What is FIRE?

Most explanations of FIRE start with extreme frugality and a photograph of somebody on a beach at 35. That is the version that gets written about, and it is a small corner of what the idea actually is.

FIRE is a target and a rate. The target is a portfolio large enough that withdrawals from it cover your spending. The rate is how much of your income you keep. Everything else in the movement is argument about the edges.

The two halves separate

Financial independence is the portfolio. Retiring early is a decision you can make once you have it, and a lot of people who reach the number keep working anyway. They change jobs, drop to four days, or start something that would have been too risky with a mortgage hanging over it.

That is worth saying early, because the retire-early half is where most of the criticism lands. The independence half is just a savings goal with a specific size, and it is useful whether or not you ever hand in notice.

The number

Take your annual spending and multiply by 25. That is the 4% rule turned around: if you can safely withdraw 4% a year, then 25 times spending is the portfolio that supports it.

Spend $40,000 a year and the target is $1 million. Spend $100,000 and it is $2.5 million. Spend $60,000 and it is $1.5 million. The arithmetic is the easy part.

Savings rate decides the timeline

This is the part that surprises people. Your income barely appears in the calculation. What matters is the percentage of it you keep, because that number does two jobs at once: it fills the portfolio faster and it shrinks the portfolio you need.

Someone earning $200,000 and spending $190,000 needs $4.75 million and is saving $10,000 a year toward it. Someone earning $70,000 and spending $40,000 needs $1 million and is saving $30,000. The second person retires first, by decades.

Assumes a 5% real return and that you start from zero. Existing savings shorten all of these.

Why cutting spending beats earning more

A raise moves one number. Cutting spending moves both. Take $5,000 a year off what you spend and you have $5,000 more going in, and you have also taken $125,000 off the target, because 25 times $5,000 is $125,000.

That is the mechanism behind the whole movement, and it is why the housing and transport decisions matter far more than the coffee ones. A cheaper mortgage is a permanent cut to both sides of the equation. Skipping a coffee is not.

The variants

Full FIRE is one target, and it does not suit everybody. Most of the variants exist because somebody worked out that a slightly different goal was a much shorter wait.

• Coast FIRE. Enough invested that compounding alone reaches the target by your retirement age. You still work, but you stop saving. The earliest milestone worth hitting.
• Barista FIRE. A portfolio that covers most of your spending, with part-time work covering the rest. Often chosen for the health insurance rather than the money.
• Lean FIRE. Full independence on a deliberately small budget, usually under $40,000 a year. Fastest to reach and the least forgiving if anything changes.
• Fat FIRE. Independence without cutting your standard of living. Takes longer and usually needs a high income rather than a high savings rate.
• Chubby FIRE. The middle. Comfortable rather than frugal, without the Fat FIRE timeline.

What the arithmetic leaves out

Three things reliably break plans that looked fine on a spreadsheet.

Health insurance. In the United States, retiring before 65 means covering yourself until Medicare. Budget somewhere around $9,000 a year per person and it stops being a footnote. Retire at 45 and that is 20 years of it.

Sequence of returns. A bad first few years does far more damage than the same years later, because you are selling into the fall. Two retirements with identical average returns can end very differently depending on the order. Sequence risk explains the mechanism.

Getting at the money. Most retirement accounts penalise withdrawals before 59½. Retiring at 45 means bridging 14 years with taxable accounts, Roth contributions, a 72(t) schedule or a conversion ladder started five years ahead. Withdrawal order covers the options.

The criticism worth taking seriously

Plenty of the criticism of FIRE is aimed at a caricature. One objection is not, and it is worth sitting with.

A plan built on a 60% savings rate assumes 60% is available, and that assumes an income well above your costs, no dependents arriving unplanned and nothing going structurally wrong. For a lot of people the rate is not the constraint. The gap between income and rent is.

That does not make the arithmetic wrong. It makes the timeline longer, and it makes Coast FIRE the more useful milestone than full FIRE, because Coast is reachable on a normal savings rate and full FIRE often is not.

Where to start

Work out your annual spending. Not your income, your spending, from a year of real statements rather than an estimate. Multiply by 25. That is the target, and almost everybody is surprised by it the first time.

Then find out when your current savings rate gets you there, and how much a change to it moves the date. That second number is the one that decides what you do next.