If you’ve been on any financial blogs lately, you may have encountered the term “FIRE” — in all caps. What is FIRE? It’s an acronym meaning “Financial Independent / Retire Early.”
It is a financial plan for those that are, generally, high income earners and are saving prodigiously so that they can no longer need to work a job in order to live. Regardless of your exact income, anyone on the FIRE path needs to be a strong saver and disciplined in their finances.
But did you know that there are different flavors of FIRE? Flavors, you ask?
At its core, in order to achieve FIRE, one generally has to have enough investments such that the earnings from your investments can replace the income you earn from your job. A good rule of thumb is that your investments should equal 20-30x your spending (20x would represent a 5% withdrawal rate and 30x would represent a more conservative 3.33% withdrawal rate).
However, there are different flavors of FIRE, each of which reflects the philosophy or perspective of the individuals or couple or family behind it. Let’s look at some:
This is basically aiming to get to FIRE by cutting expenses heavily and being exceptionally frugal. The subreddit r/leanFIRE defines it as having less than $40k in annual expenses. This would also place your annual spending at nearly 1/3 less than the median income for the United States (currently around $59,000).
Based on $40,000 of annual expenses, this means that you would need around $800,000-$1,200,000 in investments to become financially independent or retire early (aka, “to FIRE”).
If leanFIRE is becoming FIRE’d by extreme frugality, fatFIRE is becoming FIRE’d with a substantial amount of investments such that you don’t have to be frugal at all. Similarly, there’s a subreddit devoted to these kind of folks: r/fatFIRE. However, the definition isn’t so clear with these folks what level of spending they expect to be able to support.
Additionally, there is a broader range of spending in this range. Many are very high-income earners that either save substantially to achieve this badge or, seemingly more commonly, are high income earners earning a windfall, be it a stock IPO (cough::cough::tech) or an inheritance. I’d say that many of these people plan to have at least $2,000,000 in investments, and maybe even more likely they have $3,000,000 – $5,000,000.
Perhaps a bit of a negative term, but ultimately this is used to describe someone who maybe isn’t completely FIRE’d, but is 80-90% of the way there. They then decide to take a modest part-time job to fill in the income gap, say, by working at Starbucks as a barista.
For example, if you have a spending goal of $50,000 annually, but only have $800,000 in investments, you may only feel comfortable pulling $30,000-$40,000 out of your investments each year. You then take a part-time job that only needs to bring in $10,000-$20,000 a year to cover the rest. This way, you’re still reducing your hours from a full-time career, but able to do it earlier than waiting for a full-FIRE type situation. This can also work well if you’re willing to do seasonal work (work the slopes in the winter? or work at the cruise ship dock during the summer?).
Some also bring this up specifically with respect to Starbucks due to their health benefits. Once you leave a full-time job, you generally lose benefits and health insurance on the open market is apparently very expensive (I have not researched this particular point myself). Starbucks offers health insurance to those who average at least 20 hours a week, hence you can work part-time and then also get benefits!
Alas, not for those heading to the beach, this describes people who still want to work, but save aggressively for retirement during their early years so they can wane a bit on climbing the corporate ladder and just coast towards retirement, since their investments are already in play.
A way of looking at this is, if you’re still planning to retire at 65 anyway, you can save aggressively when you’re much younger and then stop saving. By the time you’re retired, your investments will have compounded all on their own into a retirement nest egg large enough to support your lifestyle in retirement.
To make this concrete, let’s say you were able to save $100,000 in your retirement accounts by age 30. You then turn off the spigot and stop contributing at all to your investments (this is the coast phase). You then keep doing your life, working here, working there, and allow your investments to grow. By the time you’ve reached age 65 and are ready to fully retire, your $250,000 has grown to $1,478,534 (assuming 8% annual return for 35 years). If you then want to withdraw conservatively, take out 3% a year and you’ll have around $44,000 a year to enjoy during retirement.
Often people on this track are able to then switch to a very different type of job — perhaps one that’s part-time, lower stress, or both!
Take home message?
Ultimately, these are all different words or ways of expressing what all of us are interested in doing: being financially independent or retiring early. Some get there by reducing their spending and becoming ultra frugal. Some get there by hustling and busting their butts at work to make more money and save more for a hearty fatFIRE down the road.
For my wife and I, I think we’re on the road to just, regular, simple, FIRE, with an inclination towards leanFIRE. We’re both pretty practical and frugal people, however I don’t know if we’ll quite get to the goal of <$40,000 spending a year, at least not until the kids are out of preschool and our house is paid off.
Are you on the path to FIRE? What path are you taking or goals do you have? Any other flavors of FIRE I haven’t considered? Let me know in the comments!