One of my favourite combo strategies is what I call the “Barista-Coast approach” (a mouthful, I know). Let me explain.
With Coast FI, we cover our living expenses by working while our nest egg compounds in the background. The obvious downside is that we cannot touch our nest egg for a really long time.
With Barista FI, we can draw a regular annual income from our investment portfolio, but it is unlikely that we will ever become financially independent with this approach.
We can get the best out of both strategies and avoid their main disadvantages by combining them. Combining Barista FI and Coast FI allows us to draw some income from our investments in semi-retirement AND become financially independent later on in life.
The Barista-Coast Approach In Action
Let’s use a real-life scenario* to explore how we can design a custom strategy using these two alternative FI approaches.
Sue is 30. She has a 2-year-old son and wants to semi-retire as soon as possible in order to spend more time with him before he starts school. Sue works as a full-time marketing manager and earns $130,000 p.a. ($93,600 after-tax).
In semi-retirement, Sue would like to work part-time in an industry that pays a lot less but that she is passionate about. To make up for the lower salary, she would like to supplement her part-time income with at least $15,000 in income from her portfolio.
Sue currently spends about $60,000 per year, so her FIRE number is $1.5 Million ($60,000 x 25). Ideally, she would like to have $75,000 available annually once she fully retires so she can do some international travel.
Sue wants to work part-time for the next 20 years and retire early by age 50.
She believes she will be able to achieve annual returns of 5% (inflation-adjusted). Her current portfolio value is a healthy $1,000,000.
Obviously, Sue is in a great financial position and is not too far away from Financial Independence at this stage.
However, she finds herself in a situation where she wants to take the foot off the pedal as soon as possible. Many new parents I speak to are in exactly this position: they have made a lot of progress towards their financial goals but now want to spend as much time as possible with their kids. Working full-time for an extended period of time is no longer an option. Mr. Flamingo and I were in a very similar situation before we semi-retired in 2020.
Fortunately, Sue has several options. Let’s explore them one by one.
Option 1: The Traditional Path
Sue could, of course, continue working full-time for a few more years. She should reach her FIRE number at around age 35 that way, which would allow her to retire early. The obvious downside is that by then, her son will be 7, so Sue misses his early childhood years with this approach. She also doesn’t want to stop working altogether, so reaching FI at an early age is simply not necessary for Sue.
Note: The screenshots below are from our free Semi-Retirement Calculator. You can download it here.
Option 2: Coasting to FI
Sue could also stop saving and investing now, semi-retire and simply coast to FIRE. Based on her assumptions she should get to FI by age 38 just via compound interest:
The downside is that she won’t be able to touch her nest egg, so she cannot use it to supplement her part-time income. This means that she would either have to work more in her new semi-retirement job or work part-time in the corporate marketing job she doesn’t like. Coast FI is an excellent option for anyone who doesn’t need to access any funds from their portfolio during the semi-retirement phase. However, it is not an ideal choice for Sue.
Option 3: The Barista-Coast Approach
With this combo approach, Sue would split her nest egg up into two buckets:
- Bucket 1: The Coast bucket.
- Bucket 2: The Barista bucket
Coast Bucket: A quick calculation using our Coast FI Calculator tells me that Sue’s current Coast FI number is $565,334. This is the amount she would need to leave untouched so it can compound into her FIRE number by the time she turns 50.
Barista bucket: The remainder of her nest egg ($434,666) could be used to supplement her semi-retirement income. Based on the 4% rule, she could draw an income of up to $17,386.64 per year during her semi-retirement years.
Over the next 20 years, Sue’s Coast FI buckets should grow into her FIRE nest egg ($1.5 Million).
With this strategy, Sue achieves both her goals: a supplemental passive income over the next 20 years and Financial Independence by age 50.
But there is more!
Depending on market performance, the balance of Sue’s Barista bucket will be smaller or larger than the initial value of $434,666. Chances are that it won’t be depleted completely after the 20 years in which she withdrew 4% per year.
If remains intact over the 20 years, Sue can now combine her Coast and Barista buckets ($1.5 Million plus $434,666 = $1,934,666). This would allow her to withdraw the additional $15,000 per year she was hoping for, which she can use to go travelling.
It is, of course, completely uncertain how much will be left in the Barista FI bucket after 20 years of annual withdrawals. Any additional funds from the Barista bucket would simply be a bonus.
Overall this is probably the best option for Sue. I think this Barista-Coast FI strategy is suitable for anyone who wants to draw some investment income during semi-retirement and who would also like to reach FIRE one day.
Retirement accounts like superannuation here in Australia or a 401k in the US seem logical, tax-efficient “homes” for the Coast component – especially if you don’t plan to fully retire for quite a while.
The benefits of this combo strategy are obvious – Sue gets to spend time with her son now, she can draw an income from her Barista FI bucket in semi-retirement and she has secured her financial future via her Coast FI bucket.
This strategy is just one example of a custom-built FI approach that suits your lifestyle and goals. I have often spoken about the importance of alternative FIRE strategies – they provide us with flexibility and options. FIRE is not one-size-fits-all and there are plenty of creative ways to make the journey more enjoyable.
Let me know what you think! Would you consider splitting your nest egg into buckets to achieve different goals?
*Sue is a real person (but the name isn’t). I worked with Sue on a 1:1 basis about a year ago. She is happy for me to share this scenario with you all (with some minor tweaks) in the hope that other new parents might be inspired to re-think their working lives and FIRE plans. Sue successfully transitioned to semi-retirement over the last year and now works 3 days a week in a new field that she really enjoys. She has also fallen pregnant again and is expecting baby number two in October. 🙂