FIRE – What in the world does that mean?

“FIRE – what the hell is that?”

This is the question a close friend of mine messaged me after I made a post sharing my FIRE numbers on instagram. So I thought it would be the perfect time to make a post all about the fire movement, the most common types and how I’m approaching it.

So first of all….. what the hell is FIRE?

Financial Independence Retire Early

FIRE is an acronym for the personal finance movement that is seeing people living extra frugally in their 20s and 30s, investing as much money as possible so the interest is enough for them to be able leave the workforce long before the stereotypical retirement age.

Financial Independence is the concept that you don’t need to work for an income as you can survive off money you already have. Essentially you are free from having to work, many use this freedom to follow their passions, travel or start their own businesses.

The Retire Early portion of FIRE is one that causes the most issues. Many feel that they can’t be apart of the FIRE movement because they don’t want to retire early! However, this is not a requirement! You don’t have to retire once you hit your FI number, rather you will always have the choice to.

4% Rule

The basic principle behind the FIRE movement is having enough money invested that the interest covers your cost of living. Historically the stock market has produced 10% returns each year – but most financial experts state 7% as a conservative aim. The FIRE movement relies on the principle that you could withdraw 4% of your total portfolio each year and essentially never have to tap into the original balance. Hence you simply need to get to a place where 4% is enough to cover your cost of living.

Therefore, to find your FI number you need to times your total expenses by 25 – as this would make your yearly expenses 4% of the total balance.

Types of FIRE

There are five commonly recognised types of FIRE which each differ ever so slightly. These all follow the general principle of the 4% rule but differ based on the total goal. You can either chose one and work towards that or work out each number and track them all – something that I did and shared on my instagram a few weeks ago.

Each type of FIRE suggests a different type of “retirement” – ranging from having your basic expenses covered but still working part-time to living on a 6-figure “salary”.

Regular FIRE

As the name suggests this type of FIRE is the most common – generally the one people aim for. Regular FIRE is where you withdraw enough money to continue enjoying your current lifestyle. To achieve this you need to work out how much you spend each year and then times this by 25. This means that each year you can safely withdraw the costs of your yearly expenses.

EXAMPLE: You spend on average £2k each month on living expenses = 24k each year. Following the 4% rule you need to times your total expenses by 25 = £600k. Therefore, you would need to have £600,000 invested to be able to safely withdraw £24k each year to cover your living costs.

Fat FIRE

Fat FIRE is the one for those that want to retire in luxury. It describes those that want to live on a bigger budget, i.e. over £100k per year. Obviously, this means your total FI goal will be much larger than if you were aiming for regular FIRE.

Lean FIRE

FIRE on a smaller budget is known as Lean FIRE. Your total FI goal will be lower than your regular FIRE one, making it a more obtainable goal. Perfect for those that wish to continue a frugal lifestyle.

Barista FIRE

This is where 4% of your total investment covers your basic living costs (i.e. housing, bills and food) but you still maintain a part-time job to cover the rest. This type gives you the freedom to choose a job that you truly enjoy without taking into account the salary, meaning you can truly follow your passion. It is also perfect for those that know they don’t want to retire but still want to pursue financial independence.

Coast FIRE

The final type is slightly different as once you reach this number you won’t be able to retire immediately. Rather, Coast FIRE describes the situation where you have enough money invested to retire at 65 (average) without adding another penny to your fund. Hence from that point on you are coasting your way to retirement 😉

How am I embracing FIRE?

Following the FIRE movement has inspired me to live frugally and begin investing. In 2021, I invested just over £14k into various index funds beginning my journey towards my version of FIRE, which is pretty much a mix of both Barista and Coast FIRE.

Currently, I have two separate FIRE goals – one that will allow me to become work optional at 30 and a more stereotypical retirement goal.

Goal #1: Becoming Work Optional

You might be thinking, why doesn’t she just follow Barista FIRE. Well, currently the amount I would need to have invested for Barista FIRE is very unrealistic. I have estimated my basic living expenses to be £1000/month meaning if I follow the FIRE principles I would need to have £300k invested. Like with all financial movements, you don’t have to follow them to the letter, rather you can take inspiration from them and make your own plan. This is exactly what I have done.

£300k by 30 is not realistic for me! Further, whilst I understand the principles of the 4% rule, it doesn’t fit my current life vision. By also saving towards my stereotypical retirement, I only need my work optional fund to last 30 years – from age 30-60.

All my calculations are based on my investments earning a 6% yield, which is very very conservative! I have done this to take inflation into account, as the value of £1 now will not be the same in 40 years. I need to reach a total of £175k invested by age 30 to be able to withdraw £12k each year until I turn 60. Taking into account investment gains and my withdrawals I would be left with £4k when I turn 60.

Whilst £175k is a huge amount of money – it is far more realistic for me than £300k!

Goal #2: Stereotypical Retirement

My second FIRE goal is my more generic retirement goal – building a nest egg for when I turn 60. This one is most similar to a Coast FIRE goal but I’m not rushing to complete it as soon as possible. In the UK we have a tax advantaged savings account called a Lifetime ISA which encourages people to save for their first home/retirement. We can contribute up to £4k each tax year to this account, with the incentive of a 25% bonus on any contributions – essentially an extra £1k for maxing it out 🤩

I opened my Lifetime ISA in April 2021 and maxed it out within the month because I repurposed money that was sitting in cash accounts. My specific LISA is the Stocks & Shares variant, meaning the money (+ bonus) is automatically invested into a range of index funds. My plan is to max this out until I turn 50 – the age you are no longer allowed to add to it!

Taking into account my contributions, the government bonus and projected interest returns – this account should be worth £860k when I turn 60. More than enough for me to live my best retirement life 🏝

These goals are not set in stone!

This plan is obviously subject to change, as at age 20 I am very uncertain as to what I will be doing in the future. It is very likely that I will change my FIRE approach, but at least I have started eh 😜

Thank you for reading! Hopefully this gives you an insight into the FIRE movement and my approach. I would love to know your thoughts in the comments ✨