Retiring Abroad on Coast FI

Coast FI means you have saved enough that your investments can grow to your full retirement target on their own. You stop adding to the pot and let time and returns do the rest. Retiring abroad makes that point arrive sooner, because the target itself is smaller.

That is the main reason retiring abroad and Coast FI go together so well. One lowers the cost of the life you want. The other lowers the savings you need before you can stop chasing a high salary. Put them together and the plan gets easier on both ends.

Why living abroad lowers your Coast FI number

Your retirement target is your yearly spending in retirement times 25. That comes from the 4 percent rule. If living abroad cuts your yearly spending, your target falls by 25 times the cut. Every $1,000 you cut from yearly spending cuts your target by $25,000.

The 4 percent rule is a starting point, not a promise. In 1994, William Bengen found that a first-year withdrawal of about 4.1 percent lasted 30 years with a portfolio of 50 percent stocks and 50 percent intermediate-term government bonds. The 1998 Trinity study tested withdrawal rates over 30-year periods and found similar results. Both studies looked at the past. The future can differ. For the full story, read The 4 Percent Rule, Explained in Plain Language.

Here is what that looks like with round numbers. These are planning numbers, not quotes.

• In the US: $40,000 a year in spending means a $1,000,000 target ($40,000 times 25).
• Abroad: $25,000 a year in spending means a $625,000 target ($25,000 times 25).
• Difference: $375,000 less to save ($1,000,000 minus $625,000).

How to estimate your Coast FI number abroad

Your Coast FI number is your full target divided by the growth of your savings between now and retirement. The math below uses one clear assumption: a 7 percent real return, which means 7 percent a year after inflation. That is the same assumption used in the other Coast FI posts on this site. It is an assumption, not a promise. Real returns vary from year to year, and no one can know them in advance.

The formula is simple. Coast FI number equals your full target divided by 1.07 to the power of the years until retirement. With 30 years to go, 1.07 to the power of 30 is about 7.61. With 20 years to go, it is about 3.87.

With 30 years to go, a $1,000,000 target needs about $131,000 saved now ($1,000,000 divided by 7.61). A $625,000 target needs about $82,000 saved now ($625,000 divided by 7.61). With 20 years to go, the same targets need about $258,000 and about $162,000 ($1,000,000 and $625,000 divided by 3.87). The longer the money has to grow, the less you need today. Work through your own numbers with the Coast FI Calculator worksheet.

Worked example: how lower spending shrinks the number

Take a hypothetical saver who is 35 and plans to retire at 65. That is 30 years of growth. All numbers are round and made up. They show the math, not a real person.

Step 1: At home, yearly spending is $40,000. The target is $40,000 times 25, which is $1,000,000.

Step 2: Abroad, yearly spending is $25,000. The target is $25,000 times 25, which is $625,000.

Step 3: The growth factor over 30 years at a 7 percent real return is 1.07 to the power of 30, which is about 7.61.

Step 4: At home, the Coast FI number is $1,000,000 divided by 7.61, which is about $131,000.

Step 5: Abroad, the Coast FI number is $625,000 divided by 7.61, which is about $82,000.

Step 6: The gap is about $49,000 ($131,000 minus $82,000). The saver needs about $49,000 less saved by age 35, and the full target is $375,000 smaller. Lower spending helps twice: once in the target, and once in the amount needed today.

What still needs a plan

A lower target does not remove the hard parts. Health care is the first item. Medicare usually does not pay for care outside the United States. You need a plan for that. Health Care When You Retire Abroad covers the options.

Taxes come next. Moving abroad does not end your US tax return. Taxes When You Retire Abroad explains the basics.

Visas are the third item. A tourist stamp is not a retirement plan. Check the visa rules for the country you have in mind, and keep an eye on the money and income proof it asks for. Currency is the fourth item. A weak dollar makes life abroad more costly, and a strong dollar makes it cheaper. Keep a cash buffer for the swings.

The bottom line

Retiring abroad on Coast FI works when the lower cost is real. Run the numbers on your own spending first. Then check health care, taxes, and visas. If the plan holds up on all four, the lower target is real too. Start with What Is Coast FI and How Much Do You Need to Reach Coast FI.

This post is for education only. It is not personal financial advice. Talk with a qualified financial adviser before you make decisions about your own retirement.

Sources

• William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994: financialplanningassociation.org
• Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz, “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable,” AAII Journal, February 1998 (the Trinity study): aaii.com
• Streetwise Folio, “What Is Coast FI” and “How Much Do You Need to Reach Coast FI,” for the 7 percent real return assumption used in this post: What Is Coast FI and How Much Do You Need to Reach Coast FI