Short for “financial independence, retire early,” the FIRE movement has many adherents — and each of them brings their own take on how to approach FIRE.
In this context, financial independence refers to the ability to live on your passive income from investments. As soon as your investments bring in enough income to live on, your job becomes optional, and you can retire whether you’re 30 or 70.
But there’s a big difference between enough money to live in a van down by the river and enough money to live in style for the rest of your life. Enter: lean FIRE vs. fat FIRE. Which says nothing of all the quirky nodes in between, such as “barista FIRE” and “coast FI.”
If you love the idea of building passive income and rendering your job optional, the following tour of the FIRE spectrum will help you find your own path to financial independence.
Concept Zero: Focus on FI, Not Early Retirement
In my other life I teach people how to reach financial independence with real estate. And if there’s one thing I’ve learned, it’s that people come for the “early retirement” but stay for the “financial independence.”
Everyone knows what early retirement means. It makes for an easy marketing hook. But too many people foster the fantasy of storming out of their dreary day job in a blaze of glory, telling off their boss and all their hated coworkers.
If that sounds like you, let me offer another suggestion: find a job you actually enjoy.
Don’t get me wrong, you should still pursue financial independence. A higher savings rate, net worth, and monthly passive income will always come in handy, regardless of whether your long-term financial goal is to retire at 40 or pay for your children’s college education — or both.
Creating passive income and pursuing financial independence take the pressure off your day job. The more passive income you have from investments, the less dependent you are on your job — and the easier it is to abandon it for a lower-pay, higher-fulfillment career.
That could mean volunteering or working for a nonprofit. It could mean starting a hobby business or side hustle you love, such as travel blogging as you explore the world. Or it could simply involve doing fun work like pouring wine at the local winery, whether full or part time.
More wealth and passive income mean more options and easier lifestyle design. Look beyond the notion of sitting on a beach for the rest of your life because FIRE doesn’t have to mean retiring early.
The real fruits of FIRE come from designing your own perfect life.
FIRE Planning 101: Savings, Withdrawal Rates, and Passive Income
Before breaking down the difference between lean FIRE and fat FIRE, you first need a basic understanding of retirement planning concepts. First on that list: safe withdrawal rates and their impact on how much you need to save for retirement.
Your “withdrawal rate” in retirement refers to the percentage of your nest egg that you pull out in your first year of retirement. The classic safe withdrawal rate is 4%.
For example, if you have $1 million saved for retirement, you can withdraw $40,000 in the first year, and then raise that each successive year to keep pace with inflation.
But the classic “4% rule” was designed to preserve your nest egg for 30 years of traditional retirement after age 65 or so. To retire early, you need your nest egg to last much longer, ideally indefinitely.
Fortunately, you don’t have to slash that withdrawal rate by much for it to last forever. Financial planner Michael Kitces demonstrates mathematically that a 3.5% withdrawal rate would allow your nest egg to grow indefinitely — at least based on historical returns.
All of which matters because how much you can withdraw determines how much you need to save for retirement. A $1 million retirement portfolio following a 3.5% withdrawal rate yields $35,000 per year.
To reverse the formula, divide 100% by the 3.5% withdrawal rate to reach 28.6, which serves as your multiplier. However much annual passive income you want in retirement, you can multiply by 28.6 to determine how big your nest egg has to be.
For example, say you want $60,000 per year in passive income. You can multiply 60,000 by 28.6 to calculate your target nest egg: $1,716,000.
With that background, you’re ready to explore lean FIRE vs. fat FIRE.
What Is Fat FIRE?
Think of FIRE planning and retirement planning more generally as a spectrum.
On one extreme of the spectrum lie those who want to live an extravagant lifestyle in retirement, or at least an unrestrained lifestyle. In the FIRE community, we call that “fat FIRE.”
On the opposite end of the spectrum lies leanFIRE: living an extremely frugal life post-retirement. More on that shortly.
When middle-class people envision their future retirement, many envision something like fat FIRE. They imagine a comfortable existence with little or no drop in living expenses. But they also have 40 or more years of working to allow their savings to compound.
Compounding does much of the heavy lifting for you. It takes only $267 per month in savings to reach $1 million in 40 years at historical average rates of return. A person earning minimum wage can become a millionaire given 40 years of compounding.
If you want to reach $1 million in 10 years, expect to save $5,467 per month. Not quite so easy.
So, people pursuing fat FIRE tend to work longer, and they tend to earn more money. They have to in order to save enough money to afford a relatively carefree fat FIRE lifestyle.
Sample Fat FIRE Budget and Savings
The most recent data from the Census Bureau puts the median household income at $68,703. For fat FIRE, let’s say you want to live on 50% more than that, or $103,055.
Following a 3.5% withdrawal rate — which means a multiplier of 28.6 — you’d have to save a nest egg of nearly $3 million: $2,947,359. No trivial sum, no matter how much you earn.
Keep in mind I’m simplifying the math to some extent. In the real world, you can “cheat” with more income-oriented investments like rental properties, REITs, real estate crowdfunding investments like Groundfloor and Fundrise, private notes, syndications, and other private equity. You can also use tax-sheltered accounts to complement FIRE rather than hinder it.
Even so, if you want to live an unrestrained lifestyle, it takes a lot of money to retire young.
If you want to live in an expensive coastal city, have multiple children, pay for their college education, travel frequently and expensively, eat at restaurants often, and otherwise live a traditional middle- or upper-middle-class lifestyle post-retirement, you’re looking at fat FIRE numbers.
What Is Lean FIRE?
Alternatively, if you’re willing to live a frugal, low-expense lifestyle, you can reach financial independence relatively quickly.
Those who subscribe to the lean FIRE model aim to slash their living expenses to the bare minimum. It serves them in two ways. First, it enables them to boost their savings rate and build wealth faster. Second, it means a much lower target nest egg.
Lean FIRE typically involves living in a lower-cost area, or even other countries with a lower cost of living. Many adherents find a way to house hack for free housing, or live without a car — I do both and live quite comfortably.
They prepare most of their own meals and send their children to public schools if they have children. When they travel, they do so inexpensively, usually at hotel alternatives rather than four- or five-star hotels.
If that sounds like a “sacrifice” to you, you probably aren’t a good fit for the lean FIRE model. If you enjoy savings hacks and living simply and frugally, lean FIRE could fit you perfectly.
Sample Lean FIRE Budget and Savings
If we added 50% to the median household income for a sample fat FIRE spending model, let’s cut 50% for a target lean FIRE budget. That puts the annual passive income target at $34,352.
At a 3.5% withdrawal rate (a 28.6 multiplier), that means you’d need to save $982,453. No minor sum itself, but a far cry from the $3 million you’d need in the fat FIRE example.
Living on $34,352 per year comes out to $2,863 per month. Eliminate your housing payment by house hacking, and a monthly budget of $2,863 looks far more feasible.
And you can live a downright luxurious lifestyle in many countries for $2,863 per month. There are some countries where $2,000 a month buys the good life, including several in Europe.
If you earn a strong living but spend at lean FIRE levels, it doesn’t take long to reach financial independence.
I know a couple that earns over $10,000 per month and spends around $1,500, and through real estate investing they reached financial independence in under three years.
They live outside New York City, where the cost of living is higher than most of the country, but they house hack for free housing, they share an older car, and they mostly cook their own meals.
How Does Lean FIRE Differ From Coast FI?
A more obscure concept in the FIRE community, coast FI refers to saving enough to “coast” to financial independence. It occurs when you save enough of a nest egg to compound and grow on its own to reach financial independence by your target age, without you having to invest another cent.
For example, imagine a couple that marries at age 25 and spends the next five years living an extremely frugal lifestyle. They save $350,000 by the time they turn 30.
At 30, they get pregnant and buy a traditional house in the suburbs with a dog named Fido. Their previously high savings rate goes out the window — in fact, they stop saving at all.
But over time, their $350,000 investment will compound on its own. If they left it invested for 10 years at a 10% return, it would balloon to $907,810. If they opted to give it 20 years and retire at 50 instead of 40, they’d have a hearty $2,354,625.
They saved enough money while they were young to coast their way to financial independence and retirement, no more monthly savings required.
“Barista FIRE,” Health Insurance, and the Uncertainty of Tomorrow
I hear objections to the concept of FIRE all the time:
- “How will I pay for health insurance if I retire before I’m eligible for Medicare?”
- “What if I get hit with a financial emergency?”
- “What if stock markets go through a prolonged depression?”
Yes, life is uncertain. Aliens could invade tomorrow, after all.
But I respond to all of these with a question of my own: What’s stopping you from picking up more work, on your own terms?
When you retire at 70, you may no longer be able to work. Even if you can still physically and mentally perform, older workers increasingly find themselves pushed out of high-paying jobs.
When you retire at 40, you can pick up work any time. Whether that means a full-time job, a part-time job, a side hustle, freelance work, consulting work, or something else entirely, you can always earn more money if you want or need it.
In fact, many people pursuing FIRE specifically pick up a part-time job that provides health insurance when and if they quit their day job. The extra money helps, but the insurance saves them from paying hefty premiums.
This model even comes with its own kitschy moniker: barista FIRE.
You earn enough passive income to cover your bills, but you work 10 to 15 hours per week to get out of the house, have some fun and social interaction, and of course score health insurance benefits.
The classic retirement model feels like flipping a light switch on your career. One day you’re working full time, the next your company throws you a party with a gift-wrapped watch, and you stop working forever.
Consider an evolving model for financial independence instead. Too many middle- and upper-middle-class people earn a decent living doing something they don’t love, but they’ve come to rely on the salary and benefits through lifestyle inflation.
They don’t want to use the term “golden handcuffs,” but if they’re honest with themselves, there’s something else they’d rather do. Yet they don’t change careers to do it because it would involve a pay cut or learning new skills.
Forget the binary model of retirement, of flipping an on-off switch. Instead, plan out what it would take to transition toward your perfect career and lifestyle, regardless of the pay cut.
Start cutting your spending now, both to invest more while you still earn a strong salary, and to prepare for a more fulfilling career and life.
Reaching FIRE doesn’t mean never working again. It means working on your own terms, whether that involves a fun post-retirement job or a hobby business that you love.