Financial independence and FIRE: lean, fat, coast and barista, plus the 4% rule

What FIRE is

Financial Independence, Retire Early is a movement built on saving a high share of income and investing it until the portfolio can cover living costs. The key idea is that independence is a number you can calculate, which makes the target concrete.

The flavours

• Lean FIRE: retire on a modest budget, with a smaller required portfolio.
• Fat FIRE: retire with generous spending, requiring a larger portfolio.
• Coast FIRE: you have already invested enough that, left alone to grow, it should reach your retirement target, so you only need to cover current expenses.
• Barista FIRE: leave full-time work for part-time or lower-stress work that covers part of your spending while investments cover the rest.

The 4% rule

A rule of thumb from historical US studies: if you withdraw about 4% of your starting portfolio in the first year, then adjust that dollar amount for inflation each year, a diversified portfolio would have lasted at least 30 years in most historical periods tested. Multiply your annual spending by 25 to get the matching portfolio size. For $40,000 a year, that is $1,000,000.

It is a guideline built on specific past data. Retirement that lasts longer than 30 years, such as early retirement, different markets, lower future returns and high fees can all mean a lower safe rate. Many people use a range (for example 3% to 4%) and stay flexible.

Sequence of returns risk

Two portfolios with the same average return can end very differently depending on the order of returns. A large fall in the first years of withdrawals forces you to sell more shares at low prices, leaving less to recover. This is why people close to retirement hold some safer assets and may keep a cash buffer for a couple of years of spending.

Getting there

• Savings rate is the biggest lever early on.
• Keep investment costs low.
• Use tax-advantaged accounts.
• Plan healthcare, which is a big cost for early retirees.
• Stay flexible: some spending can flex in bad years.

Building wealth and becoming a millionaire

For most people it is the result of a long period of saving more than they spend, investing consistently and avoiding big mistakes, not of a single great pick. Illustration: $1,000 a month at a hypothetical 7% a year for 30 years comes to around $1.2 million, with $360,000 of that being contributions. It is arithmetic, not a forecast.

Independence is a spectrum. Even partial coverage of your costs from investments buys freedom and options.