A Beginner’s Guide to the FIRE Movement

Disclaimer: Nothing in this article should ever be considered advice, research or an invitation to buy or sell securities. I am not a financial advisor.

Over the last decade, the FIRE (Financial Independence Retire Early) Movement has exploded in popularity. And it’s not hard to see why.

FIRE offers an alluring alternative to working 40+ hours a week until the traditional retirement age of 65. In fact, many who do pursue FIRE are often able to retire decades before that.

I myself discovered the FIRE Movement 6 years ago and am currently on track to retire by 40.

As a result, I wanted to cover the basics of FIRE including:

• What is the FIRE Movement?
• How to Calculate Our FIRE Number
• The Path to Financial Independence
• The Different Types of FIRE

Let’s dive in.

What is the FIRE Movement?

Contrary to popular belief, there is no rule or law saying that one has to work until their 65.

Yes, that is the age for when we become eligible for Medicare and Social Security. However, by saving early and often along with some detailed planning ahead of time, we can often be financially prepared to exit from the workforce much earlier than this.

That’s where FIRE comes in.

The FIRE Movement is a lifestyle movement that is actively challenging the traditional role of money in our lives. It’s about redefining our relationship with money in order to gain the financial freedom to buy back and have more control of our time.

As an example, most individuals do not have the choice to simply stop working. Whereas someone who is pursuing FIRE may have the option to change jobs, pursue a passion or quit working altogether.

By actively taking control of our personal finances, we are able to give ourselves that choice.

Furthermore, it’s important to note that the focus of FIRE isn’t to accumulate wealth as fast as possible in order to retire as soon as possible. That’s entirely missing the point. Instead, it revolves around the idea of empowering ourselves to building the life that we want and then saving for it.

How to Calculate Our FIRE Number

To achieve FIRE, one must have a sustainable cash flow that can over their expenses via a portfolio of investments.

It’s important to note that everyone’s financial and life situation is different and therefore everyone’s FIRE number is also different. Factors that can impact one’s FIRE number includes but is not limited to:

• Cost of Living
• Family Size
• Lifestyle Preferences

With that being said, let’s now walk through a general guide on how to figure how much money one needs to FIRE in three easy steps.

Step 1: Calculate Our Estimated Annual Expenses

The first step in calculating our FIRE number is understanding what our annual expenses are.

The best way to do this is by recording our expenses for 6-9 months and then taking an average. This can help ensure that we are accounting for any potential seasonal fluctuations in our spending. This can be done either manually via a spreadsheet or using an automated tracking tool such as Personal Capital or Mint.

After calculating our average monthly spend, we can then multiple that number by 12 in order to get our estimated annual budget. We can then take this baseline annual budget and increase/decrease it in order to account for any anticipated changes in our lifestyle (want to travel more in retirement, etc.)

As a hypothetical example, let’s assume that that our budget averages out to $3333 / month which is equivalent to an annual budget of $40,000 / year.

Step 2: Settle on a Safe Withdrawal Rate

The second step is deciding on what safe withdrawal rate we want to use.

Fidelity defines a safe withdrawal rate as “the estimated percentage of savings you’re able to withdraw each year throughout retirement without running out of money.”

The FIRE Movement, as well as the broader retirement planning community, will commonly use a safe withdrawal rate of 4%.

Why 4%? That answer can be found in a research paper called the Trinity Study: the goal of which was to determine safe withdrawal rates for different portfolio compositions. The original Trinity Study found that a 4% safe withdrawal rate had between a 98% – 100% chance of not running out of money over a time period of 30 years.

With that being said, the Trinity Study also found that a 3% safe withdrawal rate had a 100% chance of never running out of money over a time period of 30 years. As a result, it’s common practice for more conservative investors to opt for a 3% safe withdrawal rate in order to further increase their chances of their portfolio never running out of money.

Step 3: Calculate Our FIRE Number

With our variables defined, we can now calculate our hypothetical FIRE Number:

• Assuming a 4% safe withdrawal rate and a $40,000 annual budget, our FIRE Number would be equivalent to $1,000,000.
• Assuming a 3% safe withdrawal rate and a $40,000 annual budget, our FIRE Number would be equivalent to $1,333,333.

However, that isn’t the end of the story.

This imaginary FIRE portfolio is based on current spending levels. If we anticipated spending more or less in the future, we would need to adjust this number to reflect our anticipated annual budget.

With that being said, if one planned to maintain a lifestyle similar to today, then this number may represent a good baseline target to measure ourselves against.

The Path to Financial Independence

Now that we have defined our FIRE target, how do we get there?

We have to maximize the single most important metric when it comes to FIRE: our savings rate.

To get a better understanding how our savings rate impacts when we can FIRE, we can look to Mr. Money Mustache, who is often credited for starting the modern-day FIRE Movement. He developed a table detailing how even minor increases to our savings rate can melt years off the path to financial independence in his post titled: The Shockingly Simple Math Behind Early Retirement.

In other words, our savings rate determines the speed at which we will be able to retire.

There are only three ways to increase our savings rate:

• Increasing our Income
• Decrease our Expenses
• Investing the Difference

From a mathematical perspective, increasing our income and decreasing our expenses will have identical impacts on our savings rate.

Therefore, we should focus on optimizing both these variables to the point where it makes sense. As an example, while it may initially be easier to decrease our expenses, we don’t want to cut our expenses to the point where we feel deprived.

Popular ways to decrease our expenses include:

• Decrease our big 3 expenses
• Live a more frugal lifestyle
• Pay down our debts as soon as possible

Once we’ve streamlined our budget, it may make more sense to then focus our attention on increasing our income. However, this will only work if we do not fall victim to lifestyle inflation or the idea of spending more money because we make more money. 

Popular ways to increase our income include:

• Starting a Side Hustle
• Negotiating a Raise / Changing Companies
• Increasing our Passive Income

At this point, we will now have money to invest. With that being said, we want to make sure that we are optimizing our investing strategy.

Furthermore, we should also be having an honest conversation with ourselves on what is considered a sustainable long-term savings rate. Because while having a 70% savings rate can have us retire much earlier, what are we giving up in order to make that happen?

It’s important to remember that FIRE is about building the life you want and then saving for it. We shouldn’t give up things that genuinely make us happier in order to knock a few days/months off our FIRE goals.

The Different Types of FIRE

One of the largest misconceptions about the FIRE Movement is that there is only one way to do it.

When in reality, there many different types of financial independence that we can pursue that align with different lifestyles and investing strategies.

Here are the 5 most common ways to FIRE:

Lean FIRE

Lean FIRE is achieved when our portfolio is able to cover our essential expenses.

The best way to think of Lean FIRE is that it represents the point where our portfolio can provide a basic safety net that is able to cover our basic expenses including: housing, food & utilities. However, a Lean FIRE portfolio would not be able to support additional discretionary budget categories such as taking yearly vacations, etc.

Using our example from earlier, let’s assume that someone’s Traditional FIRE number was equivalent to $40,000 / year and that $25,000 of that annual budget consisted of essential expenses. Assuming a 4% withdrawal rate, their Lean FIRE number would be equivalent to $625,000.

Traditional FIRE

Traditional FIRE is achieved when our portfolio is able to cover our current lifestyle including both essential and discretionary spending. When someone says they are working towards FIRE, it is usually this type that they are referring to.

That is because this portfolio would enable someone to leave their job while being able to support their current lifestyle. Our hypothetical example from earlier of the $40,000 / year ($1,000,000 portfolio) would be considered a Traditional FIRE Number.

Fat FIRE

Fat FIRE is achieved when our portfolio can cover a higher standard of living than our current lifestyle.

There are many reasons to potentially consider Fat FIRE including:

• Wanting more discretionary spending later (more traveling, etc.)
• Mitigating potential impacts of market volatility on our portfolio

The major disadvantage to Fat FIRE is that it is the longest type to achieve. However, if our portfolio is large enough, it may only require a few more years of compound interest to achieve Fat FIRE.

As an example, assuming a 4% safe withdrawal rate, if someone’s traditional FIRE number is $40,000 / year ($1,000,000 portfolio) then a potential Fat FIRE number could be $70,000 / year ($1,750,000 portfolio).

Barista FIRE

Barista FIRE is achieved when our portfolio can fund a portion of our lifestyle today, however we would have to fund the rest of our lifestyle via working a part-time job.

An example of this is someone who works at Starbucks part-time in order to receive a supplemental income as well as access to benefits such as health insurance.

If someone’s annual budget was $40,000 / year and they could make $20,000 / year via a part-time job, then they would only need to have a $500,000 portfolio to support their lifestyle. The key here is that someone who first have to accumulate a $500,000 portfolio before this could be an option.

And while this type of FIRE includes still having to work, it does substantially cut into the amount of money that one needs to save. The result is less years of having to save as well as realizing some of the benefits of FIRE today vs in the future.

Coast FIRE

Coast FIRE is achieved by aggressively saving early on and allowing compound interest to grow our portfolio over time in order to hit our FIRE number.

The benefit here is the earlier we start, the less overall saving we have to do. Once we hit the point where our money is able to grow on its own via compound interest, we can then have the peace of mind of knowing that our retirement is already funded.

Coast FIRE is similar to Barista FIRE in the sense that it enables us to enjoy more of our money today.

Final Thoughts

The truth is that working towards FIRE can sometimes be a long and difficult journey. Especially considering:

• The challenge of maintaining a high savings rate
• Investments potentially not performing as well as expected
• Emergencies happening

At the end of the day, there is risk associated with any decision that we make. However, that shouldn’t stop us in our pursuit of building the lives that we want to live. As a result, before starting our path to financial independence, it’s important to ask ourselves “Why FI?”

• Do we not want to work until we are 65?
• Do we want to pursue a passion project?
• Do we want to spend more time with our family?

Personally, the answer to my “Why FI” is that I want to have full control of my time in order to spend as much time as I can with my wife, daughter and our silly dog.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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