You will be able to calculate the balance at which growth alone could reach your number by a chosen age.
You are 38, and the job that pays well has started to grind. A friend runs a small design studio and has offered you a role at two-thirds of your salary, with more interesting work and shorter hours. The pay would cover your life but leave almost nothing to invest. You assume that means giving up on financial independence. It might not. If your portfolio is already large enough, it can finish the job on its own.
So far, the course has treated financial independence as a single finish line: the day your portfolio reaches your full number and you stop work. This module looks at two earlier versions. The first is coast FI.
You reach coast FI when your invested balance, with no further contributions, could grow to your full number by a target age. From that point, you do not need to save another dollar for the long term. Growth alone, at your assumed return, does the rest.
That changes what work is for. Before coast FI, your job has to pay for your life and fund your future. After it, the job only has to pay for your life today. You still work, but you can choose work that pays less, takes fewer hours or matters more to you, because nothing has to be left over for investing.
Coast FI does not mean you stop work. It means the pressure to earn more than you spend goes away.
The calculation runs compound growth backwards. Take the number you need at your target age and divide it by one plus your return, raised to the power of the years until then. The result is the balance you need today.
Going forwards, here is a made-up example. Someone has S$200,000 invested at 30. With no more contributions, growing at an assumed 4% a year after inflation, it becomes S$200,000 times 1.04 to the power of 30, which is about S$648,700 by 60, roughly S$650,000. If their number at 60 is S$650,000, they reached coast FI at 30.
You can do this in a spreadsheet with one formula. The present value tools from How money works, lesson 6.3, Present value: what a future promise is worth today, do exactly this job.
Priya, 34, from the earlier modules, has made-up figures throughout. Suppose she decides that if she coasts, she would keep working until 60 and then stop. Her number for a stop at 60 comes from lesson 3.4: a five-year bridge of S$220,000 plus the long-term figure of about S$777,000, for about S$997,000.
At an assumed 4% real return over the 26 years from 34 to 60, the balance she would need today is S$997,000 divided by 1.04 to the power of 26, about S$360,000. She has S$200,000, so she is not there yet. Her model from lesson 4.4 shows that if she keeps saving at her current rate, she passes the coast line at 38, when her balance is about S$448,000 and the line has risen to about S$421,000 as fewer years are left to grow.
Coast FI is very sensitive to the return assumption, because the growth has to do all the work over a long period. A small change in the return compounds into a large change in the result.
Run Priya's figure again at 2%. The balance she would need today is S$997,000 divided by 1.02 to the power of 26, about S$596,000. That is two-thirds more than at 4%. On her model at 2%, she would not reach the coast line until 43.
The example from earlier shows the same thing. S$200,000 at 3% for thirty years becomes about S$485,000, not S$650,000. One percentage point less, and the result is a quarter lower.
So always test your coast figure at a lower return than your central case. If you would only be safe coasting at your optimistic return, you are not there yet.
Coasting assumes several things, and each one deserves a check. Your spending must stay where your number assumed it would. Your job must cover all of today's costs, including the occasional lumpy one, without dipping into the portfolio. And you must leave the portfolio invested through every downturn, because there are no new contributions to buy at lower prices.
Coast FI also does not touch CPF. If you move to lower-paid work, your CPF contributions fall too, and your eventual CPF LIFE payout may be smaller than the estimate in your number. Rerun the CPF planner from lesson 3.1 with the lower salary before you rely on the coast figure.
For the activity, open your model from lesson 4.4 and add one column: the balance needed today to coast to your number by your chosen age. You will compare it with your actual balance at two return assumptions.
Use your model to find the balance you would need today to coast to your number by your chosen age, at two return assumptions.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).