The “normal retirement age” is 65 years old. For a lot of people, that number is simply too high and they want to speed up the process as much as they can. That's where FIRE comes in.
FIRE stands for Financial Independence / Retire Early. In the past few years, this term has grown to encompass an entire movement of people working hard, saving harder, and investing their money in hopes of gaining financial freedom sooner rather than later in life.
As the movement has grown, so has the number of ways that someone can FIRE. After all, different people have the ability to invest and store away different amounts of money depending on their own life situations. One such new retirement strategy is lean FIRE.
Lean FIRE is when you follow the same principles of FIRE but instead enact an extremely frugal lifestyle to A) lower your yearly expenses and hence lower your retirement number b) save faster to reach your retirement number.
This post will dive deep into exactly how Lean FIRE works and whether it's the right approach for you.
What is Lean FIRE?
The way that traditional FIRE works is that you cut expenses, save/invest heavily, build up retirement savings until you hit your number, then retire. In retirement, FIRE participants live off the growth of their portfolios and (ideally) have enough so that they never need to work again.
Participants of Lean FIRE do the exact same thing, except with a MUCH higher savings rate and usually a much more frugal lifestyle. Someone following the traditional FIRE path might save 20% of their income and still maintain a relatively “normal” life, whereas someone on the lean FIRE path might save around 50% – 60% of their income and live an extremely minimalistic life.
For example, instead of living in a regular house, a lean FIRE participant might live in a van or trailer and put the extra money saved on the mortgage straight into investments.
How Much Money Do You Need to Lean FIRE?
The same rules for retirement are the same with lean FIRE as with traditional FIRE. The general rule of thumb for FIRE participants is to save up 25x their annual expenses. In other words, to retire comfortably, you need to follow the “4% rule.” Only being allowed to withdraw 4% of your total funds every year seems low but this is taking into account the fact that most broad stock market index funds grow about 7% a year (adjusted for inflation), and that there may be some volatility involved so 4% is a safe withdrawal rate.
When it comes to the actual dollar amount you need to save and retirement-age, this will vary based on your own spending needs. If you live as frugally as possible and determine that you need $30,000 a year to live, your lean FIRE number is $30,000 x 25 = $750,000.
That being said, in most places even the most frugal of people require at least $40,000 a year to survive, so the generally accepted lean FIRE amount is $40,000 x 25 = $1,000,000.
You can achieve this number by saving up and trimming down expenses via the following:
- Starting to invest early and often.
- Maxxing out tax-advantaged accounts year after year.
- Tracking your spending habits and keeping them in check.
- Choosing to live in a trailer, van, or studio.
- Living with your parents instead of having your own place.
- Living in a very low cost of living area (as opposed to big cities like New York, Toronto, or Houston).
Because rent and mortgage payments are such a big part of most people's expenses, that is an area where participants of lean FIRE tend to cut down the most. Of course, there are many ways to save money and each person will have their own preferences.
Pros and Cons of Lean FIRE
When determining whether lean FIRE is right for you, it's essential first to understand the pros and cons of this kind of lifestyle. Here are some of the advantages and disadvantages to pursuing the lean FIRE path:
- Encourages a minimalist lifestyle – By partaking in lean FIRE, you have to live frugally and cut expenses aggressively (almost by definition). One way to do this is to take stock of what are wants and what are needs in your life, and getting rid of wants. Though this may sound like torture for some, this is actually very in line with the minimalist lifestyle. Not only that, but most minimalist choices have a positive impact on the environment.
- Provides a quick way to be financially free – Nobody likes being chained to a job they don't enjoy. Though you may need to sacrifice a bit, by participating in lean FIRE, you will be putting yourself much closer to financial freedom than if you took the regular FIRE path (or if you didn't do anything at all).
- Opens your eyes to the different ways to enjoy life (outside of spending money) – Lean FIRE participants often find that even though they are living a more simple life, their happiness does not decrease. Instead of going out to a fancy wine and dine restaurant, you might instead opt for a fishing trip to a local lake or a picnic by a park.
- Gives you a good baseline goal to first achieve – Lean FIRE doesn't need to be the end goal for you. It can serve as a good baseline goal to reach first. When you hit your lean FIRE number, you don't have to quit your job (you can just live with more security knowing that you can quit if you really want to).
- Prevents you from living a certain way – There's something to be said about enjoying life now instead of scrooging away for a future that is uncertain. For some people, the joys of life come from spending lavishly. This is tough to do on a lean FIRE budget, and some people might find that living the minimalist life for years (or even decades) is just not for them.
- Makes early-retirement less satisfying in some ways – Lean FIRE is all about cutting down your expenses both while working and in retirement. For some, this may seem unsatisfying as they are required to live frugally to save towards retirement. Then, once becoming retirees, they are required to continue living frugally and don't really get to enjoy the benefits of free time.
- Makes raising kids tougher – According to the USDA, married-couple parents can expect to spend upwards of $200,000 on a child between the time that they are born through to age 17. For somebody hoping to achieve lean FIRE, this can put a huge dent in your plans. This doesn't mean that it's impossible to raise kids on a lean FIRE budget, but it does mean that you'll likely need to sacrifice even more and go on an even stricter budget than regular lean FIRE participants.
- Forces you to rely on certain passive investments for support – The main way that lean FIRE participants build up their nest egg is through compound interest in investments like the stock market. Though historically, broad US index funds have risen 7% annually, there is still the risk of volatility in the short term (think 2008 and 2000). This could result in certain portfolios falling upwards of 40% and wreak havoc on lean FIRE retirement plans.
Different Kinds of FIRE
If living extremely frugally and taking on a minimalist lifestyle sounds like a dream to you, then lean FIRE could be perfect. Bonus points if you're willing to relocate to a lower cost of living area to save even more money.
That being said, not everybody can make the drastic lifestyle changes required for lean FIRE. This doesn't mean that you should give up entirely on the idea of retiring early. Here are some different kinds of FIRE you can check out to see if they are right for you.
Instead of saving super aggressively like lean FIRE participants, those following the traditional FIRE path won't need to make too many lifestyle changes and instead invest 10% – 20% of their income.
Those on the traditional FIRE path can typically retire by their 40s or 50s, and continue to maintain their living standards with few cuts. This isn't as early as those on the lean FIRE path, but there are lifestyle benefits to take into account.
FatFIRE is on the opposite end of the spectrum as leanFIRE. Participants of fat FIRE attempt to achieve financial independence and retire early while maintaining a high cost of living in retirement.
Not many people have the capital resources required for fat FIRE, and usually those “fat FIREing” work in lucrative industries like big tech, finance, or hold an executive position.
Barista FIRE is all about retiring early, but still working a part-time job to supplement your income. The reason it's called “barista FIRE” is because the position of barista typically offers decent pay, flexible hours, and acceptance of people from all sorts of backgrounds.
Barista FIRE participants have the ability to retire earlier than those on the traditional FIRE path because of the additional money that comes in from their part-time job during retirement. It's almost as though they are providing themselves with their own pension.
Coast FIRE involves working and saving aggressively when you're young so you can “coast” your way to financial freedom via compounding.
For example, someone on the coast FIRE path might save up $500,000 by age 30, then determine that if the general stock market keeps compounding the way it has historically, their $500k will turn into over $1.5 million by the time they are 45. They'll stop saving/investing, work until they're 45, and live off their nest egg (which they built 15 years ago but has since grown).
Recap: What is Lean FIRE and is it For You?
Retirement planning is different for everyone. Some people may want to leave their job at age thirty while others may want to stay as long as they can. One thing is almost universal though: most people want to be financially independent and not be forced to rely on their employer. There are many paths to achieve this, with one popular one being lean FIRE.
When it comes to becoming financially free and retiring early, not everyone is cut out for the frugal lifestyle that's required of those pursuing the lean FIRE path. FIRE already calls for participants to sacrifice and lean FIRE takes those aspects to the extreme.
That being said, for those willing to take the leap, lean FIRE can offer a way to escape the 9-5 and work for yourself earlier than the traditional and fat FIRE paths. Plus, lean FIRE participants can rest easy knowing that they've not only regained control of their personal finances but also lived a life that's beneficial for the environment.
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.