Is Coast FI Riskier Than Traditional FI?

13:43Evan Lawler:Yeah, I totally agree. And I think that's a great exercise to kind of think through what does that financial freedom really mean for someone in my position. And something that I really like about Coast Fire is that although you're projected to cover your entire retirement income situation, you still need to cover your day-to-day expenses. So for someone like me, that could mean that I step into a part-time role. Maybe I continue with my business of content creation, but for someone else, maybe they still continue to work as an engineer, but maybe on a contract basis, maybe in a role that is not so demanding.

14:21Evan Lawler:and if in five to eight to 10 years, like you said, they find that their math is not mathing, they could potentially still be in a position where they've still continued to hone their skills. They still have a lot of work experience. Maybe it's not full-time work experience or quite as rigorous as they were pursuing Coast Fire, but still plenty in order to be able to reenter the job market to a role that they were at before.

14:46Mindy Jensen:Yeah, and I think this is something that since I am forgetting this, I bet a lot of other people listening are also forgetting this. Coast Fi doesn't mean you stop working. Coast Fi means if you have a job that you hate, you stop working that job and get a different job, maybe in the same field. But you do need to generate income now to cover your expenses now. You've provided for your traditional retirement age is what Coast Fi is for. Yeah, you shouldn't leave your job completely. You can leave the job that you hate, the job that got you looking, banging on the computer at nine o 'clock at night.

15:22Mindy Jensen:How do I leave my job early? Financial independence. It's great. You should do it. So we've talked about the risks of Coast FI. Let's talk about the risks of traditional FI. What's one of the risks that you see for people pursuing traditional financial independence?

15:38Evan Lawler:In traditional FI, the primary risk, I think, is that you make an assumption of a safe withdrawal rate for a 30-year retirement. But in reality, you might have a 40, 50, 60-year retirement, depending on when you achieve traditional financial independence. Whereas Coast Fire is building towards a 30-year retirement, which is far more traditional. And a lot of the research around retirement is based around that. So the safe withdrawal rate is a primary risk, in my opinion, for traditional FI.

16:09Mindy Jensen:And there is quite the lively debate in the community about what is the true safe withdrawal rate. Because Bill Bengen's original research said 4%. I think it said 4.15. And then he has redone the research. His original research was in 1994 or 1996. I never remember which one. And he did it more recently. And he said, actually, it could be more like 4.7. But again, that's the 30-year retirement range. And if you're having a 40, 50, 60-year retirement? Did Mr. Money Mustache retire at like age 30 or something? He could very well have a 60-year retirement because he's super healthy. So that's a big difference.

16:48Mindy Jensen:And when you run the numbers, it starts to look a lot different on the 40, 50-year retirement rather than the 30-year retirement. So I think that is absolutely one of the biggest risks of traditional FI. Another risk is market returns. The historical return of all time averages about 10%, but there are chunks of time where that is absolutely not the case. In the 1970s, we had high inflation. And from 1973 to 1974, values dropped nearly 50 % in the S &P 500. If you just retired in 1972, and then you're walking into this period of high inflation and bad market returns, that can be a real issue. That lends right into the sequence of returns risk, which is the poor returns or negative returns right when you retire.

17:44Mindy Jensen:So you're pulling money out of your retirement when it's at its lowest. You can combat this by having a higher cash position, several years of your spending in cash. So you're not pulling from your retirement accounts when they've dipped. Along with these risks are inflation. Right now, we are in a higher than normal inflationary period. Just today, Kevin Warsh came out and said that they're really going to try and keep the inflation at 2%. The quote was, they have work to do if it starts getting out of control again. And a lot of this This is due to the Iran war and gas is very expensive, which causes everything else to be very expensive because everything is delivered by gas or diesel or whatever.

18:32Mindy Jensen:Jay Scott has a really fascinating take on this. He posts on Facebook quite frequently about the economic conditions that are coming into play right now. I think that's more of a risk to everybody than just traditional FI, but kind of a big risk for traditional FI because those are people that aren't working. If you jump out of the job market today and then the market drops down, oh, I just took a six-month sabbatical. I am looking for work again. But if you jump out of the market three years ago, what have you been doing for three years? That's a job market, not the stock market.

19:05Evan Lawler:I think that that's a great point. And I also think that in my own personal opinion, it's easier to say I'm going to be in Coast Fire. I've reached Coast Fire and I'm going to invest 0%, running the numbers and realizing that you have to continue saving and investing because you haven't reached the goal. The math is not mathing, as we said. The inflation is high. Market returns have gone some way that you weren't expecting. I would make the claim that I think that it's much easier to say, OK, I'm going to go back to investing 10, 15, 20, 25%, and I'm going to have to not do the things that I had in mind.

19:41Evan Lawler:versus someone who is in a traditional FI approach and is expecting that their life is going to change completely or that they already have stepped away from work and now they have to reenter the job market from zero. So I think that that's something that I really like about Coast Fire is that because you're giving yourself that time for the portfolio to grow as you approach that traditional retirement age, you can kind of fluctuate the needle and kind of move things as you need to in order to be really comfortable and prepared for that goal of retirement, whereas traditional FI really is kind of a step away moment.

20:18Mindy Jensen:So how would somebody listening to this episode consider which one is right for them? Do you think it has to do with your age or do you think it has to do with your income or just your mindset?

20:31Evan Lawler:Yeah, I think that that's a great question. And I think the truth is that it's difficult to know, right? If you're starting your financial independence journey, we could easily be talking about a 10, 15, 20, 25 year journey. So it's difficult to know. And I think that I always push young people towards Coast Fire. It's what I'm pursuing myself. So I'll fully acknowledge that I'm probably biased. But I think that Coast Fire, as you pursue it, you are still on the path to pursue traditional FI. If you reach that Coast Fire milestone and you want to continue working towards it, whereas once you reach Fi, you've already made it, right?

21:11Evan Lawler:So you can't go back to Coast Fi. I think some of the elements to consider is if you're in your job, in your career, you've been doing it for a while and you hate it, you can't stand it, and you just want to step away, but you're highly compensated so you have the golden handcuffs, maybe a traditional Fi is something for you. And with that, you also think, when I step away from work, I don't want to do a thing. I don't want to sell woodworking. I don't want to do any type of work. I just want to retire fully. Then traditional FI could be for you. But if you're someone who thinks that you're going to find a way to earn money or you actually enjoy work, then Coast FI could be a great goal for you.

21:51Mindy Jensen:I'd love that. How would you recommend somebody make Coast FI less risky?

21:58Evan Lawler:I think the way someone makes Coast Fire less risky is simply to build in margin to their plan and acknowledge the reality that we do not know what is going to happen over the next 30 or 40 years. You don't know what's going to happen in the world around you. You also don't know what's going to happen in your own life, what your spending might be. So make sure that you build in plenty of margin. And I would make the claim, maybe this would be refuted by other people in the community, that you would rather have more than not enough, right? And so it's a balance there. But I think building in margin to your Coast Fire plan is absolutely crucial.

22:34Mindy Jensen:When I hear people talk about their numbers and they, oh, I like you spend$36 ,000 a year. If your goal was a million dollars, I would probably have a conversation with you because I don't think that's realistic based on your age. You're not married. You don't have children. But these are some things that you would like to have in your life in the future.

22:56Evan Lawler:Right.

22:57Mindy Jensen:Yeah. So being married is more expensive than being single. And having kids is more expensive. It's not that$300 ,000 till age 18 garbage that you see so much of, but it is more expensive. Three can eat as cheaply as two. No, they can't. Adding this in and adding in a nice, healthy buffer. You could get to age 40, 45 and say, hey, you know what? I am married, I do have kids and I'm spending about$100 ,000 a year. I had projected that I wanted to be spending$200 ,000, but really this$100 ,000 is good. I might be able to retire a lot sooner or I really love my job and I'm spending$200 ,000 a year and my original goal is absolutely perfect.

23:47Mindy Jensen:I think that people who are on this path are not going to suddenly reach COSFI and be like, I am never looking at my numbers again. Again, that's just not inherent in the people that are pursuing financial independence to begin with.

24:00Evan Lawler:If you've been putting off life insurance, I get it. The old process was miserable. Phone calls with an agent, a nurse coming to your house for a blood draw, then waiting weeks to find out what you'd pay for. That friction is exactly why so many people who should have coverage don't. Here's what I believe. Most BP money listeners need term life, and the right move is to build a ladder. A few term policies of different lengths stack together so your coverage steps down as your mortgage shrinks and your kids get closer to being financially independent or you get closer to hitting your financial independence number.

24:28Evan Lawler:The thing that makes that practical now is Ethos, a platform that helps you find life insurance all 100 % online. Same day coverage, no medical exam. You just answer a few health questions online, up to$3 million in coverage, some policies as low as$30 a month. So building a two or three layer ladder that used to take a month of appointments is something you can knock out before your coffee gets cold. Get your free quote at ethos.com slash bpmoney. That is E-T-H-O-S dot com slash bpmoney. Application times may vary and rates may vary. You know that feeling you get when checking your finances means logging into five different apps?

25:04Evan Lawler:That's why I use Monarch. Setup takes about 10 minutes. You can link your accounts and everything you own and owe lands in one clean dashboard. Banking, cards, investments, even keeping track of recurring charges. After that, you can stay on top of your money in just minutes, not hours per month. Monarch saves you time and actually helps you use it wisely. Use the code POCKETS at monarch.com to get your first year of Monarch core half off at just$50. That's 50 % off your first year at monarch.com with the code POCKETS. Something that I just realized we could have covered in the risks as you were saying that is account structure in Coast Fire is that a primary risk of Coast Fire is that if you are preparing for a traditional retirement, 59 and a half, If you do reach 50 and realize that you're done and you have enough, you overestimate it.

25:54Evan Lawler:It's not easy to withdraw.

25:55Mindy Jensen:Wow. It's like you're looking right at me and telling me my exact situation. Yeah. Account structure is risky for both traditional and Coast Fi because you don't want to have all of your money in your 401k, which is accessible, but then you have to do a 72T or Roth conversions. But here's the thing about Roth conversions. If I want to retire now, and I haven't really been paying attention to where I'm putting my money, I'm just simply putting it in the 401k because I want to reduce my taxable income currently, I might find myself in a position where most of my money is in my traditional 401k. I'm 50 years old and I want to access it.

26:42Mindy Jensen:I can't. I would have to do a 72T to get access to that money now. If I wanted to do Roth conversions, that would be a taxable event. But that's a taxable event that I have to come up with the money to pay the taxes on. I can't just take the money out of the Roth conversion to pay the taxes because that's considered a withdrawal, which is a taxable event, adding to my problems. So yeah, I think in both respects, making sure your money is accessible at any age, as well as like traditional retirement accounts are great because you can access that money at 59 and a half. But if you decide to retire at 45, then the 72T is for five years or until you turn 59 and a half, whichever is longer.

27:28Mindy Jensen:So I actually just did a 72T. My husband did, he's 52. So he's got a seven year 72T. If I were to do it, I'm 53. So I would only have a six year 72T. But if you did it at age 45, you would have a 17-year 72T.

27:46Evan Lawler:Yeah, it's super important in both approaches to understand your account structure.

27:50Mindy Jensen:Exactly. I absolutely agree. Okay, Evan, we've talked about the risks of traditional FI. We've talked about the risks of Coast FI. Which one do you think is riskier?

27:58Evan Lawler:I'll say in my opinion, I think the traditional FI is riskier than Coast FI. I think Coast Fi adds a lot of flexibility and gives you a long runway to correct any changes that you need to make between your Coast Fi milestone and your traditional retirement age. Whereas in a traditional Fi sense, there's not as much time and it can be difficult to course correct if you've already reached what you thought was your Fi number and you realize it's no longer your Fi number.

28:27Mindy Jensen:I'm going to have to agree with you, Evan. I do think that traditional FI is a riskier bet than Coast FI, unless you have just blown so far past your FI number that it doesn't matter. But I love the concept of Coast FI. Your number is so much lower because there's such a long timeline to let it grow that it just seems more doable to begin with. And then, like I said, you're not quitting employment once you reach Coast Fi. You still have to provide for your spending until traditional retirement age. If you decide that, oh, you know what? I don't have enough or it hasn't been working out as well as I thought it was, you currently have a job.

29:09Mindy Jensen:It's always easier to get a job when you have a job.

29:12Evan Lawler:Absolutely.

29:13Mindy Jensen:All right, Evan, this was a super fun conversation. I really appreciate your time today. Where can people find you besides the BiggerPocketsMoney podcast?

29:21Evan Lawler:You can find me on all social media platforms, Instagram, TikTok, Facebook, YouTube, at the underscore financial foundation.

29:29Mindy Jensen:I love it. All right, Evan, hop on over to biggerpocketsmoney.com and read our blog, sign up for our newsletter, and check out all of our free resources. We have templates and calculators and worksheets all designed to help you on your journey to financial independence. If that's Coast Fi, Traditional Fi, Barista Fi, Fat Fi, Lean Fi, all the fies, any type of fi that you are pursuing, we are here to support you. And that wraps up this episode of the BiggerPocketsMoney podcast. He is Evan Lawler. I am Mindy Jensen saying we're out, trout.

30:04Evan Lawler:I'm skeptical of a lot of financial products, but life insurance isn't one of them, at least not term life. For the vast majority of you listening, term life is simply the right answer. And the smartest way to buy it isn't one big policy, it's a ladder. Your need for coverage isn't flat. It declines over time. You've got a 30-year mortgage, a couple of young kids, maybe a spouse mid-career. In 15 years, the mortgage is going to be smaller and the kids are almost launched. So instead of buying one giant 30-year policy you'll overpay for, you stack a few, say a 10-year, a 20-year, and a 30-year layer.

30:33Evan Lawler:So your total coverage steps down as your actual obligations step down. You only pay for what you actually need when you need it. Ethos is a platform that helps you find life insurance 100 % online. You can get a quote in seconds and apply in minutes. There's no medical exam. You just answer a few health questions online. You can get up to$3 million in coverage. Some policies are as low as$30 a month. That makes building a ladder genuinely fast. Get your free quote at ethos.com slash bpmoney. That's E-T-H-O-S dot com slash bpmoney. Application times may vary and rates may vary.