The FIRE movement is a personal finance movement that focuses on saving aggressively in the early years of your working career in order to each financial independence. FIRE stands for Financial Independence, Retire Early.
The goal of FIRE is similar to our mission here at The Budget Brigade: to allow followers options in how they choose to spend their time. People who achieve FIRE own their lives, not just their stuff.
- The FIRE movement focuses on saving aggressively in the early years of your career in order to reach Financial Independence in order to Retire Early
- Followers typically focus on frugality and a minimalist lifestyle in order to reduce their cost of living and associated expenses, allowing for savings rates of 40% or greater of their annual income.
- Many FIRE followers use the 4% rule (also known as the rule of 25) as a guideline to calculate their projected FIRE number for financial independence
With the federal government continually pushing back the retirement age that dictates tax-advantaged retirement accounts such as IRAs and 401(k)s, the FIRE movement has gained increasing popularity. We have no doubt that the weight of financial burdens such as student loans, car loans, credit card debt, and mortgages plays into the desire for financial independence. Seeing the stress that money struggles bring to families was a large motivator for our FIRE journey.
FIRE is a long-term financial plan. As nice as it would be, most people can’t wake up tomorrow and decide they want to retire in five years. Or rather, they can, but they aren’t likely to succeed if they haven’t laid any foundational financial work to get them there. FIRE takes discipline not just in saving for retirement through investing strategically and continually, but also focusing on maintaining a low cost-of-living lifestyle.
Makes sense, right? The less money you have going out to categories such as debt, housing, and entertainment, the more you have left in your monthly budget to save.
What Does FIRE Really Mean?
Financial Independence
FIRE can have different definitions. Many people jump on the FIRE bandwagon because they hate their job and don’t want to work anymore.
While we want people to have the financial freedom that affords them the ability to leave a bad situation, we hope you’ll consider FIRE as something to look forward to, instead of a means to run away from something else. We don’t want you churning and burning at a job you hate for the next seven years just so you don’t have to work anymore. Why suffer through that terrible situation for seven more years? That will leave you fried and hating your life. Wouldn’t it be better to get a job you enjoy now that fits your lifestyle and needs, even if it means you have to work another year or two longer before you can retire?
Everything in life in a balance of opportunity costs, which we’ll show a little more with the different types of FIRE below. When designing your FIRE evacuation route, we want you to be frugal but content. We would love for you to save for retirement so you know you’ll be able to live your best retirement life while still enjoying your best life now. It doesn’t have to be either/or, though it can require painting a slightly different picture of what your best life is.
Retire Early
The traditional definition of retirement is to quit working. While some people can golf and fish five days a week and be perfectly content with their lives, it isn’t a situation that suits everyone. My husband and I get stir crazy if we don’t have a purpose or project to work on after about a week. For us, retirement doesn’t mean we’re going to stop working. It means we can quit if we choose.
For us, Financial Independence, Retire Early means we will be able to work doing whatever we want for as many hours a week as fits our lifestyle, while getting to travel and spend time with family and friends. We will get to follow our passions and continue to build additional skillsets we enjoy, sometimes while getting paid for our time.
Different Types of FIRE
Several types of FIRE exist, depending on your goal of what retirement looks like. This is why we recommend building your goals and vision on the first rung of our FIRE ladder. Unless you are a super saver by nature, it’s hard to stick to a FIRE plan when you don’t know what your goal is.
I’ve learned this first hand. A goal of saving 50% of our income just because my husband thinks that’s a good benchmark Polite pass, I’m heading to Books-a-Million, but thanks for the suggestion. But a goal of saving 50% of our income so I can travel the country in a camper while working on The Budget Brigade full time? That makes me more willing to stay out of bookstores.
Retirement and even financial dependence are like other aspects of finance—personal. Paint a vivid, specific picture of what your dream retirement looks like. Once you have a goal, you can work backwards to see what you need to do to achieve your FIRE goal.
We cover some of the most popular versions of FIRE below to help you develop your vision.
Regular FIRE
The standard FIRE maintains a comfortable standard of living—generally tagged between $40,000 and $100,000 of annual expenses a year—that often follows a withdrawal rate on investments of 4%. More of the 4% rule below.
With this regular FIRE, you don’t “retire” or reach financial independence until you have enough in savings for this safe withdraw rate.
Barista FIRE
With barista fire, you retire early but maintain a part-time job—such as a barista in a coffee house—in order to supplement your retirement investing income. This way, you don’t have to rely on your investments as your only source of income for the first several years or decade(s) of your retirement.
Neither one of us could ever imagine not doing something for work, so this is part of our FIRE vision. While I work part time by American standards (though not by European ones), my husband still works full time and I spend the additional hours a week on my entrepreneurial goals with creative writing. Since we can’t afford to both work part time year, we haven’t hit this FIRE threshold yet.
Barista FIRE attracts a lot of attention because it allows for flexibility in career and a better work/life balance faster than people can attain regular or fat FIRE. If both spouses are working part time, it’s important to consider health insurance premiums in your FIRE budget as few part-time jobs provide employer-subsidized health insurance. Depending on your barista FIRE income, plans on the marketplace can be pricey, as any self-employed individual can confirm.
Lean FIRE
Lean FIRE is for the ultra frugal. We’re talking combining deodorant remnants into new sticks and eating ramen for life frugality.
While we’re all about frugal fun, followers of lean FIRE take this to an extreme in all aspects of life. Unlike barista FIRE, they hope to live off their retirement income but plan on saving up a lot less than our regular FIRE and fat FIRE folks. This translates to people who live off around $25,000 a year in their lean FIRE retirement.
We’re all about you do you, but this one seems a little cre-cre to us. Why save and invest for decades of your life to then have to spend the decades of your retirement stuck on beans and rice and PB&J? I want to enjoy my golden years, just like I want to enjoy our lives now.
If you can find contentment in $25,000 a year for the rest of your life, we applaud you. To us, this is the most extreme of the FIRE movement variations, as it doesn’t leave room for margin when life rears its head and knocks your teeth out. In these situations, which happen to everyone and their mothers, lean FIRE followers have to either dip into their retirement at an unsustainable rate or get a part-time job… which looks an awful lot like barista FIRE, but without the conscious choice upfront. We’ve found that margin in your life and your money is a key to content and peace, so we recommend building that into your personal FIRE plan.
Fat FIRE
Fat FIRE is for those who love to YOLO. In this most lavish of the FIRE variations, you get to live comfortability without sacrificing lifestyle. These FIRE followers can make more off of their retirement investing than they made on average during their working years.
There’s no need for part-time work or part-time partying under a fat FIRE variation. Here, you can live where you want and enjoy the lifestyle you want.
Sounds like the dream. Why wouldn’t everyone fat FIRE?
Because the more you want to live off of in retirement, the more you have to save aggressively for that lifestyle.
We dig into the numbers next.
How Much Do You Need to Retire in FIRE?
Your version of what FIRE will look like is personal, so what you’ll need in order to fund that goal is personal as well.
There are, however, two popular and inter-connected rough estimates people use to get an idea of what they need to achieve their version of FIRE: the 4% rule and the rule of 25.
The 4% rule states you can withdraw 4% from your invested retirement savings safely without running out of money during your retirement years. Since no one wants to end up broke as joke and eating cat food at 93 years old, this has become a standard guiding principle in personal finance circles.
Where Does the 4% Withdrawal Rate Come From?
In 1994, financial advisor William Bengen published the paper Determining Withdrawal Rates Using Historical Data (1) in which he came up with the 4% rule. To develop the 4% rule, Bengen looked at historical returns for money invested in the stock market and compared it with inflation rates to see how to withdraw safely from investments by skimming off the growth instead of dipping into the amount invested. To super simplify his paper:
safe withdrawal rate < average market returns – average inflation rate
So if the stock market on average returns 10% a year and average inflation is 3.5% annually:
4% < 9.5% – 3.5%
While your money loses 3.5% of its value thanks to inflation, a 4% withdraw rate on 9.5% growth still means, on average, you’ll have enough growth that your retirement investing will continue to grow. It’s more complicated that this simple math, but we don’t want to put you to sleep.
Though we’ve got a little more math to go. Sorry non nerd, hang in there.
When Bengen reviewed the data, 4% was the golden ticket to the Willy Wonky factory, at least for a projected 30 years in retirement.
So if you have $1,000,000 in retirement (not too shabby, right?), you could safely withdraw 4%, or
1,000,000 * 0.04 = $40,000
An annual withdrawal of $40,000 is the example threshold used above for regular FIRE. This would suggest that to FIRE properly, followers of the FIRE movement need at least $1,000,000 in retirement investing. This is where variations such as barista FIRE and lean FIRE come in to assist the early retirement timeframe by lowering the need from $1,000,000 in retirement savings. It’s also why fat FIRE isn’t a likely possibility for a lot of average Jane and John Joneses.
The Rule of 25
The rule of 25 is the 4% rule in reverse. From the rule of 25 lens, you look at your target income you want in retirement to tell you how much you need invested in order to retire (by multiplying it by 25). So if you wanted $40,000 to live off of in your FIRE retirement, you would need:
$40,000 x 25 = $1,000,000
Ta-da! See, it’s the same math in reverse. For the rule of 25, you multiply your desired income to get your retirement balance required. For the 4% rule, you divide your retirement balance to see what you can withdraw.
But Wait, There’s More!
The rule of 25 and the 4% rule have assumptions and limitations that don’t make them perfect predictors of a successful FIRE or retirement in general. Anyone who has money invested in the stock market or real estate can attest that while the market may average around 10% growth annually, it isn’t 10% every year. Recessions can put a deep divot in your retirement green if you don’t have a high investment tee. (Fore!)
The longer you plan to live off your retirement savings, the more likely you’ll want buffer to help weather the stock market storms.
What We Love about the FIRE Movement
The FIRE movement is a great way to get people focused with intentionality on their personal finances. A lot of people struggle to get a grasp on their budgets and debt, but everyone wants the opportunity to retire at some point in their lives. By looking forward, the FIRE mentality can motivate people to start planning today. The longer you wait to get your personal finances on track, the longer your train is going to cho-cho down the tracks to the retirement station and the harder Thomas the Tank Engine has to work to get you there, no matter how much he thinks he can.
A FIRE mentality also sets a clear goal, and we’re firm believers that goals are the first step to success. If you haven’t set your own financial goals yet, check out our FIRE ladder to help you climb your way to FIRE freedom.
Key Reminders When Considering Joining the FIRE Movement
If your eyes glazed over with the math above, focus on this section. When you’re putting together your plan for financial independence, here are some key reminders to keep in mind.
- Freedom FIRE looks different for everyone
- Your freedom FIRE vision may evolve as your goals change
- We never hear people complain they wish they’d saved less for retirement (this is why lean FIRE scares us)
- FIRE shouldn’t be about starving yourself of all joy and fun; it’s about focused intentionality by balancing living for today with saving for tomorrow and spending your money on what actually matters to you, trimming the excess from your budget
- The cheaper you can keep your lifestyle, the faster you can FIRE (this is why we love the minimalism movement as well)
Keys for a Successful FIRE
Ready to start your FIRE journey? Here are a few final tips we have to help you plan and save for a successful FIRE.
- Start saving as early as you can
- Avoid lifestyle creep as much as possible; it’s a lot harder to peel back lifestyle once you’ve built it up, and every dollar you spend on needs cuts into your savings opportunities (this is why we recommend adjusting the 50/30/20 budget especially for followers of the FIRE movement)
- Don’t make yourself miserable for these decades working toward retirement; career burnout is a primary driver of wanting to retire (AKA quit your job) earlier and earlier
- Track your progress, but not so often that dips in the market stress you out (we check our FIRE progress once or twice a year)
- Make sure you’re capitalizing on compounding growth
- Balance tax-advantaged accounts with a brokerage account to build a ladder between your retirement and the government’s defined retirement age for penalty-free withdraws from retirement plans
- Ease into FIRE retirement to make sure your planned FIRE goal is the one you’ll actually enjoy
We wish everyone success on their FIRE journey, regardless of what your destination looks like. Join our budgeting and personal finance Facebook group to share your progress and questions along the way.