Step-by-Step Calculation Method
Determine Your Retirement Income Needs
Calculate how much annual income you'll need in retirement. This should cover:
- Basic living expenses (housing, food, utilities)
- Healthcare costs
- Travel and leisure activities
- Inflation adjustments
Example: You want $60,000 per year in today's purchasing power
Calculate Required Nest Egg
Using the 4% rule (or your preferred withdrawal rate), determine how much you need saved at retirement.
Formula: Annual Income ÷ Withdrawal Rate = Nest Egg
Example: $60,000 ÷ 4% = $1,500,000 needed at retirement
Apply Compound Interest Formula
Work backwards to find how much you need today for your investments to grow to your target amount.
Formula: COAST Number = Future Value ÷ (1 + Real Return Rate)^Years
Where:
• Real Return Rate = Nominal Return - Inflation
• Years = Retirement Age - Current Age
Example: $1,500,000 ÷ (1.04^35) = $378,000 COAST FIRE number
Complete Example Calculation
Sarah's COAST FIRE Journey
Sarah's Details:
• Current Age: 28
• Target Retirement Age: 65
• Desired Annual Income: $80,000
• Expected Real Return: 4%
• Current Savings: $50,000
Calculations:
Required Nest Egg: $80,000 ÷ 4% = $2,000,000
Years to Retirement: 65 - 28 = 37 years
COAST Number: $2M ÷ (1.04^37) = $458,000
Sarah's Action Plan:
Sarah needs $458,000 to reach COAST FIRE. She currently has $50,000, so she needs to save an additional $408,000.
If she can save $40,800 per year for the next 10 years, she'll reach her COAST FIRE number by age 38 and can then coast for 27 years until retirement!
Important Assumptions & Considerations
Return Rate Assumptions
- • Historical stock market returns: 7-10%
- • Conservative real return: 4-5%
- • Inflation adjustment: 2-3%
- • Consider market volatility
Withdrawal Rate Considerations
- • 4% rule is widely accepted
- • 3.5% for extra safety
- • Account for sequence of returns risk
- • Consider Social Security benefits
Lifestyle Factors
- • Healthcare cost increases
- • Geographic cost differences
- • Paid-off mortgage assumption
- • Emergency fund separate
Tax Considerations
- • Tax-advantaged account types
- • Roth vs Traditional IRA/401k
- • Tax-efficient withdrawal strategies
- • State tax implications