FIRE vs. LeanFIRE vs. FatFIRE: What Does It All Mean?

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We’re not talking about a campfire exactly. Rather, FIRE is a movement to retire early with enough money to outlast your life expectancy.

What is FIRE and how does it work?

What are the differences between FIRE, LeanFIRE and FatFIRE?

And, how does one achieve FIRE status?

Here’s a description of the FIRE movement and what you need to know to achieve FIRE status.

→ Related reading: 9 Steps to Financial Independence (How to Retire Early)

What Is FIRE and What Does It Stand For?

Perhaps you’ve heard of Vickie Robin and Joe Dominguez? They co-authored “Your Money or Your Life”, a popular and best-selling book on personal finance. In the book, the concept of weighing your time spent working for money and paying your bills versus the amount of time available to you in life is discussed as a way to judge and calculate what is needed to save for and retire at your desired age.

The concept sparked the FIRE movement, which stands for Financial Independence, Retire Early.

In other words, save as much money as you can, as fast as you can, so that you can retire ahead of schedule and live the rest of your life in financial freedom. Achieving FIRE status often means saving enough to retire within as short as 10, 15 or 20 years, depending on your situation, and retiring well ahead of schedule.

Following some basic calculations and retirement savings strategies, one can determine the amount of money they will need to retire comfortably, and therefore calculate how much they need to save each week, month and year to achieve FIRE status.

Although “financial independence” or “financial freedom” means different things to different people, the typical definition among people within the FIRE community is a net worth 25x your annual living expenses. So if you spend $50,000 per year, you would need a net worth of $1,250,000 in order to reach financial independence (the value of your home is usually excluded from your net worth for this purpose).

This definition is based on the Trinity Study, which found that you should be able to safely withdraw 4% of your net worth per year.

Of course, there are a lot of other factors that may influence your true financial independence, but this gives you a quick explanation.

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How Does FIRE Affect Your Finances?

Some may ask, how is one to retire early in just even 10 or 15 years’ time? Is it even possible?

There are a few things to consider when seeking to become financially free and retire early. Some of them are:

  • Consider how much debt you currently have, and how fast you can pay it off.
  • Consider what living conditions you will want when you retire. Do you plan on renting an apartment or owning your home? If you plan to own, do you anticipate still having a mortgage or do you plan to own your home free and clear?
  • Do you plan to live on a higher income in retirement than you live on now? Or do you anticipate living on a lower income in retirement as compared to your current income?

These types of questions will help form your objectives for determining how to save for retirement and even retire early. Seeking to achieve FIRE status takes an aggressive approach to saving money as fast as possible, in order to become financially free for the better part of your life. Thus, a rigorous savings and investing approach is needed in most cases to achieve FIRE

Consider these following points on what it will take to save enough for retirement in just 20, 15 or even 10 years:

  • Those seeking financial independence to retire early often save 50% or more of their total income. This often means living frugally now to save as much as possible.
  • Having high amounts of debt will make it very difficult to save enough for retirement, especially if you plan to retire early. Thus, paying off debt as fast as possible is advisable.
  • An overall minimalist type of lifestyle is sometimes needed in order to save these amounts of your income, meaning you drive a less expensive car, live in cheaper housing, commute for travel whenever possible, and seldomly eat out at restaurants.

Perhaps the hardest part to overcome, is your emotional well-being. If you make $60,000 per year and know that you can only spend $30,000 and save the other $30,000, chances are there may be some tough times emotionally to keep your mind right. But it has been done, and you certainly can do it too!

→ Related reading: 7 Different Paths to Financial Independence

3 Versions of FIRE, & How to Calculate Needed Savings

It’s good to note that the FIRE movement has multiple different levels or stages of achieving FIRE. Each FIRE category is a reference to approximately how much money you can live on in retirement, which helps determine how much you need to save up. The three different FIRE categories are:

  • LeanFIRE
  • FIRE
  • FatFIRE

We’ll cover in detail what each category entails below. Each is a varying degree of financial independence and depending on where you feel most comfortable will determine the approximate path to take.

Below is a brief explanation of each of the different kinds of FIRE. After which, we’ll take a look at a fictional example to show you how it is actually possible to save $1,682,325 in 15 short years, to give you an idea of what you could expect to achieve FIRE with your retirement savings number (assuming it may slightly vary from the above example).

How to Calculate the Retirement Savings Needed to Achieve FIRE

There are essentially two stages to properly calculate what you need to save to retire earlier than the average person.

First, we need to calculate how much you need to have saved up in order to retire, and second, we need to calculate how much you need to save each year in order to achieve your savings goal. We also need to take into consideration investment returns to accurately plan to achieve FIRE status. Here’s how it works.

Calculate How Much You Need to Save To Retire

The first step is to figure out how much money we need to save in order to retire comfortably. If $50,000 is enough to live on, we need to figure out what number we need to save to in order to have enough money for retirement, so that our money will outlast our life expectancy. Here’s how to do this:

  1. Determine how much you can comfortably live on in retirement (in this case, we decided $50,000 to illustrate).
  2. Using a financial calculator, or an online financial calculator, we want to calculate how much money $50,000 will be equal to in 15 years from now given an average inflation number of 2%.
    • In the financial calculator, input $50,000 as the PV (present value), 15 as “N” or number of periods, 2% as the I/Y or Interest/Yield, $0 as the annual payment or PMT, and then press compute followed by FV (Future Value). Your answer should be approximately $67,293.
    • If you don’t have a financial calculator, visit Calculator.net for an online “future value” financial calculator, and type in the following values under the FV tab: N (#of periods) is 15, Start Principal is $50,000, I/Y (Interest) is 2% (inflation), $0 is PMT (Annuity Payment) and select PMT made at the beginning of each compound period. Press “Calculate” and to the right you will see the FV (Future Value) is equal to $67,293.
    • This means that $67,293 fifteen years from now will have the same buying power as $50,000 does today, based on inflation of 2%.
  3. Since we need to calculate your retirement savings based on the value of money when you retire, we will use $67,293, your desired annual income in retirement (aka $50,000 income in today’s dollars, but fifteen years from now). A general rule of thumb is to expect your retirement savings to be equal to 25 years’ worth of savings. This works because if we assume you withdraw 4% of your retirement savings, which is based on the results of the Trinity Study mentioned earlier.

To live on a $50,000 per year income in today’s dollars (aka $67,293 fifteen years from now), you need to save approximately $1,682,325 to retire comfortably.

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Determine How Much Savings Per Year Is Needed to Achieve FIRE

Now that we know you need to have $1,682,325 saved up in order to retire in 15 years and live on a $50,000 income, now we want to determine how much we need to save each year to achieve that. One would naturally think they need to simply divide the total savings number by 15 years, but keep in mind that investing your savings will speed up the process.

Thankfully, the process is easy because we simply use our financial calculator or Calculator.net to determine our annual savings. Essentially, we are taking the end retirement savings needed, and calculating how much savings is needed given an average investment rate of return. Here’s how it works:

  1. Using Calculator.net’s financial calculator, go to the Payment tab of the finance calculator. This is the calculator used to calculate payments needed to achieve a savings goal, given an invested rate of return.
  2. Type the following values into the calculator (note that the same values would be input into your financial calculator if you wish to do this manually with a calculator):
    • FV (Future Value): $1,682,325 (this is your savings needed to retire, thus the term “Future Value”
    • N (# of Periods): 15
    • Start Principle: $0 (or you can type in your total amount already saved, but for this example we assume nothing is yet saved).
    • I/Y (Interest): 6% (this is your expected investment rate of return that you expect while saving for retirement.
    • Select that the PMT is to be made at the “beginning” of each compound period.
    • Click “Calculate” to get $68,186.16.

This is the amount needed to save each year to achieve retirement in 15 years with an expected retirement income of $50,000. Does that sound like a number you can achieve in 15 years from now given your current savings amount? If that seems a bit daunting, that’s because it is. Condensing a 45-year career into 15 years and having enough money in order to require comfortably will require a lot of saving. 

NOTE: The numbers used to calculate your savings needed to achieve FIRE may vary. For example, consider the following:

Starting Net Worth: The calculation above assumes zero net worth to start. The numbers look much better if you currently have some money saved. For example, if you’re starting with $200,000 and all of the other variables are the same, you’ll need to save $48,759.21 each year.

The Rate of Inflation: One may want to assume a 3% average rate of inflation instead of 2% as used above. A higher inflation rate in the calculation will result in a slightly higher amount needed to save for retirement, and the opposite is also true if you choose to use a lower rate of inflation, your retirement savings needed will be less than the example above. To alter this amount, simply input your expected inflation rate in the I/Y section of your financial calculator or the respective section on Calculator.net.

The Amount of Time Needed to Save Until You Reach FIRE Status: In this example, we assumed you need 15 years to save for retirement. This number will affect the final amount needed to save for retirement: 1) If you expect you need more or less time to save, your calculation of the future value of today’s income will vary slightly, and 2) If you expect you need more or less time to save, your calculation on how much you need to save per year will also be slightly altered. To change the amount of time needed to save, first replace the values of “N (# of Periods)” on your financial calculator or on Calculator.net to the desired years to save, and second, be sure to use the same number of years to calculate how much you need to save per year.

The Investment Rate of Return Expected: To some, an investment return of 6% annually may seem low. While I believe it is a realistic number, it’s certainly possible that you could do better. A higher rate of return would have a big impact and will change the calculations significantly.

How to Achieve LeanFIRE

Ok, so if the previous section seems depressing and you feel like this whole FIRE thing is unrealistic, you may want to consider LeanFIRE.

LeanFIRE is the category of the FIRE achievers looking to save enough for retirement expecting to live on a more moderate income. Depending on who you talk to, this category may suggest you plan to retire with an income anywhere from as low as $25,000 per year or up to $50,000 per year. The point is, LeanFIRE is the category for those expecting to save on smaller incomes, less ability to save, and are comfortable living with a smaller budget in retirement.

Following the same scenario and process above to find out how much you need to save for retirement, we can estimate that, on the lower end, you can achieve FIRE with even a $35,000 income following the calculations below. Use the future value calculator at Calculator.net to determine how much $30,000 will be worth in 15 after 2% inflation:

  1. $30,000 is your desired income during retirement. You plan to retire in 15 years.
  2. Using Calculator.net, you type in the following values to determine what $25,000 will be worth 15 years from now after inflation:
    • N (# of periods): 15
    • Start Principle: $25,000
    • I/Y (Interest): 2%
    • PMT (Annuity Payment): $0
    • Select the option to have PMT made at the “beginning” of each compound period
    • Your FV result in the graph should show $33,647. Again, this means that $25,000 today will have the same buying power as $33,647 in 15 years.
  3. $33,647 x 25 years of income = $841,175 needed to save to achieve LeanFIRE.
  4. When using the payment calculator to calculate your annual savings needed assuming a 6% rate of return and 15 years to save, your approximate annual savings needed is $34,094 per year.

While $34,094 is still a lot of money, it’s more realistic. Plus, this calculation still assumes zero net worth as a starting point, 6% rate of return, and 15 years to reach the goal. The numbers can look a lot better if you have some net worth as a starting point, if you’re able to earn more than 6% interest, or if you are willing to take more than 15 years to reach your goal.

Also keep in mind that these calculations assume you will have no income in retirement. If you’re willing to have a side hustle or do something to make money, even if it’s a small amount, that income can have a significant impact on the calculations as well. Most people who pursue FIRE are planning to have some sort of income from a job that they enjoy, even if it’s just part-time.

How to Achieve FatFIRE

If LeanFIRE is a lower expected retirement income, regular FIRE is an average income, then FatFIRE is referring to those who expect to live on a much higher than average income in retirement. This category often includes doctors, physicians, surgeons, investment bankers, business owners, attorney’s, accountants, etc. whose income is in excess of $100,000 per year, and they expect to live on at least that much in retirement.

Here is how much is needed to retire using the same steps:

  1. Using the future value calculator with the same steps used above, you can find out that in 15 years $134,587 will have the same value as $100,000 today, assuming 2% inflation.
  2. $134,587 x 25 = $3,364,675, which is the amount you will need to save to acheive FatFIRE
  3. You’ll need to save $136,373 per year for 15 years to reach FatFIRE (assuming zero net worth to start, 6% rate of return, and 15 years of time)

With these numbers, you can see that FatFIRE is unrealistic for most people. Of course, most people pursuing FatFIRE already have a significant net worth, so that will make the required annual saving much smaller. Also, most people who achieve FatFIRE have a very high income or make money in chunks (like selling a business) that allow them to grow their net worth quickly.

Why Does It Matter Which Category of FIRE You Are Pursuing?

As you can see, the FIRE movement approaches retirement at a very aggressive rate. This is because the goal is to achieve more time in life living financially free, rather than spending most of your life working. The objective is to save enough money as fast as possible in order to live maximize your time spent doing the things you love. Thus, the faster you retire, the more time you have available to enjoy life on your own terms.

Why does it matter which category of FIRE you pursue? Because the category of FIRE you pursue will determine how much you need to save for retirement, how fast you can save it, and what type of lifestyle you want to live.

Imagine A Life After Achieving FIRE…

Perhaps you are intimidated by the amount of money you need to save for retirement from the calculations above. You’re not alone. But one thing is for sure, it can be done, and people are doing it every day!

One tip to help keep the motivation strong is beginning with the end in mind. Imagine your life after you’ve retired. You have the ability to spend your time doing what you love most, with who you love most, for as long as you want, wherever you want. If that’s not enough motivation to retire early, then you’re probably best working your whole life anyways! (only half joking…)

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FIRE vs. LeanFIRE vs. FatFIRE

FIRE vs. LeanFIRE vs. FatFIRE: What Does It All Mean? FIRE stands for financial independence, retire early, but there are different types of FIRE and this article covers the details. LeanFIRE involves living on a small amount of money, usually with a very frugal or minimalist lifestyle. FatFIRE allows you to live on a six-figure income in retirement, but requires you to have more money saved. #financialindependence #fire #fi #retirement #money #personalfinance