The financial independence community loves creating abbreviations with somewhat ambiguous meanings. In the past year, the /r/financialindependence subreddit has doubled in size. Not to mention a wealth of blogs touching on the subject (myself included). This has meant many of the same questions come up over and over again for discussion:
- How do you calculate savings rate? (total savings / total saveable income)
- What is a good safe withdraw rate for retiring early? (4% is historically safe, but no one can tell you what the future holds).
- What “type” of FIRE are you pursuing? Figuring that out is the goal of this post!
Let’s back up a bit and loosely define a few terms so we’re on the same page:
FI – Financial Independence. Having enough money saved up such that you don’t need to work to maintain your lifestyle. This can be done in a number of ways, but the most common is by saving up 25x your yearly spending and investing it. At that point, you’ll have enough saved up to withdraw 4% of that total each year to live off. For example, if you’re going to spend $40,000 a year, you’ll need $40k*25 – $1,000,000 saved up.
RE – Retire Early. This has different meanings for everyone. It could mean not working a fulltime job, or not working a job at all. It could mean having income coming in from side hustles or real estate, or it could mean having $0 cash flow. The common thread to me is about flexibility in your own time without the reliance on the work you’re doing to survive. If you need the money from this work to continue supporting your life or building your wealth to prepare for later, to me you’re not retired (but you are probably doing something right if you’re loving it).
FIRE – Financial Independence, Retire Early. The combination of both of these. You can be FI and continue working at a fulltime job (as I plan to do). Or you can be taking a mini-retirement, like Scott from I Dream of Fire is doing.
Lean Fire – FIRE, but with a smaller amount saved up. Think of it as FIRE on a budget. The leanfire Reddit community places the yearly spending number for lean fire at under $40,000 a year. Using the 4% rule, that means people going this route need less than $1,000,000 saved up to hit “lean fire”. For this to work, you need to have a great understanding of your expenses and be able to keep them in check. This is something you’d need with FIRE as well, but there is less wiggle room with lean fire. People looking at lean fire are usually younger (more on that later).
Fat Fire – FIRE, but on a very large budget. If leanfire is for people spending under $40k/yr, fat fire is the term for people planning to spend more a lot more. How much more? This discussion on Reddit puts the number around $152,000/yr+. Physician on Fire pegs the number around $100,000/yr+, roughly twice the typical household spending. With 25x savings, that means you’d need at least $2,500,000 saved up.
Soo Many Terms!
Ok, that’s a lot of terms! Lean and Fat Fire are both completely arbitrary numbers too. They’re not based on a proportion of the population, so there’s no way to calculate these either. These all boil down to one question: How much do you plan to spend in retirement? If you know that, you can describe which one makes the most sense for you:
- $0 – $40k: Lean FIRE (<$1,000,000)
- $40k – $100k: FIRE ($1,000,000 – $2,500,000)
- $100k+: Fat FIRE ($2,500,000+)
I like how simple these ranges are, with a clear boundary. These are the ranges I’ll use in this post.
What Type of FIRE Are Most People Pursuing?
Luckily, I happen to have some data on that from The Interactive Guide to Early Retirement and Financial Independence! Based on peoples current spending, we can look and see how many people are pursuing which types of Fire.
Before getting too deep here, it’s important to give a caveat. These numbers are all about the time when people would become FI given their income, expected savings and amount they expect to spend in retirement. This doesn’t imply that people will retire at this age though.
62% of people using the guide say they will work at least 1 year after they are FI before retiring. The largest number of those, around 30% of the total, plan to work under 2 years after they’re FI before becoming FI. Looking at that, you could swap the Lean FIRE and FIRE numbers on this chart, since a large number of people are riiiight on that $1,000,000 cusp between FIRE and Lean Fire, and hope to make the jump from lean fire to be the low-end of FIRE.
Number of People Pursuing Fire by Amount
What would you do with $1,000,000? If your answer is “retire”, it’s likely you’re under 32 years old with yearly spending under $50,000. $1,000,000 is the most common number people gave as their calculated number for FI. $800,000 is the next closest, which fits in with the idea of spending $40,000 now, but reducing your spending by 20% in retirement (which was a recommendation in the guide).
There are a few things that are striking to me about this chart:
- A lot of people expect to be able to maintain spending of $40,000 or less a year for the rest of their lives. Based on the gender pay gap data, however, we see that peoples spending continues to rise. My unpopular opinion: most people retiring on $40,000 a year will have a rough time not increasing their spending. Some will do it for sure, but from what I can tell most people will see their spending rise and need more money.
- There is a very long tail for Fat Fire. $2.5m the Fat Fire number with the highest count of people. One person filling out the chart is shooting for $60 billion. I can only assume Warren Buffett is a fan of Minafi.
There is one thing this chart doesn’t take into account: age. Most people who have filled out the guide are millennials between 24 and 35, which heavily skew the total spending down. People in this age range spend considerably less than those in their 40s who filled out the guide.
What if we split things out by age to see how that impacts FI number?
Fire Amount and Retirement Age
The relationship between spending and FI amount needed is direct, so it’s no surprise these grow linearly with each other. What is surprising is that the numbers tend towards a 5% WR rate overall. Most people really want to retire as soon as possible, even if the numbers don’t work out exactly right.
If we were to associate ages with this chart, we could say:
- People 35 and younger lean towards lean fire.
- There is no “age” for Fat Fire. It’s for high-income earners of all ages.
This makes sense to me, as spending has a tendency to grow over time. What’s often considered a luxury in your 20s can quickly become something you wouldn’t think to live without in your 30s.
When I look at my own spending now compared to my 20s, it’s easy to see where it’s going:
- Housing – $700 or less a month with roommates. Now $1,800 a month for Mrs. Minafi and I. (+$13,000/yr)
- Travel – $1,000 a year in my 20s, traveling cheap (if at all). Budgeting $7,000/yr now. (+$5,000/yr).
- Food – $3k/yr, never eating out or drinking. $12,000 a year now for 2 people (+$9,000/yr).
Other areas increased as well, but these were MASSIVE increases compared to the others. The difference between having roommates vs not is the biggest one. The total of these 3 areas alone is an increase in our spending of $27,000! That’s $675,000 right there needed to support these three additions to our lifestyle. With our yearly budget around $60,000, these 3 items make up almost half of it.
Would I think about giving them up and going back to my 20s lifestyle? Hell. No. I’d much rather eat tasty food and travel the world, thanks.
These budgets are now for 2 people rather than one. We do have 2 incomes, but their growth still outpaces that.
We are aiming to lower the travel one by spending more time preparing and taking advantage of travel hacking, but that’ll take some time. Even for this year, we’re planning on taking 2 international trips, 4 domestic flights, and at least 1 road trip – and that’s without us even planning out the holiday season!
Back to the above chart
Even you love your job, there are good days and bad days. If you love every minute of every day of your job, I doubt you’ll need to read a guide on how to retire early.
What’s striking is how quickly retirement spending grows. I have a hypothesis for this:
As long as someone else is paying your salary, your spending will grow.
It’s harder to resist spending money when you have it than it is to live within your means at a moderate salary. The average American family earns under $60,000 a year. The Fire spending community earns more but also spends less overall.
Tips for People Pursuing Lean FIRE (<$1m)
If you’re going for lean fire, you’re banking on one important thing: your spending won’t increase with the same trend as most other people. While saving up to reach your FI number, you’ll need to avoid lifestyle inflation like the plague.
The other option is to not retire, but instead, semi-retire. Rather than counting on using your savings for 100% of your income, what if you can supplement it with a part-time job? This may not be the sexy “I’m FREE!” proclamation that it’s portrayed in the media (fake retirement!), but it is a very realistic and achievable way of gaining a degree of freedom with a much more achievable number.
Lean FIRE people are also banking on the idea of being retired for a very long time horizon. I’d recommend tracking your spending for a few years to make sure you can control it. If each year your spending is rising, that’s a HUGE red flag that maybe it’s time to take a hard look at lean fire and see if you need to save more.
Also, health insurance. Check out Healthcare.gov and get an estimate of how much it would be for you to get coverage. Add that amount to your spending. The risk of not having healthcare is just too great here in the US.
What’s amazing (and controversial) about early retirement is that your “income” may be super low. This could qualify you for a massive tax credit. If you’re spending $40,000 a year in retirement, but you’re drawing from investments, it’s possible your AGI (adjusted gross income) will be next to nothing. If you can get your AGI down below $20k, you could save $1,000 a month in health insurance (just an example using our numbers – yours will be different).
Tips for People Pursuing FIRE ($1m-$2.5m)
The same tips as Lean FIRE apply here. At FIRE in this range there is more room to make changes.
Pay extra attention to large, long-term commitments. If you’re buying a house, be aware of the hidden costs of homeownership. Furniture, maintenance (I budgeted at least 1% of the home price each year), landscaping, taxes and more. These big costs are what can tank a retirement plan.
I put myself in this category, as my number is around $2m. One challenge I have is looking for ways to reduce expenses. In this range, one focus many have is seeing what they can do to optimize your lifestyle while spending the same amount.
If you want to give yourself a few more options, try being flexible with your spending. Spend more on some things in some years and less on others. For example, what if you reduce your traveling budget one year, and spend that same money skiing or enjoying the outdoors in your area.
Tips for People Pursuing Fat Fire ($2.5m+)
In addition to the tips for people pursuing FIRE, those looking to Fat Fire have a new set of concerns as well.
For one, taxes start to play a much more prominent role in your planning. I read tax books for fun, and a few of the same themes come up over and over:
Start a business. If you’re hitting this number, it could be because you already have a business. If you have money coming in from real estate or other means, that’s a great opportunity to use it to minimize your taxes and lower your personal liability.
Reduce your travel spending with real estate: If you have a business, you can deduct your expenses. Buy real estate in places you love to travel to. When you travel there if you spend a certain amount of time “working”, you can deduct the trips (food, airfare, the works).
Protect your wealth: I recently decided to get an umbrella insurance policy to cover my a variety of potential issues. If someone attempts to sue you, your insurance will be the first line of defense in handling the legal side and defending against frivolous claims. For a few hundred dollars of year, having an entire team of lawyers backed by a multi-billion dollar insurance company protecting my assets is worth it for peace of mind alone.
Which Fire Are you Going For?
Based on your spending, what type of FIRE are you going for? What do you see as the biggest threats to achieving it?
22 CommentsWhy not add to the conversation below? Your voice is welcome!
Half Life Theory
May 14, 2018
FAT Fire or morbidly obese fire sounds like the ideal lifestyle for me lol 😉
May 15, 2018
Morbidly obese fire sounds like something you should get checked out. 😉
September 17, 2018
There is a lot of research out there showing that ( for many or most people) the happiness increases with the income up to around 70-80k a year and then decreases after that, once you start making more than 80k/year.
September 17, 2018
From what I’ve seen happiness doesn’t decrease after 80k, but the increase in money after that starts to flatline. Hunk that’s what you meant, but just to clarify!
Xyz from Our Financial Path
May 22, 2018
We are aiming for the million, it’s a nice round number and it is pretty accessible.
May 31, 2018
Nice! Yeah there’s something satisfying about hitting a nice round number like that beyond the exact calculations.
The Smart FI
May 22, 2018
I am in the plain old FIRE camp. I am shooting for $2,000,000. Almost halfway there, Yay! Thanks for the great article comparing all the different variations of FIRE.
May 31, 2018
Thanks! $2m is right around my goal too, based on forecasted spending. Do you have any concerns with that not being enough?
September 17, 2018
I have a question ?
Everybody always talks about a 4% withdrawal rate .If you are a dividend investor
and make 5% in dividends do you still withdraw 4% from your million or do you do both and end up with 90.000$ ?
One more question ?
you have a million and withdraw 4% that leaves you with 960000$ .Now the following
year the market looses 20% .How much do you withdraw ? 40000$ or 960000-182000=772000…….4%=30880$
September 17, 2018
The “theory” ( the old simulations) say you withdraw how much you took out the previous year times the inflation. So you take out 40k*2%inflation REGARDLESS of how much the market drops. The old simulations account for the market to drop a lot one year , go up a lot other years.
The “new FIRE” simulations they prove though that if the market drops in the first 10 years of retirement and you keep taking out the 4% you will have much fewer chances to have money for the rest of your life.
That is why they advocate 3% or 3.3% in the first 10years and 4-5% afterwards
September 17, 2018
Bogie covered it! On the dividends question – what is considered “taken out” for the 4% rule would be dividends that you convert to cash + selling stocks. If your dividends are returning 5%, then you could live off 4% (+inflation) and reinvest the rest back in.
September 17, 2018
I’m aiming for FAT FIRE and plan to retire in 15 years. According to the calculations I have received (from Personal Capital), that should be easy to accomplish with my current plans/goals. I want lots of wiggle room when I finally discontinue bringing in other income. You never know what tomorrow will bring in terms of future expenses (thinking health insurance today).
September 18, 2018
Nice! If you’re thinking you’d be Fat Fire in 15 years, that probably means you’ll be solidly in FIRE territory in maybe… 10? If you can keep your spending under control in that time (something I’ve struggled with) then sounds like you’ll be in good shape!
November 12, 2018
Wonderful article, i have recently started my own FIRE journey and i am documenting it on my blog as well, I have adapted this to my target audience. Feel free to check out.
January 28, 2019
Love the data driven approach to this! I’m glad I came across your blog. FIRED two years ago with close to 700k NW. Doubled it since and created some passive income streams. I tend to agree with you that a lot of things will change so am now working towards FatFire but on my own time and speed.
January 28, 2019
Sounds like bullshit. Fire and make $350k/year? Get real. Or did people die and give you money?
February 6, 2019
Could be investing to double their money (which would be crazy lucky). Could also mean net worth doubled rather than investment amount. That’d be realistically possible if the original number was cash and the net worth one included leveraged real estate with unrealized gains.
February 7, 2019
Sorry for some reason I didn’t get a notification about a reply. Not too crazy but fairly lucky timing. I did forget to add my equities (>110k) in the the NW sum. I keep forgetting it as it’s not accessible till official retirement age, so I see it more as a bonus for if and when I get there, rather than I can count on today.
1) exchanged dollars to Zlotys at a high (21% currency gain).
2) Invested in Polish Real Estate for cash. Right before it took off again and in the place that had the highest increase out of all of Poland – Katowice. I knew this place was undervalued observing it for years. (+40% gain).
3) Paid myself the rental return – 12% net (2 years of 6.5%)
4. Held a little money in stocks. And hold cash in high interest saving account. Just a little more to outperform real inflation.
5. Dividends and stock option pay outs from my old work did the rest.
So yeah I took a calculated risk. And it turned out much better than expected. That part is lucky. For the exchange rate I bought another place, and the unrealised property gains are not important to me. Most importantly I have a stable investment that runs a net positive cash flow for me.
July 31, 2019
Do folks include 401k assets when
In these investment amounts ?
August 4, 2019
Yes, they do! To me, this is anything that’s a liquid investment – things that could be sold for money immediately. This wouldn’t include home, car or other physical assets, but would include cash, investments and bonds in any account.
For all of these numbers there’ll be a bunch of tax consequences for sure. $1 million for one person might be free and clear, while for someone else that $1m might have 20% taxes (or more if they withdraw early!).
August 22, 2020
Great article. What confuses me is the impact of income tax.
You can’t directly compare your NW figure with 25 X expenses if your NW figure includes your pension pot, because pensions are subject to income tax. So is it reasonable to take 20% off your pension pot as an estimate of income tax and use that lower pension figure when calculating your NW?
August 25, 2020
Yeah, that’s what I’d do. What you want is 25x to 33x after taxes. For people with a pension that’ll get hit with 20% in taxes, then they might want 30x-40x saved up.
If some income was taxed a lower rate that could be a good reason to lower the max amount – for instance, if they had some saved up in a brokerage account or a Roth IRA.
If you’re in a state with an income tax that’s another one to take into account. That could make enough difference to want to pack away a little more.