If the army of personal finance influencers out there has managed to infiltrate your social media algorithms, you’ve likely come across the concept of “Coast FIRE.“

It’s an approach to retirement savings that lets you start to enjoy some form of financial freedom in the decades before retirement without having to stick to a rigorous savings regimen to fully retire early.

Essentially, you save and invest aggressively in your early working years, eventually building up enough of a nest egg that you can allow compounding to do the rest of the work to get you to your retirement savings goal. No more saving needed.

For example, if by 65 you want $2 million in retirement savings at today’s purchasing power and assume annual inflation of 3%, you’ll need around $278,000 invested by age 35. Average historical inflation-adjusted annualized returns of 7% will carry you to $2 million. In nominal terms, with returns averaging 10%, your portfolio will actually be worth almost $5 million.

The concept is meant to reward you for doing the work early and taking advantage of the magic of compounding over long time horizons. With your retirement needs taken care of, you can spend more of the money you earn, or could even move to a lower paying job that you’re more passionate about, as long as you can cover your immediate financial needs.

But according to investing pros, there are risks to the strategy, and the assumptions needed for it to work may not prove as reliable as Coast FIRE proponents are hoping.

Risks to the Coast FIRE strategy

Let’s start with the return assumptions.

Through the decades, stocks have averaged 10% annualized nominal returns. Over the last decade-plus, returns have been particularly stellar. Is it safe to assume that 10% returns will continue?

If you’re planning to hold for multiple decades, then the answer is probably yes. However, high stock valuations imply that returns over the next decade or so may be subpar, and there’s no guarantee that markets are advancing swimmingly to new highs right around the time one plans to retire.

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In other words, don’t expect a smooth 10% annual return. If a significant pullback in stocks occurs right around the time you stop saving or are set to retire, it could lower that 10% average at the worst possible time.

It’s a concept called sequencing of returns, said Dominic Pappalardo, the chief multi-asset strategist at Morningstar Wealth.

“There’s no doubt that that could influence your ability to withdraw and spend when you’re in retirement,” Pappalardo told Business Insider.

Stopping your retirement savings early also takes away your ability to take advantage of downswings in the market, after which some of the largest gains are made, Pappalardo said.

Then there are the inflation assumptions of 3% per year. While this is higher than the Fed’s 2% long-term target, it doesn’t account for more severe swings in inflation. Right now, for example, inflation is running at 3.4%, and in 2022, inflation was as high as 9.1%.

Periods like that can eat away at real returns, Pappalardo said, and the longer the gap between when you stop contributing to your savings to when you actually retire, the higher the odds are of an outburst of inflation.

There’s also the risk of higher-than-expected expenses in retirement, according to Nilay Gandhi, a senior wealth advisor at Vanguard.

This could come in the form of healthcare costs or caregiving responsibilities, he said. Plus, you may end up earning more in the years after you stop saving, and may realize you want to spend more in retirement than you had originally planned.

Practical ways to lessen risk

Gandhi said one way to deal with all of the above risks is to take a more active approach to your Coast FIRE strategy, periodically making sure you’re still on track.

“A good rule of thumb is that Coast FIRE works best when investors continue monitoring their plan rather than coasting and treating it as ‘set it and forget it,'” he said.

One could also build an extra cushion by saving for a few more years beyond their initial goal, Gandhi said, adding that flexibility later on is also key, whether that means working a bit longer or cutting back on planned spending.

Investors could also plan to start contributing to retirement savings again when markets decline, Pappalardo said, however, he also acknowledged that this defeats the ethos of the Coast FIRE movement.

“I personally think there’s a lot of value in being able to contribute in those down years, and that’s really kind of how you accelerate returns in any investment portfolio, whether that’s new dollars coming into the account or rebalancing into more risky assets when they sell off,” Pappalardo said.

However, “if that’s your way of approaching Coast FIRE, you’re almost arguing against you’re own philosophy immediately,” he added.

Maybe there’s room for yet another niche in the financial independence, retire-early movement. How does Flex-Coast FIRE sound?