There is a growing trend in the personal finance space that goes by the acronym 'FIRE' , which stands for Financial Independence, Retire Early. Bloggers promoting FIRE, like Mr. Money Mustache, have blown up in popularity, financial columnists love writing about it, and a documentary about the movement called Playing With Fire is being released in 2019.

So what is all the buzz about? At a high level, the FIRE movement is about saving enough money so you can live off income generated from your investment portfolio and get out of the 'rat race'. In order to save enough money and have it last, most of the FIRE community promotes a frugal lifestyle that would make The Minimalists proud.

The concept of being thrifty in order to achieve your retirement goals isn't necessarily new. Books like The Wealthy Barber and The Millionaire Nextdoor, have promoted smart saving strategies for decades, and could be considered the foundations of the more recent and radical FIRE movement.

What is FIRE?

The best way to explain FIRE is to break down it's components and highlight the key FIRE variations.

FI - Financial Independence

You can consider yourself truly financially independent when the investment earnings from your savings are enough to cover your living expenses. When you reach financial independence it means that you don't have to work again, but you still might choose to.

RE - Retire Early

You are retired when you stop working altogether, and in order to do this you need to be financially independent.

1) Lean FIRE

This is the most popular, and risky, version of FIRE. The lean FIRE model implores that you accumulate enough funds in your portfolio to live off the investment income forever. At a minimum, this usually requires a $1 million portfolio with a 3-4% annual withdrawal rate.

Lean FIRE practitioners also encourage an ultra-minimalist lifestyle. Many try to get their annual household expenses in the low tens of thousands, and some adopt concepts such as moving into a tiny-home, or to a country with a super low cost of living.


2) Fat FIRE

On the other end of the spectrum, the fat FIRE movement emphasizes earning more and aggressively growing your retirement fund. Instead of living an extreme minimalist lifestyle and trying to get annual expenses below $50,000, the fat FIRE proponents say that it's okay to spend more when you stop working - you just need to save more to get there. In order to do this you can have a side business, work two jobs, focus on climbing the corporate latter, or any combination of these options.

With fat FIRE, in order to save a large nest-egg (usually over $3 million) you don't have to be extremely frugal, but you shouldn't be wasteful with your spending.


3) Barista FIRE

Not everyone wants to, or can, stop working entirely, but they might want to leave their high stress corporate job and work in a field they are passionate about. The financial independence community has labeled this hybrid approach as barista FIRE, which basically says that you can leave your soul-sucking corporate job and cover your expenses with some investment income and a 'barista' job. Of course you don't have to become a barista - you could work at a brewery, book store, animal shelter, or really in whatever line of work you are passionate about.

You would work at your passion job for as long as you want, which is usually until government income, like CPP and OAS starts kicking in. Your passion job might provide cool perks (free coffee for example), as well as coverage for certain medical and insurance benefits, which can help cover costly surprises.


4) Coast F.I.R.E

Coast FIRE is similar to barista FIRE in the sense that you move into an enjoyable job, except that your passion job income covers all of your expenses, and you don't have to withdraw from your investment portfolio until you retire.

Since you are not withdrawing from your retirement investments early on, your portfolio can grow with compounded returns. This means that you can accumulate a healthy nest-egg by the time you want to stop working. This nest-egg, combined with government retirement payments, allows for a higher cost of living than if you adopted a pure lean FIRE or barista FIRE strategy.


FIRE Downsides

The big appeal of FIRE is that people can leave their hated 9 to 5 jobs and live life on their terms. Sounds good, doesn't it? Well not everyone agrees. Some financial bloggers are fairly anti-FIRE and instead promote finding work that is enjoyable and meaningful today, but that allows for a comfortable lifestyle and retirement (easier said than done!). Keep in mind that some very wealthy people, like Warren Buffett, continue to work because they love what they do.

Financial risks

Be careful with the math! Say that you can live off $4,000 a month, or $48,000 a year. With a 4% withdrawal rate, simple math would say you need to save $1,200,000.

Part of the problem with this assumption is that it ignores inflation. $48,000 in expenses today, will be much more 30 years from now! You also have to factor in taxes. Depending on your investment accounts, to generate a true 4% after-tax and inflation adjusted return over many years means that you will need more than $1,200,000 today.

In addition, although an adjusted 4% return on a balanced investment portfolio isn't unrealistic, there could be a severe economic downturn after you take the FIRE plunge.

There are other items to consider as well: what if there is a sudden unexpected expense that requires you to dip into the principal of your investments?; what if the government halts CPP and OAS payments?

Actually modeling out how all of your investment accounts will generate income with inflation and tax implications is fairly complicated. Plus, what you model today will likely need to be revised and updated six months from now. On top of all the calculations, you actually have to properly implement your investment and withdrawal strategy, which can require some financial know-how.

Hit to your social life

Not needing the newest material goods and enjoying the simple things in life can be very refreshing. That being said, depending on how extreme your savings plan is, you will have to be willing to cut back on a lot of social events, travel plans, and other activities that you likely enjoy. That means that you might need to turn down things like an invite to a weekend ski trip with friends, or a family member's destination wedding.

To FIRE or not to FIRE?

It is tempting to imagine a life where you don't have to work if you don't want to. However, truly adopting FIRE requires a change in mindset, can be risky, and might limit other lifestyle goals you want to achieve.

Many of the FIRE advocates posting to online forums seem to work corporate jobs (managers, engineers, software developers, etc...) and make above average salaries. That's not to say that FIRE doesn't work for those outside of that demographic; maybe it's more of a reflection on the lack of job satisfaction felt by so many.

To determine if FIRE makes sense for you, spend some time reading the experiences of people who have adopted it, and reflect on what you want out of life. Whether you want to work towards one of the FIRE categories, or plan for a more traditional retirement, there is a lot to consider. Remember, it's your life, so there is no right answer on how you should live it!