Retiring early is an aspiration that many individuals can get excited about.  Vicki Robin and Joe Dominguez, in their best-selling book, “Your Money or Your Life”, arguably introduced the concept of early retirement to the mainstream culture decades ago.  Today, thousands of individuals are actively pursuing their goal of becoming financially independent and quitting their nine-to-five grind.

According to one Gallup study, individuals in their early 20’s were generally optimistic about their ability to save for retirement before age 60. However, those same individuals curbed their early retirement enthusiasm when later surveyed in their 30’s as savings and other lifestyle realities made it increasingly clear that early retirement might just be an elusive goal.

Even so, data from Hearts & Wallets suggests that one out of every six Americans surveyed by the group expects to retire before the age of 55 – ten years sooner than the standard retirement age of 65.

This data illustrates one key point when it comes to the concept of retirement: individuals across all walks of life increasingly want to start the journey to become financially independent and retire early, rather than walking down the path of a traditional retirement later on in life. To be sure, retiring early has become so popular that it’s even earned its own name: the FIRE movement.

So, what is FIRE?  Well, the acronym FIRE stands for ‘financial independence, retire early,’ and the goal is to create an opportunity where you can stop chasing an unfulfilling career and live life on your terms without being tied down to the demands of a full-time job. Many individuals have accomplished this goal by living frugally through their working years, carefully planning out their finances, and prioritizing saving and investing over other frivolous lifestyle activities.

Does becoming financially independent and retiring early sound appealing to you?  And how would it feel to hand your boss a resignation letter today, knowing that you would be financially set to live your best life however you choose tomorrow?  If you’re in the camp that’s excited about early retirement but not sure that you can commit to a restrictive savings plan, you can take heart knowing that there are several options for achieving FIRE.  Certainly, the idea of retiring early may seem like a pipe dream to some individuals. Still, with proper planning and the determination to make it happen, early retirement may be closer than you think. 

Understanding the FIRE Movement

Now some individuals might get the impression that in order to achieve FIRE, one must live a spartan lifestyle and disown nearly all earthly pleasures.  While such an approach may work for some individuals, the truth is that we all have varying degrees of tolerance for postponing consumption today so that we can save for tomorrow.  That’s why over the past couple of decades, some individuals have developed a few different ways to achieve financial independence.  These include traditional FIRE, LeanFIRE, FatFIRE, and Barista FIRE.

Let’s first talk about traditional FIRE.

Traditional FIRE

So, what is traditional FIRE?  Well, it’s the most basic way to achieving financial independence and retiring early.  The concept is simple: identify your early retirement goals, calculate your financial independence number, then save as much of your income as possible.  Traditional FIRE is centered on the idea of acquiring enough income-producing assets, like financial investments or rental property to produce a steady stream of income to cover living expenses for the rest of an individual’s life. 

Achieving FIRE along this path often involves living a somewhat traditional lifestyle while finding ways to save a large portion of money received from a traditional job. An individual pursuing a traditional FIRE journey often has already achieved contentedness with their current lifestyle.  That’s why their goal is to focus their financial efforts on building up a nest egg that will help them maintain their current lifestyle for the rest of their lives.

LeanFire

Another way to retire early is by LeanFIRE.   Its very name suggests that this approach takes a more modest, frugal path to early retirement and requires living with a bare minimum budget in your current lifestyle, as well as in retirement.  Many households in this camp earn six-figure paychecks but spend only a fraction of their income to cover living expenses.  LeanFire is a genuine commitment and takes a different kind of mindset compared to the traditional FIRE path.

In fact, individuals pursuing this path often develop a minimalist mindset, finding ways to live off of less than $40,000 per year while developing a savings strategy centered around their financial retirement number.  For example, Joshua Fields and Ryan Nicodemus, who dub themselves “The Minimalists”, claim to have helped over 20 million people live meaningful lives by choosing to reevaluate their relationship with material wealth. 

Now, this path to FIRE may not be for everyone because it requires an individual to challenge their emotions and mindset to live a life well below their potential means. Nevertheless, LeanFIRE is still an attractive option because it provides one of the most accessible and quickest paths to early retirement.

FatFire

Next up, we have FatFire. How is FatFire different from LeanFire? Well, in many ways, FatFire is the opposite of LeanFire.  FatFIRE might be appealing for those individuals who can appreciate the finer things in life and would like to use their savings to experience a more extravagant retirement lifestyle.  Retirement income goals for individuals in this space typically start at around $100,000 per year.  Individuals taking the FatFire path are often high earners who spend their early years balancing quick career progression, a commitment to a disciplined savings strategy with acquiring that house by the lake or all the toys they’d like to enjoy in retirement while having the opportunity to travel when they’re finally able to quit their jobs. 

This approach typically requires more time to attain FIRE, but can make early retirement more enjoyable than LeanFIRE, which generally requires living on the bare necessities.  The idea here is to acquire financial and lifestyle assets that produce an income capable of covering your minimum living expenses while allowing you some room for additional spending as your lifestyle permits.

Barista FIRE

Now, similar to LeanFIRE, Barista FIRE focuses on living a minimalist lifestyle, acquiring revenue-producing assets, and counting on a side hustle to supplement your lifestyle income.  With Barista FIRE, there’s less pressure to save money like a minimalist.  Additionally, one often overlooked need for individuals on their journey to financial independence, and early retirement is covering the cost of healthcare.  While insurance marketplaces have improved accessibility, paying for medical coverage, especially for a family on the FIRE path, can be rather expensive. 

One thing that makes Barista FIRE attractive is the ability to work a less demanding job while having access to affordable medical coverage available through an employer-sponsored benefits plan.  Additionally, this path can help ensure individuals earn the 40 Social Security credits they need to become eligible for government retirement benefits, like Medicare and Medicaid.  Barista Fire is increasingly becoming a more common alternative to LeanFire, given that the idea is to have enough money saved and invested that you can quit your full-time job all the while working a less demanding side hustle that can help you cover some monthly expenses.

Planning for Early Retirement

Whether you want to live lavishly or are comfortable living a spartan lifestyle, the path of financial independence and the FIRE movement essentially comes down to living life on your terms without being tied down to an unfulfilling job.  And achieving this end almost always requires a little bit of planning.

So which path to FIRE is right for you?  Well, just like planning for retirement at age 65, to achieve FIRE it’s essential to define your near- and long-term lifestyle goals while at the same time having a clear understanding of your current financial situation.  Doing so will help you determine what steps need to happen first and what actions you need to prioritize.

The most significant difference between planning for traditional retirement and planning for FIRE is the time horizon. This means that to retire early, savings rates and investment contributions need to be maximized as soon as possible so you have enough money invested to draw income from.

Now, determining how much money you need to have saved can be a challenge.  That’s why in 1994, retired financial advisor William Bengen established a savings guideline called the 4% rule. This rule suggests that if you have 25x your annual living expenses saved, you can withdraw 4% from the portfolio and not run out of money for 30 years.

So, for example, if you need $75,000 per year to cover your lifestyle expenses in retirement, you’d need approximately $1.9 million saved and invested. This $1.9 million is what many in the movement would consider your financial independence number.

Now, rules of thumb are a good place to start.  Realistically, however, you’ll likely need to make some modifications to the 4% rule.  For example, you’ll likely need to account for a retirement time horizon greater than 30 years, varying inflation levels, life expectancy changes, variable spending, and rising medical costs as part of inputs to calculate a more accurate financial independence number. That’s why it’s essential to develop a plan that’s tailored for your unique goals, values, and desired life outcomes.

Outside of being able to retire early, one of the most significant benefits of planning for FIRE is that it requires you to think about the kind of life you want to live. That’s what makes Vicki Robin’s and Joe Dominguez’s work so appealing for so many people.  Too often, we fail to dream big and think about our future, but the exercise of planning for a post-employment life creates an opportunity to honestly think about what goals and experiences you want to accomplish in life.

Being able to retire early really comes down to asking yourself a few questions:

• What would my life look like if I didn’t have to work again?
• How soon do I want to be able to live such a life?
• What’s my financial independence number?
• What has to change in my life today to achieve this goal?

Once you get solid answers to these questions, you can begin working backward to determine the necessary savings rates and the action items needed to achieve FIRE.

How to Make It a Reality

While your lifestyle needs will play a significant role in deciding which FIRE path is appropriate for you, keeping expenses as low as possible while still maintaining a quality way of life is generally what makes FIRE possible. Based on the financial independence number you discovered in your planning sessions, you can then determine how much money needs to be saved each month and each year to hit that savings goal.

Even so, saving money is only a start to your financial independence journey. Investing is the most crucial piece of the FIRE puzzle because you need to put your money to work today so that it can quickly grow tomorrow. Depending on your situation, it’s generally recommended to make annual 401(k) contributions that at least qualify you for your employer match to take advantage of free money.  At the same time, keep in mind that if you do plan to retire early, you’ll need a source of savings to draw on to avoid penalties from the IRS. 

Being as debt-free as possible is also crucial to keeping expenses low and simplifying your lifestyle while in FIRE.  Remember, investment income is a reward you pay yourself for being a diligent saver. Interest on debt is income you pay to someone else for lending you their savings.

Even so, if you find yourself needing additional income, working a side hustle during your years of accumulation can help supercharge your savings and may also prove to be a fallback source of income after taking a step off the corporate ladder.

The Takeaway

Whether we’re talking about LeanFIRE, FatFIRE or BaristaFIRE, the common denominator among these early retirement paths is to take cash earned today and convert it into future cash flows for tomorrow.  Being financially independent with the ability to retire early is a dream that many people have. Even if you don’t desire to retire early, everyone can benefit from the fundamentals of the FIRE movement.

Planning out your future, being intentional with your spending, and investing for retirement are essential steps to evaluate whether you want to retire early or retire at the traditional age of 65. And that’s why working with the right financial planner can help you work through the numbers and build a plan to live life on your own terms, a reality.