If you are here reading this, chances are you are familiar with the Financial Independence, Retire Early movement. There are many different sects within this discipline, let’s break down the difference between fat FIRE and lean FIRE!
A Brief Summary of FIRE
In the event that you are not familiar, I will quickly recap the FIRE movement. If you are familiar, feel free to scroll on!
Work has never been something that is universally loved by all. In the early 90’s, the idea of saving and investing as much of your income as possible in order to retire early and live your best life began to catch steam.
This movement is rooted, at least in my opinion, in minimizing expenses and maximizing life. Giving 40, 50, or 60+ hours of your week to a job – more often than not an unfulfilling one – for 40 plus years of your life is unfortunately considered completely normal.
In saving / investing as much of your income as possible, it is surprisingly doable to retire in a fraction of the time one normally would. This effort is taken in many different forms and fashions. Some try to cut expenses as far down as possible, living in tiny houses, growing their own food, getting rid of their car to walk or bike instead. These actions have allowed some people to save upwards of 60%-70% of their income!
For others, including me, the aim is to increase income as much as possible. If the true aim of achieving financial independence is to make the most out of your life, why not enjoy life a little bit while you pursue complete freedom? Cutting expenses to the bone may get you there a little bit faster, but at what cost?
Back to the Topic
Hopefully the above wasn’t too much of a digression, let’s get into the nuts and bolts of lean and fat FIRE.
An overarching pillar of the Financial Independence movement is acquiring X times your annual expenses in investments that would generate enough passive income to fund your life without paychecks from a traditional job.
There are countless different variations of FIRE, but passive income is a staple across the board.
While there is no clean cut number, lean FIRE would typically entail having somewhere around 25 times your annual expenses in investments. The general rule of thumb is that you would withdraw roughly 4% of the account value to live off of. You can usually receive something in the 2-4% neighborhood through dividends (depending on your strategy) so you ultimately do not draw down on the principle, or at least not entirely. This allows the principle to continue to grow.
What is lean about this? Let’s take a look at an example.
If your annual expenses are $50,000, 25x that would be $1.25 million. Following that 4% rule, this $1.25 million portfolio would net you exactly your $50,000 in expenses each year, which is not an extremely large income (considerably less than the national average in the US). Not impossible to live off of, though. More often than not, one would have a paid off house before retiring early as well so that has a significant impact on annual expenses.
If someone is just desperate to get out of their 9-5, achieving lean FIRE is often a way for them to pursue things that they are more passionate about that may not pay well. With their portfolio covering their minimum annual expenses, they would have more freedom to pursue these things.
The biggest thing to remember? We are not living like kings and queens with 25x our minimum annual expenses invested. The retirement plan here would be somewhat risky, and market turmoil could quickly send you back to the 9-5.
Many pursuing lean FIRE have found that life can bring just as much happiness without buying every new thing that Amazon suggests.
Enter Fat FIRE
When I think about Fat FIRE, I typically picture doctors, lawyers, engineers and the like. These high income professions more often than not allow for a fairly luxurious lifestyle while employed where expenses fluctuate greatly and stay pretty high.
Fat FIRE is often the aim of these folks if they know that they do not want to work until the traditional age of 65+. What do these numbers often look like? They usually rely less on a multiple and more on the true annual income. If one follows the aforementioned 4% rule, bringing in a passive $400,000 annually would require $10 million in investments.
Those pursuing fat FIRE are not usually concerned with the miles / gallon they got between fill ups or how much they spent on electricity last month. They live large and plan to use a fat brokerage account to allow them to continue doing so.
Interested in learning about other areas in the FIRE world?
While these two arms of the FIRE movement are typically explored by entirely different types of people, I like to think of lean FIRE as a milestone and fat FIRE as an ending point.
Reaching a point where you have 25x your annual expenses invested and accessible provides a massive level of freedom. You can stress a whole lot less over your 9-5 once you are here, if something happened and you lost that job, you wouldn’t need to scramble to find something else as soon as possible.
If you do love your job and you make good money, I still feel that there is a point where you have enough passive income potential that you can consider leaving the working world behind. At the end of the day, I can’t tell you what to do! Hopefully this was helpful in breaking down these two forms of FIRE!
I sincerely appreciate you for taking the time to read this article! If you have any questions, comments, or suggestions please do not hesitate to reach out!