There are 3 main types of early retirement, and the only difference is how much you spend

There are 3 main types of early retirement, and the only difference is how much you spend

October 15, 2020
  • Financial independence, retire early (FIRE) is often broken down into three categories: FIRE, Lean FIRE, and Fat FIRE.
  • Lean FIRE is when someone has saved up 25 times their annual expenses and lives on a "lean" budget, spending less than the average American (around $60,000 a year). 
  • By contrast, someone who achieves Fat FIRE spends more than the average person.
  • Pursuing a Fat FIRE number — regardless of how much you actually plan to spend — can afford greater flexibility, freedom, and protection in early retirement. 
  • A lesser-known approach is Coast Fire, where you save to a target number by a certain age and then stop saving and let compounding gains "coast" you to your ultimate target retirement nest egg.
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The FIRE (financial independence, retire early) movement is largely a numbers game.

The formula is simple: A person needs to save up and invest 25 times their annual spending in order to become financially independent, assuming they plan to withdraw 4% of their nest egg each year thereafter.

At that point, they no longer need to rely on a paycheck coming in to afford their lifestyle and they have the freedom to retire early. There are a few variables at play, but the largest one in this formula is spending.

How much you spend can vary drastically depending on the size of your family, where you live, what you do in your free time, and so much more. One woman may want to be able to retire early on $100,000 a year in New York City, while a couple in the rural Midwest is happy living on $40,000 a year. As such, their target numbers will be wildly different.

To explain these variations, the online FIRE community categorizes early retirement in three ways: FIRE, Lean FIRE, and Fat FIRE.

What is Lean FIRE vs. Fat FIRE?

The average US household spends about $61,000 a year, according to Census data. Lean FIRE is when someone has saved up 25 times their annual expenses — the traditional benchmark for financial independence — and spends less each year than the average American.

Fat FIRE, by contrast, is when someone who has reached financial independence spends more than average.

Using the example above, the New Yorker would be pursuing Fat FIRE, since she's living on $100,000 a year. Ultimately she'd need $2.5 million invested before leaving work to maintain the same standard of living in early retirement ($100,000 x 25 years).

Meanwhile, the Midwestern couple lives on far less than the typical household, so they'd be considered Lean FIRE and would only need $1 million ($40,000 x 25 years) to retire early. In other words, they're frugal.

"Fat FIRE is early retirement for the entrepreneurs and high-income professionals that choose not to fully embrace frugality or give up certain creature comforts that have become customary. It's financial independence for the well-heeled," explains Leif Dahleen, a former anesthesiologist who retired at age 43, in a post on his blog, PhysicianOnFIRE.

"Whereas plain vanilla FIRE and Lean FIRE may require certain choices — I would never call them sacrifices — Fat FIRE allows those who have undergone some lifestyle inflation and have spent some time on life's hedonic treadmill to maintain that particular standard of living," Dahleen writes.

Fat FIRE may offer more flexibility in early retirement

There are benefits and drawbacks to both Lean FIRE and Fat FIRE. Some, including Dahleen, argue that pursuing a Fat FIRE number — regardless of how much you spend in the present — can afford greater flexibility, freedom, and even protection from unexpected events in early retirement.

"With a Fat FIRE portfolio, you can do things others can't afford to do, at least not as often," Dahleen writes. "You can travel regularly during the high season, even flying first class if it suits you. You can pick up a Tesla or an Acura NSX because you want one and you know it won't derail your FIRE plan."

He continued: "You also have a better ability to trim the fat when times are tough. If our economy hits a stormy patch and stock values plummet, who's got more discretionary spending in the budget to cut? That's right, the Fat FIRE family."

Ultimately, it's up to you to decide how you want your lifestyle to look in early retirement and how much it will cost. If you want some wiggle room, you may choose to aim for Fat FIRE figures. If you're ready to leave work as soon as possible and are prepared to live frugally, or you have passive income streams set up, the quickest route to early retirement is probably Lean FIRE.

A different approach: Coast FIRE

If retiring early doesn't appeal to you so much as the financial independence part — i.e. not having to worry about putting money away for future needs — then you might consider Coast FIRE.

As Kevin Panitch, founder of the website Just Start Investing, explains in an article on Business Insider, "Reaching Coast FIRE means you no longer have to save money to reach retirement. The difference between Coast FIRE and regular FIRE is that with regular FIRE, you no longer need income to retire. With Coast FIRE, you still need income to cover expenses, you just don't need to worry about saving money for retirement."

To achieve Coast FIRE, you need to choose what amount you need for retirement and exactly when. Panitch uses the example of retiring at 65 with $1 million. Now you work backwards: If your money is invested and growing by 5% annually, you need about $200,000 saved by the time you reach 30. Once you hit the mark, you won't need to save another dime for retirement over the next 35 years. "You can coast to retirement," he writes.

This strategy can also be applied to a true early retirement — say, age 50 — but your early-in-life savings mark will be higher as a result.

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