Early Retirement Hack: Everything About Fat FIRE

Published on December 13, 2021 | Last Updated on February 24, 2022 by

Fat FIRE refers to a popular financial goal management strategy and lifestyle movement known as FIRE. As the name suggests, FIRE or Financial Independence Retire Early is a modern lifestyle hack that is championed to provide a secure and stable early retirement based on a set of well-attuned financial goals. As people grow older, income sources can become elements of stress because everyone desires social and financial security when they retire. 

Achieving these goals often requires an extreme form of saving and investment technique. This means enrolling in a program that will require you to limit or live on a frugal budget. The Fire movement has grown tremendously over the last decade and continues to attract a lot of people. By living frugally for a few years, it is possible to boost your retirement calculators significantly. However, this can only be done if the expense ratio is very low. By controlling your living expenses, you can enjoy the benefits of an effective retirement investment strategy. 

The burning idea of the FIRE was first fueled by Vicki Robin and Jon Dominguez in their 1992 book, “Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence.” After inheriting a considerable sum from her grandmother, Vicki Robin met Joe Dominguez during her travels across the United States and Mexico. Joe was a Wall Street financial analyst who, in 1969, had retired at the age of 31 with $100,000 in savings. From that point on, they would become lifelong partners.

Table Of Contents:

  • How it works
  • Lean FIRE vs. Fat FIRE
  • Fat FIRE opportunities and challenges
  • Fat FIRE takeaway

How it Works

Followers of the FIRE movement may be able to quit their jobs and live off thrifty withdrawals from their investments well before the conventional retirement age. FIRE typically works by allocating 25% of your annual spending and, after that, a safe withdrawal rate of 4% from the savings nest egg. So, a FIRE enthusiast whose annual income is $100,000 and lives on about half the income will ultimately need $1.250 million (25x$50,000) before quitting work and embarking on an early retirement plan. 

The next step involves calculating how long it will take to hit the FIRE number based on the amount one saves each year. It requires accurately predicting the return on investment. The higher the rate of return, the earlier one can achieve her FIRE goal. You can try using this calculator to estimate the FIRE age and target savings before safely retiring.

A target FIRE number can vary dramatically depending on you expectations, where one lives, the standard of living adopted, the activities pursued, etc. Based on these factors, FIRE goals are usually categorized into lean FIRE and fat FIRE. 

Lean FIRE vs. Fat FIRE

Lean FIRE may mean not owning a home, living in mobile homes, staying in a Recreational Vehicle (RV), and cutting down on all other expenses like dining out, movies, electronic gadgets, and buying pre-owned stuff.

Fat FIRE, in contrast, allows you to achieve the same early retirement goal without necessarily compromising on your current standard of living. Whereas a lean FIRE budget amounts to about half of the average American household, a fat FIRE budget could be double. Fat FIRE caters to high-income professionals like physicians who are reluctant to embrace a more frugal lifestyle fully and customarily depend on a high level of spending.

Barista Fire refers to those individuals who after early retirement pursue part-time job opportunities to supplement their savings in professions that suit them the best. This helps them secure an additional source of income and supplements their savings. 

Fat FIRE opportunities and challenges 

Financial independence and early retirement is appealing prospect to many today. The fantasy of quitting a job is more prevalent than before, especially with the growing discontentment in corporate culture. Not having to work and not having to worry about money brings forth new opportunities and challenges. A life on fat FIRE ensures freedom from debt and a stable passive source of income. 

For many looking to escape from their busy and stressful job life and explore new possibilities, the philosophy of fat FIRE can be very promising. They are free to follow their passion or even take up a new, self-employed career that they enjoy. Most FIRE devotees pursue their true calling and hobbies or an online side hustle blogging or mentoring. Susan Emerson, now 61, retired from her career as a physician at age 47 to fulfill her passion as an artist. 

On the other side of the spectrum, enrolling in a fat FIRE lifestyle can pose bitter challenges and involve many risks. It may mean giving yourself an active dose of finance and planning management strategies for hiring an investment banker who will offer you help in the diversification and allocation of assets.

You must be careful to get your asset allocation and your risk tolerance right keeping in mind the life cycle stage that you are in. In short, you must have a dynamic asset allocation that changes with your age. Returns expectations are further negatively impacted by unpredictable trading and volatile economic downturns.

Historical returns on various asset classes do not remain constant and the portfolio may be eroded in the retirement years which can result in added stress. You must be aware that professional money managers may also not consistently deliver the same returns in different market environments. Also, the 4% rule does not factor in inflationary expectations in your spending habits. If you retire at the age of 40 years and assume a life expectancy of 30 years, there is no guarantee that the portfolio will last for thirty years. 

The same 4% withdrawal rate may not consistently fire! The 4% rule, as a common rule of thumb in retirement planning, is based on an older method of asset allocation in which the investment portfolio contains 60% stocks and 40% bonds. Your investment portfolio will perform depending on asset allocation choice for which the 4% rule cannot account. Also, the 4% rule was developed when the bond interest rates were much higher than they are today. It also does not account for the changing spending pattern that may arise at the later stage of retirement due to costly healthcare expenditures. 

The best way is to start your savings career early with your professional career and execute a systematic investment plan of investing. Asset classes like equity deliver the best performance in the medium to long term compared to bonds and other asset classes. In recent times there has been a profusion of asset classes like Real Estate Investment Trusts, Commodities, Currencies and even Cryptocurrency.

These investments are subject to a lot of volatility and one should be careful before deciding to allocate assets to them. One thumb rule is to create an asset allocation guideline where you decide the allocations to different classes in your portfolio. Asset allocation contributes 95% of the returns and security selection only 5%.” Do not place all your eggs in one basket” is a maxim that you must follow in your portfolio selection.

The best way to reduce portfolio volatility is to avoid concentration risk. Asset Allocation guidelines may be defined in ranges which gives the portfolio manager the flexibility to move into cash when he feels the assets are overvalued or the markets are overheated. A buy and hold strategy may be proactively managed to keep in mind the interest rate cycle and the economic environment. You may also resort to global diversification with assets that have a low correlation with your portfolio. 

Fat FIRE takeaway

Financial independence can bring about security and peace of mind to you and your family. It can rescue you and help avoid difficult situations that the future may present. However, it presents its challenges. And despite it being projected as an alternative to lean FIRE and a much-needed reprieve from living an excessively frugal lifestyle, fat FIRE may not be the ideal goal for everyone. 

Higher expenses and spending associated with a fat FIRE entails a much higher retirement number. If the math doesn’t go right as predicted, your investment will most likely take a toll. It means longer working hours to earn more money and reach the desired retirement number. This can lead to unwanted stress and eventually cause burnout in the worst-case scenario. As a result, physical exhaustion and emotional turmoil follow as a result of feeling or wanting to do two things at the same time. In the end, what chasing an unrealistic financial goal results in is neither money nor security. 

People are drawn to the whole FIRE movement for various reasons; some seek respite from a competitive and unfeeling corporate lifestyle, and others a means to support the pursuit of passions that had remained dormant. Either way, people seeking fat FIRE should ask what is important to them first and then build realistic financial goals around it.

Whether or not you adopt a Fat FIRE policy and seek early retirement, financial security is a  life goal you must adopt. Starting the savings habit early in your career is key to ensuring a carefree life free from financial worries.

Sources

●      https://seths.blog/2013/06/thinking-about-money/

●      www.fool.com/retirement/strategies/withdrawal/4-percent-rule/

●      https://www.schwab.com/resource-center/insights/content/beyond-4-rule-how-much-can-you-safely- spend-retirement

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