FIRE stands for Financial Independence Retire Early. It's a movement dedicated to saving money and investing aggressively with the ultimate goal of being able to retire much younger than the standard age of 65.
The term FIRE was first popularized in a book by Vicki Robin called Your Money or Your Life way back in 1992. Since this book release and particularly in the last decade, the FIRE movement has taken off - particularly with millennials.
For a full breakdown on what FIRE is, check out one of my first articles called What is FIRE?
The reason why there are so many FIRE strategies is because every person who is chasing financial independence is different. They will have different incomes, different debts, different everything! When every persons financial situation is different, it's likely their goals will be too.
With everything popular, there is jargon related to it. The FIRE movement is no different. There are several popular versions which we'll cover today that will help you understand what the bloody hell they mean, and may even give you an idea of which one could become your goal in the future.
The 4% rule (or 25x expenses rule)
How much person A needs to become financially independent and have the option to retire early will be different from person B. However there is a common rule that's generally accepted in the personal finance community, and that's the 4% rule, also known as the 25x rule.
The 4% rule comes from the trinity study, which states that you should be able to live off your investment income for at least 30 years into retirement without running out of money if you withdraw no more than 4% of your portfolio each year.
The inverse of 4% is 25x. The end goal is the same - have enough to retire - and while the 4% rule tells you how much you could withdraw from your total portfolio each year, the 25x rule tells you how much you need in your portfolio to retire by multiplying your annual expenses by 25.
Here's an example:
Billy spends $60,000 each year and wants to know how much he needs invested to be able to retire and cover his expenses. He would multiply his annual expenses ($60k) by 25, which equals $1.5M. Billy would need $1.5M invested to retire. He would withdraw 4% of his $1.5M each year to cover his expenses, which is $60k, and not be at risk of running out of money.
Achieving FIRE: The common strategies
Regardless of which strategy is followed, the goal is the same: become financially independent with the option to retire earlier than the traditional age. Let's dive in and cover off the popular types of FIRE.
Coast FIRE
Lean FIRE
Barista FIRE
Fat FIRE
What is Coast FIRE?
CoastFIRE is when you have enough money saved and invested - and through the power of compounding - will have enough to retire at the traditional age of 65 without investing another cent. Essentially you could "coast" your way to financial independence (but not really retire early).
This will be a fairly low dollar figure if you're in your early 20's or 30's as you have a lot of time on your side for compound growth.
Here's an example of Coast FIRE:
If you're 25 and have $100,000 invested and didn't invest another dollar, you would have $2.1M at the age of 65 (assuming an 8% return). If you follow the 4% withdrawal rule you'd be spending $84,000 each year in retirement.
What is Lean FIRE?
Lean FIRE is when your portfolio value is large enough to cover your barebones living expenses each year, using the 4% withdrawal rule. Your yearly expenses would be limited to essential - such as housing, transport, etc. - and very limited non-essential spending - such as eating out, travel, etc.
Here's an example of Lean FIRE:
You're 45 years old and your barebones living expenses are $40k each year. You would need $1,000,000 invested in order to retire and cover your annual expenses.
What is Barista FIRE?
You've reached Barista FIRE if you have enough invested to cover your essential living expenses using the 4% rule. You would need a part time job, such as a Barista (hence the name) or anything else you enjoy, to cover the remainder of your expenses. This FIRE type is usually considered a hybrid between Lean FIRE and Fat FIRE.
Here's an example of Barista FIRE:
A 40 year old has a portfolio value of $1,000,000. Following the 4% rule they could withdraw $40,000 each year, which is enough for their essential expenses (housing, transport, groceries, etc.) but not enough to cover everything they want to do which would total $60,000. They work a job at a golf shop to earn the extra $20,000 needed each year.
What is Fat FIRE?
You want to do whatever you want (within reason) when you retire? Fat FIRE is your jam. When you achieve Fat FIRE you have a large enough portfolio value to withdraw from each year that covers ALL of your expenses.
Fat FIRE covers your essential AND non-essential expenses. Like to travel? That's covered. Like to eat out more than once per month? That'd be covered. It's the baller's version of FIRE.
Here's an example of Fat FIRE:
You have expenses that total to $100,000 each year. This includes your annual international vacation among other luxuries. Your investment portfolio sits at $2.5M which is enough to cover your annual needs and wants.
Summary
As you can see, there is no one size fits all approach to becoming financially independent and having the option to retire early. We've discussed the most common FIRE strategies, however there are many others out there - of which, a lot are subset of the ones we've discussed in some fashion - that you may hear from time to time.
Regardless of which FIRE type resonates with you most, all of them require the discipline to save and invest aggressively. You'll never achieve financial independence if you never save and invest. The earlier you want to achieve FI in life, the more aggressive you will have to be.
I'm interested to hear what FIRE type you like most and why. You can comment here or DM me on Instagram over at @firewithafamily, I post there pretty much daily. Looking forward to hearing from you
Blake - FIRE with a family