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When I first came across the term “Coast FI”, I assumed that it meant living a FIRE lifestyle somewhere along the coast, perhaps near a beach. What a dream!
It is one of the many terms in the FIRE community, signifying the different levels of FIRE you can aim for – Lean FI, Fat FI, Slow FI, Barista FI, Flamingo FI and so on.
Me? I was just aiming for ordinary FIRE, or as close to FIRE as someone starting late could hope for!
What is Coast FI?
Four Pillar Freedom explains it as “having enough money invested at an early enough age that you no longer need to invest any more to achieve financial independence by age 65 (or whatever age you define as a retirement age)”
That is, you coast to financial independence once you’ve saved up enough money for it to grow by compound interest to the sum you need at traditional retirement. In the meantime, you just need enough income to support your current lifestyle without worrying about saving for your retirement.
Pretty neat, huh?
Except the bit about invested at an early enough age …
Well, that rules me out.
I am a late starter at all this investing and pursuing FIRE as I didn’t discover FIRE until my late forties.
So I dismissed the idea as interesting but unachievable.
Then Professor FIRE shared his story on the Late Starter to FI series, explaining that he is essentially at Coast FI despite starting late. Again, I dismissed it as a possibility for myself because I wasn’t earning a big enough salary.
Now, a couple of years after reading Four Pillar Freedom’s post on Coast FI, I think I’ve achieved this very milestone!
I’ve arrived at Coast FI as a late starter, woohoo!!!
How, you ask?
Super, baby, super! Or superannuation, Australia’s retirement account.
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Superannuation in a nutshell
The government mandates the minimum percentage of your gross salary that your employer must pay into your superannuation account. This is known as the Superannuation Guarantee and is set at 9.5% currently. There is considerable debate at the moment about whether it should be raised to 12% or whether employees would be better off with an increase in wages.
This contribution is taxed at 15% instead of your marginal income tax rate. Any investment returns is also taxed at 15%.
The current income tax rates in Australia are:
Up to $18200 Nil
$18201 – $45000 19%
$45001 – $120000 32%
$120001 – $180000 37%
$180001 upwards 45%
Therefore, the government has made it attractive for you to contribute to superannuation and save for retirement.
But wait, there’s more!
Once you are able to access your money in retirement, it can be withdrawn tax free and any investment returns in this pension mode is also tax free. There is a limit of $1.7 million ($1.6 million before 1 July 2021) that can be converted to this pension mode.
Of course there is a catch! And the catch is that … you can’t access your super until you are 60 (if you are born after 1 July 1964).
And because of this inaccessibility plus the automatic employer contribution, many forget that the money sitting in superannuation is YOUR money (ahem, I fell into this category!) And that investing it well is an important retirement strategy, whether you retire earlyish or not.
Back to my story
When I first started working nearly thirty years ago, superannuation was a new concept in Australia. Compulsory employer contribution had just been legislated. I knew nothing about it.
A family friend nagged me to open a second account (with AMP) ie an account that is not connected to my employer. I remember asking only one question – can I stop contributing if I don’t have the spare cash? Yes, he said, it’s up to you. So I agreed to open an account, knowing I have an escape hatch.
Every year I would contribute about $2000 after tax to this account. I never read the annual statements or cared abut how the money was invested. I just remember that I always resented forking over $2000 or so (it increased by inflation) every year.
All I cared about in my early twenties was saving enough money to go on overseas holidays and eventually buy a house. Retirement was an eternity away.
And yes, I eventually bought a house and had a mortgage. My intention was to pay off my mortgage as quickly as I can. So I stopped contributing to this extra superannuation account. After all, I needed every cent.
But I kind of got used to having debt. Everyone (except my parents) told me that having debt was normal, that some people never paid off their debt until they retire. So it is perfectly ok to travel and live a fine life while paying off your mortgage.
This is exactly what I did. I bought nice things for my house. And travelled overseas. I enjoyed my life. And stopped investing. Duh! This is one of my biggest money mistakes.
Fast forward to my 40s ...
The year I turned 47, to be exact.
I still remember vividly that morning in January 2018 when I woke up in a cold sweat … I was terrified that retirement was suddenly on the horizon and that I probably hadn’t saved enough to retire at the traditional retirement age. My job was so stressful at the time that the thought of working another 20 years was truly out of the question.
I scrambled out of bed and searched through folders of annual statements to find my account numbers. And set up online log ins. My combined balance from the two accounts was … disappointing. I did not have anywhere near enough to what the retirement experts say you need in retirement.
Fortunately I had just paid off my mortgage. That was the only plus in my favour. Because it meant I have cash to invest in something.
A friend gave me The Barefoor Investor by Scott Pape. In one of the steps, he advised contributing extra to superannuation, up to 15% – ie a top up of 5.5% if your employer contributes 9.5%.
So I decided to ‘do something’ with my super.
Optimising my superannuation
Having two super accounts meant paying two lots of administration fees. So I closed the AMP account and rolled over the balance (minus a hefty penalty) to my main account, REST.
After more reading about industry funds, I chose to roll over to yet another fund (Hostplus) with lower administration fees and the ability to choose index funds to invest in, which lowers management fees even more.
The lower the fees, the more of the investment returns I get to keep.
My next step was to salary sacrifice. That is, I contribute pre taxed dollars to the maximum of $25000 (which also includes my employer’s contribution).
I didn’t have enough time in the 2017-18 financial year to fully achieve this but I did it for the following two years. Because the pandemic affected my returns dramatically, I continued salary sacrificing for the first six months of the 2020-21 financial year.
However this meant that I didn’t have as much as I’d like to invest outside of super.
If I want to retire at 55 (and I really, really, really want to, believe me!), I need to build my ‘bridge the gap’ fund that will support me from age 55 to 60, until I can access my superannuation.
It is a delicate balance between having enough in super to cater for my sunset years (60 years old onwards) and having enough to survive in the five years before I can access super while retired.
Rule of 72
The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return – Investopaedia
I utililised the rule of 72 initially to estimate when I can stop salary sacrificing so much into super.
My reasoning is as follows.
I have 10 years before I can access super. I have an end figure in mind that will support me for the rest of my life from 60 onwards, based on the 4% rule and my expenses.
In order for my balance to double in 10 years, my annual rate of return need to be 7.2% (after fees and taxes).
Is that feasible? I think so.
Despite the tumultuous year of 2020, when my balance plummeted by 30% in March, it has since climbed back up and exceeded all expectations.
I’ve done the calculations a million times.
But just in case I got it wrong or the stock market does not cooperate, there are contingencies.
Since I plan to work for the next five years, my employer will be contributing at least 9.5% of my gross salary into my super.
And I am also still salary sacrificing but only less than a third of what I did when trying to contribute the maximum.
I will continue to monitor and review its progress. If the balance is not growing according to plan, I will increase my salary sacrificing again.
The worst case scenario is that I work a couple of shifts a week and not fully retire at 55, contributing all earnings to shore up my super balance.
Or I delay withdrawing from super for a couple of years, if I can survive on funds outside super. The next three years will be crucial in building this ‘bridge the gap’ fund.
So what contributed to my arrival at Coast FI, even as a late starter to FIRE?
(a) That second superannuation account
While I was initially disappointed by the combined value of my super balance, I should be happy with my younger self, on further review.
I calculated at best, I would have contributed around $20k – $25k to this AMP account before I bought my house. I then stopped contributing for at least 15 years. When I checked the balance in 2018, it was a whopping $80k! This was not an industry fund so fees would have been high. And the Global Financial Crisis was smack bang in the middle of it all.
While $80k is nowhere near what I need in retirement, it is good ‘seed’ money and I am grateful to my younger self.
(b) Boosting contributions
Salary sacrificing was tough at times but I am so glad I did it. Those two and a half years boosted my balance so it was totally worth it. There really is no other choice as a late starter. With a shortened time frame, all I can do is throw in as much as I can.
(c) Investing in low cost funds within super
Looking at my most recent super statement, I paid 0.04% in fees (indirect costs, other fees and administration fees). This means I get to keep more of the investment returns instead of paying others.
(d) The stock market cooperated
While this was totally out of my control, I am grateful that the share market has cooperated! Investing in shares in the long term will pay off one day.
I wasn’t aiming for Coast FI specifically. And I certainly never believed that Coast FI was possible as a late starter.
But I can tell you that despite all that, arriving at Coast FI is liberating!
I can relax a little, knowing that one phase of my retirement plan has been taken care of.
Now, I’m off to build that ‘bridge the gap’ fund.
And oh, trust in the math!