The different stages of FIRE

So you are interested in becoming Financial Independent, Retire Early? Good for you! Taking control of your finances is a first step to true freedom. Diving head first into the world of FIRE can be a bit overwhelming, but don’t worry, I’m here to help. Let’s dive right in.

If you are just starting out, I suggest you start with this introduction first. Already finished? Let’s get on with the next step. To fully understand the journey ahead, you need to understand the different stages of FIRE. Some people call them different types of FIRE, but I like to think of them as different stages you have to go through to achieve your end goal.

Coast FIRE

Coast FIRE is the first stage of the FIRE journey. It basically means that you have invested enough money to live comfortably at the age of retirement without having to rely on government assistance. Depending on your age, coast FIRE is surprisingly easy to achieve. You see, the magic of compound interest does most of the work.

The earlier you start, the lesser you have to invest to achieve coast FIRE. Let’s do a little math here. First, we need to determine how much money you need during your retirement. This is actually the most difficult part, because how do we know how much money we’ll need so far into the further? There is no right answer, and it depends a lot on some specific circumstances. Is your house paid off or do you still need to pay your mortgage or rent? Are you in good health or not, and does your country have universal healthcare? What do you intend to do during your retirement? All these factors greatly influence the amount of money you will need during your retirement.

A good benchmark is that you need around 80% of your current income. The average Belgian net income is around $2.400* net per month. This means you will need a little more than $1.900 each month during your retirement, which is just shy of $23.000 a year. Following the 4% rule, you would need a total of $575.000 in your portfolio to retire.

Let’s be positive and assume you can retire at the nice old age of 67. How much do you need to invest to achieve the goal of $575.000 by that age? It all depends on when you start investing. If you start investing at the young age of 27, then you have 40 years to take advantage of that compound interest magic. With an average market return of 8%, you would need to invest $24.000 by the age of 27.

Now let’s say you are a little late to the party and only start investing when you are 37 years old. By now, you only have 30 more years to let your money grow. In this case, you need to invest $53.000 by the age of 37. That is more than double the amount that you needed to invest by the age of 27.   

There is one more scenario. What if you start investing when you are 47? This means you have 20 years to earn compound interest on your investment. How much do you need to get to $575.000 by the age of 67? You would need to invest $117.000  by the age of 47.

So you see, the earlier you start investing, the lesser you need to achieve coast FIRE. The fun part about coast FIRE is that it takes away your dependence on government assistance or social security. Your retirement is now financially independent, and the only thing you had to do is invest some money at as young as possible age. Once you’ve invested that sum, there is nothing else to do but live your life and watch your retirement money grow.

*These numbers are based on western European income and spending patterns. You Americans need to adjust these numbers to your own income levels. The math stays the same though, take 80% of your current income and that’s how much you need in retirement.

Lean FIRE

While coast FIRE is a great way to take away your worry about not having enough in your retirement years, some people do not want to work until they are 67 years old. Myself included. This is where the RE part of FIRE comes into play: Retire Early. The concept stays the same: you invest your money, but instead of waiting until retirement age, you stop working as soon as you hit your FIRE number.

Your FIRE number depends on how much you need, and that can vary wildly depending on what kind of lifestyle you are looking for. As the name implies, lean FIRE stands for a minimalist lifestyle. People going after lean FIRE prioritize their retirement above comfort and luxury. There are “rules” for determining whether you are lean FIRE, traditional FIRE, or fat FIRE, but those don’t consider that the average income and living expenses between the US and the rest of the world are very different.

Lean FIRE is categorized by having a yearly expense budget under $40.000 per year. Given that the average yearly net income of a Belgian citizen is only $29.000 per year, I consider living off $40.000 not lean at all. I set my lean FIRE goal at $13.500 per year, which is around €1.000 per month. Doing this in Belgium would be very hard, and that’s why lean FIRE is usually accompanied by moving to a lower cost-of-living area, such as southeast Asia or South America.

Let’s try a little more math on this one. If I need $13.500 per year, how much do I need to invest before I can retire? With a 4% safe withdrawal rate, my lean FIRE number would be $337.500. That’s a lot more than you need to invest to achieve coast FIRE, but that is because you have a different timeframe. You see, with coast FIRE, you just have to wait and during that waiting period, the magic of compound interest does most of the work. However, the goal of lean FIRE is not to wait until retirement, but to go on early retirement. In this case, the magic of compound interest has less time to do its magic. Most of the grunt work has to come from you: you have to keep investing until you have reached your FIRE number.

Barista FIRE

Barista FIRE is a variation of lean FIRE. Instead of going for full early retirement, you aim for something in between. Barista FIRE is a semi-retirement. You save and invest enough so that you can create a steady stream of passive income from your investments. In this way, you only need to work a little to supplement your income. Basically, it’s like part-time FIRE. You now have the freedom to ease up on your workload or try a different career that isn’t so high demanding but pays less, such as becoming a barista. Although I doubt that becoming a barista is less demanding, but that might be because I am not a people person.

Barista FIRE is also a great way to free up more time to do creative projects that don’t guarantee money right from the start. Are you an artist or an aspiring writer? Now you have more time to devote to those projects without having to wait for full retirement. You have the option to work for pleasure instead of working to survive.

Another version of barista FIRE is that you have enough to fully retire, but you chose to keep working part-time. This can be simply because you like it, or because of health insurance and other benefits. Starbucks has good benefits, and that’s where the barista FIRE analogy comes from.

Traditional FIRE

We have finally arrived at traditional FIRE. The term FIRE, Financial Independence Retire Early, comes from the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez. It took a while before the book really got out there, but thanks to the internet and blogs in the early 2000s, the FIRE movement took off.

FIRE became popular with the masses around 2010. A new book called Early Retirement Extreme by Jacob Lund Fisker and the popular blog of Mr. Money Mustache made it possible for the FIRE movement to go mainstream. With the lockdowns of COVID-19, people had no where to spend their money, and many took to the stock market and so discovered the concepts of FIRE. Millennials, in particular, have embraced this new way of thinking and are re-evaluating how they want to live their lives.   

The basics of FIRE are simple: cover your living expenses by making small withdrawals from your investments, typically around 4%. With traditional FIRE, you have enough invested to retire early with no changes in lifestyle. To calculate your traditional FIRE number, you take your yearly expenses and multiply by 25. For example, if you your yearly expenses are $40.000, then you would need $1.000.000 to keep up your current lifestyle while retiring early.

Fat FIRE

Fat FIRE is for the overachievers among us, or simply for those who want to spend their retirement in comfortable luxury. People who want to achieve fat FIRE have annual spending of $100.000 or more. Following the 4% rule, you’d have to invest a whopping $2.500.000 or more.

People pursuing fat FIRE are usually top earners and are not willing to make extreme sacrifices in their current lifestyle to save more money. Many of those going after fat FIRE have experience in the stock market or trust their money to someone else who has. Getting lucky with early Tesla options or riding the wave of the GameStop roller coaster could carry you from traditional FIRE to far FIRE in no time, but do realize that those are unique situations.

Fat FIRE is nice to dream of, but probably unrealistic for most of us. Fat FIRE is also the odd man out on this list. FIRE is usually focused on frugal living and understanding the true cost of an item. If you earn $12 an hour, then that new iPhone costs you 83 hours of work. Fat FIRE doesn’t concern itself with such ways of thinking.

Is FIRE for me?

FIRE is not for everybody. While I think most people would like to retire early, not everybody is willing to make the necessary sacrifices. I don’t like the word ‘sacrifices’, because to me it doesn’t feel like a sacrifice at all. I value my time more than any earthly possessions, so I don’t mind living minimalistic.

However, before you decide to pursue FIRE, you should be aware of what it takes to make it work.

Detailed planning and budgeting

The most important thing about pursuing FIRE is being diligent with your budget and planning. It is impossible to plan for early retirement without having a detailed oversight of your income and expenses. You will need to plan and budget for your long-term future, but also for the short-term “living in the now” moments. It’s not the most fun thing to do, but if you stick with it and are consistent, then it shouldn’t be too much trouble.  

Discipline

Achieving FIRE is not something that just happens, otherwise, everybody would be FIRE right now. No, it takes discipline to get there. You have to maximize your income and minimize your expenses. Not just for a few months or a year, but probably for several years in a row. This might mean no exotic vacations for a while, or eating out less. This does not mean you can’t splurge on something every once in a while, but keep your focus on the end goal: live frugal now, so you can retire early.

Understanding the stock market

Saving enough money to achieve FIRE can be difficult. Saving enough money to achieve FIRE without the stock market is almost impossible. The money in your savings account only loses value thanks to inflation. Your money in investment funds makes more money thanks to compound interest. I don’t recommend just starting investing blindly, so do your own research and try to understand the basics of the stock market.