can stop at that point and retire 30 years later, withdrawing $100,000 a year for the rest of your life with a high level of security. That $100,000 a year at that point is like withdrawing $30,000 a year now, of course, but it’s a pretty solid retirement income.
Naturally, the less you save per year, the less that result will be, and the more you save per year, the higher that result will be. The more years you save, the higher that result; the fewer years, the lower the result.
Still, $31,500 a year for 10 years is a lot of savings. How can a person really do that? Won’t life be “miserable”?
A big part of this is really understanding your wants and needs, because “misery” often isn’t true misery. People often feel “miserable” when they want something and it’s unfulfilled, transforming a very mild discomfort into something much more stressful and painful. In the end, most of us are driven by the things we want, not the things we need.
One key part of spending less than you earn is simply having a firm grip on what your needs are, what your big goals are, and what your wants are and how they’re secondary to those needs and goals.
Consider some of these “outside of the box” strategies. Many of them might step on the things that you want, but they don’t take away from things you need and they can certainly help you achieve your goals.
Live with your parents, with other family members, or with multiple roommates. Living with other people drastically reduces the cost of living. It cuts the cost of rent or a mortgage payment, cuts the cost of utilities, cuts the cost of insurance, cuts the cost of entertainment (you’ll likely share a cable bill and an internet bill, for example), and likely cuts into the cost of food, too.
Live without a car and rely on public transportation. A car is a symbol of freedom for many, but if you can get to most of the places you want to go using public transportation, getting rid of a car eliminates the cost of the car itself, the cost of gas, the cost of maintenance, the cost of parking, the cost of registration, and the cost of insurance all at once. That’s a lot of savings!
Prepare most of your own food from low-cost high-nutrition staples. Learn how to prepare a lot of low cost foods at home using ingredients like rice, beans, peanut butter, pasta, chicken, potatoes, sweet potatoes, and so on and you’ll find yourself with a shockingly low food bill at the end of the month. It takes some learning to know how to make meals efficiently and prepare tasty things that you enjoy, but once you get there, that skill will save you thousands a year.
Focus your spare time on free and low-cost hobbies and activities. What things do you enjoy that are free or could be? Focus your energy on those activities and hobbies rather than expensive ones. For example, I personally spend most of my time on things like hiking in the woods, reading books I’ve checked out from the library, and experimenting with strange recipes (like making homemade radish sauerkraut), all of which are low cost hobbies, indeed.
If the foundations of your life are very low cost, then it’s going to be very easy for you to live well below your means and come up with enough money to actually make a “coast” retirement strategy work. The thing to remember is that if or when you do decide to change things or your circumstances change at a later point in your life, you’ll already have retirement savings in check. Nothing is permanent – this is just the life you’re leading now and, because of that, you’re opening up a lot of opportunities later on in life.
Second, build a plan for what to do with that gap money. Given that your goal is to save for retirement, you should be focused on taking advantage of retirement savings plans that offer tax benefits for retirement savings.
These accounts come in a variety of flavors: Roth and Traditional, IRA and 401(k) and TSP and 403(b), and so on. It’s a word salad out there, so here’s a simple plan to follow that I offer to almost anyone, a plan that works very well if you’re shooting for a “coast” strategy.
First, put money in the 401(k)/403(b)/TSP plan available at your workplace up to the employer match. If your employer matches your contributions in any way, you’re going to want to vacuum up every dime of that matching money. If you have a choice between a Roth account and a traditional account, choose the traditional account, because you’re better off hedging your bets on whether a Roth will pay off more (meaning that taxes will be higher when you retire) or a traditional will (meaning taxes will be lower when you retire). Since it’s not clear at all which will be true 40 years from now, hedge your bets, and that means using a traditional account.
Second, open a Roth IRA and contribute to that to the maximum limit. Almost every investment firm offers a Roth IRA. What you’re going to want is a simple one that you can set up automatic contributions to and then simply forget about. I use Vanguard for my own Roth IRA, but many companies have solid Roth IRA offerings.
Third, contribute as much as you possibly can to your company’s plan. Once you’ve maxed out your Roth IRA, up your contributions again to your company’s retirement plan.
In Erika’s case, that means she’d be contributing a full $5,500 a year to her Roth IRA and then $18K to her employer’s retirement plan, as $18K is the annual limit for elective contributions. Anything beyond that can be saved in a traditional investment account.
But what should people invest in? With 30 to 40 years to go before retirement, you’re going to want to choose a very aggressive investment option. One good option is to simply choose the target retirement fund with the latest target date, either 2060 or 2065 as this is being written, and use that for all investments. Later on, you may want to move your money to one with an even later target date. This will ensure that your money is invested aggressively when you’re young and it will gradually become less aggressive as you age.
Third, automate that plan and leave it alone. Sign up for automatic contributions to your employer’s plan at work, and when you sign up for your Roth IRA, sign up for automatic contributions from your checking account – $100 each week with a catchup at the end of the year is a good choice.
If you automate this savings, you simply don’t have to think about it regularly. The money just goes away, pushing you toward the point where you can “coast” to retirement.
Fourth, live a thoughtful and reflective life, and change your plan only as needed. If you live your life according to what you need and what your genuine desires are, you’ll be able to pull this off and still have a deeply fulfilling life. Just be sure that when your feelings begin to change, you reflect on those changes and make sure that you’re ready to start shifting toward a “coast” mode. If you never reach that point, then you’re likely to be able to retire quite early with this strategy.
Less Extreme ‘Coasting’
Some people might be interested in this plan but find themselves without the means to save that much each year or don’t have the inclination to commit so strongly to the plan. What can they do?
You can still “coast” by committing less per year during your twenties and thirties. However, you’ll need to add back something else to compensate, either in the form of more years of buildup or a small contribution in subsequent years instead of contributing nothing at all. The math might change a little bit, but the core principle does not: by saving a ton during your early years, you can save very little in later years and still achieve a wonderful retirement.
For example, if you’re in a field where employers consistently offer matching, it might make sense to simply take advantage of that matching even as you enter “coast” mode. This means that you can save with less intensity during your buildup years and then “coast” by contributing only enough to retirement to get matching funds.
Some Final Thoughts
The “coast” strategy definitely isn’t for everyone. It requires a healthy career and a true commitment to low cost living in one’s twenties, two factors that don’t always show up together.
However, when you have the ability and the desire to use the “coast” strategy, you’ll find yourself with the means to coast to retirement before you ever hit middle age. That gives you a great deal of freedom over how to live your life at that point, with countless career and family options before you.