What is FIRE? It is definitely hot, but not in the way you might think 🙂
FIRE is an acronym meaning Financial Independence Retire Early. People like Vicki Robin, author of Your Money or Your Life, are credited with creating the FIRE movement. There are various levels of FIRE, but let’s first cover the two halves of the acronym – FIRE.
The first part, financial independence, is really all about getting to the point financially where you can support your expenses (weekly, monthly, yearly) through investments you’ve made or through passive income, such as rental income. Financial independence means freedom. Because you don’t have to worry about having a job with a certain income to meet your financial needs, you are free to make choices with how you spend your time. Some people, like myself, choose to continue working. With financial independence, work is no longer an obligation. It is a choice.
The second part, RE or retire early is about making the choice to finally stop working and instead, living a life of leisure. Retiring early means different things for different people. It could simply mean retiring from what you’re currently doing and instead, beginning a new chapter, such as starting a business. With financial independence accomplished, you can take some risks that you might not have taken while you were actively climbing the corporate ladder and so forth.
So, how do I know what my FIRE number is?
People in the FIRE community often refer to their retirement goal number, meaning the amount that they desire to save for retirement, as their FIRE number or FU number. I’ve written about this before. A general rule of thumb can be applied using the 4% rule.
If you total up all of your investments and savings, then take 4% of that number, this tells you how much of an income (or safe withdrawal) you can take for 30 years to cover your expenses. Reversely, this is the 25X rule. I personally like to use the 25X approach because it starts with your expenses. Figure out how much your annual expenses are, then multiply that by 25. This will give you the amount of money you should have in investments and savings in order to sustain the withdrawals for those expenses over a 30+ year period. If you want to be a bit more conservative, multiply by 30. Note, that this does account for inflation!
What are the different levels of FIRE?
FIRE is not one size fits all. In fact, there are five levels of FIRE. Each has distinct characteristics.
Lean FIRE
Lean FIRE is when an individual is striving for FIRE, but is planning to tighten up on expenses in retirement, sometimes significantly, in order to make ends meet. For instance, Joe works a corporate job that pays $90k per year. His regular expenses are $70k per year while he is working. But Joe wants to FIRE, so he trims away at his expenses to get them down to $50k per year. Perhaps he trimmed down by deciding to move to a lower cost of living area or through being more frugal overall. With the 4% or 25X rule, Joe needs $1.25M in investments to make FIRE work while still covering that $50k a year in expenses. Lean FIRE is all about going “leaner” in retirement. It is generally talked about as those who intend to live on $40k or less while retiring early.
Regular FIRE
Regular FIRE means that you’re seeking to continue a similar lifestyle in retirement that you had while working. It is generally those who tend to live on a retirement income of $40-100k per year. Let’s say Christina makes $80k per year, but she understands that $15k/year of that was going into savings while she was working (something she might not continue to do when she’s retired). She also spent $5k more per year in income taxes while she was working vs. what she expects when she retires. So, Christina’s expenses (to maintain her current lifestyle) are really $60k. This means that Christina needs $1.5M in savings and investments in order to stop working while still maintaining her lifestyle.
Fat FIRE
Fat FIRE means that a person is striving to achieve a retirement income generally in the $100k+ range. Sometimes individuals strive for a higher income in retirement because their expenses are higher. They may need to cover a mortgage, cars and large travel expenses in addition to life goals that they’ve had for themselves. For a $100k annual retirement income, the 4% or 25x rule indicates you’d need to have $2.5M in savings and investments. This is Fat FIRE.
Barista FIRE
Barista FIRE (love this name) is when a person meets their FIRE goals as mentioned above, but by continuing to hold a part-time job that supplements their investment income. In all of the scenarios above, the savings target can be reduced when you have additional streams of income, such as a part-time job, perhaps you own a rental property or you have a side-hustle business. Julie “Barista FIRED.” She worked in corporate america for 20 years, but then became burned out.
Julie crunched the numbers and realized that although she earned $100k per year, her actual expenses each year were $70k because $30k of her income went to savings, something she didn’t feel was necessary to continue when she stopped her corporate job. With $1M in retirement and other investments, she decided to quit. Using the 4% rule, she knew that this would only allow her to withdraw $40k per year of her investments. Julie needed to make up for the $30k/year shortfall. She decided to use her accounting skills to do gig work from home part time, supporting local small businesses as an independent contractor. She achieved her goal of “retiring” from her corporate job in pursuit of a less stressful work-from-home job, setting her own hours.
Coast FIRE
Coast FIRE occurs when a person has enough saved and can project to reach their FIRE goals without having to save any more money. In other words, they’re coasting to retirement. Adam is one of those people. He has a goal of reaching $1.5M in 10 years. Today, he has $700k saved. At an 8% annual return on his investments, he calculates that he won’t have to save another penny in his account in order to reach his goal. His 8% return alone will get him to his goal (note, past returns are never a guarantee of future returns).
Adam is then offered a promotion at work, but it comes with an increased level of hours, responsibility and stress. Adam is obviously a valuable employee, but he turns down that promotion because he wants to put more of his time into his passions and the hobbies he enjoys. He has that freedom knowing he’ll be able to achieve his financial goals without the additional stress of more hours and responsibility. He is coasting to FIRE.
But how do I account for social security when calculating my FIRE number?
All of the scenarios above can have social security applied. Personal finance is just that, personal. Some people plan for 100% of their social security payout, some plan for a 50-75% payout, and some do not budget for social security at all in their retirement income. How you plan for social security is largely dependent on whether you want to conservatively plan for retirement or if you feel strongly that social security will fully be there for you when you reach that eligibility age.
If you want to plan for social security as part of calculating your FIRE number, simply total up your anticipated monthly expenses, then subtract the amount of social security you anticipate getting. Take that total and multiply it by 25. This is roughly your adjusted FIRE number considering social security.
If you retire prior to your social security eligibility age, you will need to have a plan for how you will fund your expenses, including health care, to bridge you there. You can do this through part-time work, tapping into savings, or through other streams of income.
Which level of FIRE are you striving for, and what lights your FIRE?
As you can see, there are several ways to “FIRE.” Have you thought about this? Which FIRE level or flavor do you align to? Are there things that you’ve always wanted to do, but never have the time? FIRE is definitely a solution. Take some time to think about what lights your FIRE. Do you want to spend more time with family? Start a business? Write a book? Make some goals to get to your FIRE number, even if it means you don’t flip the switch on the RE part of FIRE. Simply having additional choices that financial independence brings is liberating.
FIRE up!
