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 LeanFIRE vs. 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.

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Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Fully Revised and Updated for 2018
  • Audible Audiobook
  • Vicki Robin (Author) - Vicki Robin (Narrator)
  • English (Publication Language)
  • 06/26/2018 (Publication Date) - Penguin Audio (Publisher)

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.

→ Related reading: 50+ Financial Freedom Quotes to Motivate and Inspire

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).

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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. And remember that not all assets are equal. Liquid net worth values cash and other liquid assets over non-liquid assets. 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.

→ Related reading: 50+ of the Best FIRE Blogs

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