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 amini-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 the 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 life 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 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 alone 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.
For one, 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, 2 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 and making sure that 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 AGI 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 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: This is an area I haven’t looked into, so I’m hesitant to mention it, but umbrella liability insurance may start to make a lot more sense at this point. In The White Coat Investor’s Course (note: affiliate link), there is an entire section devoted to various types of insurance (disability, life, liability, health, etc). While I can’t claim to be an expert in these topics, WCI’s course was helpful in getting an overview of these areas.
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?