What Are The Different Levels of FIRE?

Despite what some may believe, the FIRE community is not a monolith (flexing my 8th grade vocabulary) and your financial objectives will be different from mine. Each level of FIRE involves a varying balance of time and money. Only you can decide what balance is right for you.

If you missed the first newsletter in the FIRE series covering early retirement, start here.

Mike here, back from Army summer camp at lovely Fort Polk, Louisiana (IYKYK).

Quick refresher from FIRE newsletter #1: Financial Independence (FI) describes the point when your monthly passive income from your investments meets or exceeds your monthly living expenses. Financial Independence Retire Early (FIRE) is a response to achieving FI for those who want to quit working (or change the way they currently work).

FIRE is not a single benchmark but rather a spectrum of options with varying levels of financial freedom. There are five common levels of FIRE, three of which involve quitting work completely and two of which emphasize continuing work on your terms.

The three primary levels of FIRE are Lean FIRE, FIRE, and Fat FIRE, ranging from having just enough passive income to meet your basic needs to earning enough income to cover your desired spending. While some people’s definitions of each may vary, I find the following to be the simplest.

Lean FIRE: Your passive income covers your basic needs.

You achieve Lean FIRE when your passive income covers your basic needs but not much else. Your basic needs include: housing, food, insurance, and other essential resources. Lean FIRE doesn’t accommodate a significant budget for miscellaneous spending on your wants. You can live minimally, but with little wiggle room.

FIRE: Your passive income covers your current lifestyle.

FIRE describes the point where your passive income is enough to sustain your current standard of living for the rest of your life. This includes not just your necessities but all of your current living expenses.

Fat FIRE: Your passive income covers your desired lifestyle.

Fat FIRE describes the point where your passive income is sufficient enough to indefinitely fund whatever lifestyle you choose, not just your current living expenses. People who choose Fat FIRE want a life of luxury in retirement.

People who practice Lean FIRE often value transitioning out of the workforce as soon as possible, prioritizing their time at the expense of a less lavish retirement (for Wilson, this looks like sacrificing his Yankee Candle collection). People who favor Fat FIRE may choose to continue working to build enough assets to fund their desired retirement lifestyle at the cost of more time in the workforce.

Coast and Barista FIRE are the last two levels of FIRE that emphasize continued employment. Both are solid options for those who want to continue working, but in a way/field they find enjoyable and sustainable.

Coast FIRE:

You’ve reached Coast FIRE when your current investment portfolio will grow to the point where you hit your FI Number (more on this in a future newsletter) at your desired retirement age, without you having to contribute another penny toward retirement.

Coast FIRE emphasizes securing your financial future early by investing aggressively upfront and then stopping or reducing retirement contributions, letting compound interest take over once you’ve built a large enough portfolio. This lets you transition to earning just enough money to cover your living expenses while your current investment portfolio does all the heavy lifting and growing.

Let’s say Porkchop (sticking with the Louisiana/Swamp People theme) is a 25-year-old that wants to retire by 50 with $1 million. Assuming an 8% annual return on investment and 3% inflation, Porkchop needs an investment portfolio of ~$376,000 by age 30 or ~$614,000 by age 40 for it to grow to $1 million by age 50 without any additional contributions.

Am I a wizard that just pulled these numbers from thin air? No, I’m a dude with internet access. Check out this Coast FIRE Calculator from Wallet Burst to run the numbers yourself and see how Coast FIRE could work for you.

Barista FIRE:

Barista FIRE is a semi-retirement approach to FIRE. Barista FIRE involves growing your investment portfolio to cover a portion of your living expenses and working part-time to cover the remainder.

If the passive income from your investment portfolio averages $30,000 a year and your living expenses are $50,000 a year, you would only need to earn an additional $20,000 a year through part-time or freelance work to cover the remainder of your expenses.

An added benefit to continuing part-time employment is if your employer offers health insurance. The term Barista FIRE originates from employees working part-time at Starbucks to receive health insurance benefits while earning a paycheck. Of course, you don’t have to work at Starbucks to pursue Barista FIRE. Any form of part-time work that provides enough income to cover what your investment portfolio doesn’t fits the bill. Check out this Barista FIRE Calculator from Wallet Burst to see how this strategy could play out for you.

None of the five FIRE options is the correct style of FIRE. There is no proper level of financial independence or balance of time and money to achieve. What lifestyle works for me may not work for you. Your decisions will depend on your goals and preferences.

Lastly, one common misconception about FIRE is that it’s an all-or-nothing benefit. That you don’t reap the benefits of saving and investing until the moment you reach that elusive FI Number. This couldn’t be further from the truth.

As your net worth grows, you progressively gain the freedom to act boldly toward your goals and desires without the feeling of instability or the fear of repercussions from your employer. As your net worth grows, your autonomy grows. The infographic below from The Fioneers highlights this truth.

Call to Action

Define which level of financial independence appeals most to you. This will help you lay out the path to get there.

What We’re Reading/Listening To:

Burn the Boats by Matt Higgins. This book is about throwing away your Plan B, acting boldly toward the things you want to explore your true potential both personally and professionally. Although this isn’t a finance book, the theme of relentless commitment reminds me of the FIRE mindset (and it’ll fire you up to do something wild).

Debrief on Deck

Next week, Wilson will tackle securities investing, explaining what stocks, bonds, exchange-traded funds (ETFs), and mutual funds are. No Yankee Candle recommendations, however.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (Twitter and Instagram).

Until then, stay the course.

Disclaimer