A minimalist mindset could help you retire sooner.

Lean FIRE is an extra-frugal approach to the Financial Independence, Retire Early (FIRE) movement that emphasizes minimal living expenses and a simplified lifestyle. Lean FIRE enthusiasts aim for early retirement by curating a lifestyle that works on less than $40,000 a year, or about $3,300 per month, which is a brutal budget for some.

In this article, we'll do an overview of Lean FIRE, including how to calculate your FIRE number and whether this financial goal is right for you.

What Is Lean FIRE?

Financial Independence, Retire Early (FIRE) is a movement gaining momentum around the globe, and Lean FIRE is one of its popular subsets. It’s a lifestyle built on the principles of simplicity, minimalism and frugality.

You already know these Lean FIRE people. They live in a smaller home, drive a used car, and engage in DIY projects to keep expenses low. They pinch every penny, and for good reason: They want to achieve financial independence and retire early. 💰

Generally, Lean FIRE adherents aim for an annual retirement budget of around $40,000 or less. This number is derived from the FIRE number, the amount of invested assets you need to live off of annual interest alone.

The FIRE Number and the 4% Rule

So how do you calculate your FIRE number?

The way FIRE works is that you save up enough money such that you could live off annual interest gains on your investments, without having to touch the principal. There isn't concern about having enough runway like there is in typical retirement thinking.

Many use the 4% rule as a benchmark for how much they expect their investments to gain each year. This percentage comes from The Trinity Study, a 1998 research paper that measured withdrawal rates from 401(k)s. It found that a draw of 4% per year had a near-zero chance of depleting savings after 30 years.

To calculate your FIRE number using the 4% rule, multiply your expected annual retirement expenses by 4% (divide by 0.04). Another way to think of this is to multiply by 25.

For example, if you want $40,000 a year in passive income, your FIRE number would be $1 million ($40,000 x 25). Know that this figure is an estimate and will depend on inflation and your own circumstances.

Essentials of Lean FIRE

At its core, the Lean FIRE movement is about minimalist living, strict budgeting and smart investing. From downsizing your living space to cutting non-essential expenses, every decision you make is a factor in reaching your financial independence and early retirement goals.

First and Foremost, a Lean Budget

Budgeting is the lifeblood of the Lean FIRE lifestyle. It’s not just about tracking your expenses; it’s about understanding where your money goes and finding ways to cut costs without sacrificing your quality of life.

Creating a Lean FIRE budget helps you:

• Identify cost-cutting opportunities.
• Set a savings goal, often referred to as your FIRE number.
• Calculate your FIRE number as 25 times your annual expenses in retirement.

To reduce expenses, Lean FIRE enthusiasts align their spending with true value. This may involve:

• Purchasing used items.
• Utilizing public transportation.
• Cooking at home.
• Downsizing your home or apartment.

Eliminating or reducing debt can further alleviate financial stress and bolster your financial foundation.

Invested Assets

While budgeting is crucial to Lean FIRE, investing is the engine that drives your wealth growth.

Building a diversified portfolio through low-cost, passive investment methods such as index funds and ETFs is key to accelerating your wealth creation. Lean FIRE enthusiasts often invest a significant portion of their savings, harnessing the power of compound interest to grow their wealth over time.

By navigating market ups and downs with wisdom and resilience, you can ensure the long-term viability of your Lean FIRE plan.

A Minimalist Lifestyle

Your lifestyle choices play a significant role in your Lean FIRE journey. The Lean FIRE lifestyle is about more than just saving and investing; it’s about living within your means and making conscious decisions that align with your financial goals.

Crafting Your Lean FIRE Plan

Formulating a custom Lean FIRE plan involves the following steps:

1. Calculate your FIRE number.
2. Set milestones.
3. Craft an investment strategy.
4. Continuously monitor your expenses.

Calculate Your FIRE Number

Your FIRE number is a crucial factor in your Lean FIRE journey. It’s the total amount you need in your investment portfolio to be considered financially independent.

While the typical FIRE number is $1 million, achieving Lean FIRE might involve targeting smaller amounts like $500,000 or aiming for $20,000 per person in the household annually.

Remember, the goal is not to amass a fortune, but to achieve financial independence that allows you to retire early and live a life of freedom and fulfillment.

Set Milestones Along the Way

Setting financial milestones is another crucial step in crafting your Lean FIRE plan. These milestones help you track your progress, stay motivated, and stay focused on your early retirement goals.

Short-term milestones can involve achieving a particular savings rate or fully funding an emergency account. Long-term milestones, on the other hand, could involve reaching a certain net worth or investment portfolio size.

Celebrating these milestones can provide a psychological boost, reinforcing your positive financial habits and keeping you focused on your goals. When you reach a milestone, take the time to celebrate your progress. Every step you take brings you closer to your dream of financial independence and early retirement.

Lean FIRE Drawbacks

As with any journey, the Lean FIRE path comes with its own set of challenges. Life circumstances change, and unexpected hurdles can crop up along the way. Being adaptable and flexible is key to navigating these challenges and staying on track towards financial independence.

Unexpected Costs Are Harder to Manage

Unexpected costs can throw a wrench in your Lean FIRE journey.

Building an emergency fund is one way Lean FIRE followers manage unexpected costs. This fund serves as a safety net, helping you cover surprise expenses without dipping into your retirement savings.

On top of building an emergency fund, Lean FIRE individuals also prioritize personal health to prevent costly medical expenses that can threaten their financial security. Some even relocate to areas with lower living costs as a proactive approach to mitigating unexpected costs.

These strategies not only help manage unexpected costs but also ensure that you stay on track towards achieving your financial independence.

Markets Inevitably Shift

Market fluctuations are another challenge that you may face on your Lean FIRE journey.

Investing in a diversified portfolio and focusing on stable assets can lead to steadier returns and help you navigate market turbulence effectively. Consider guaranteed-income options like bonds, which can also offer a reliable source of income in retirement and reduce your dependency on market performance.

Alternative Paths to Financial Freedom

Despite Lean FIRE presenting a route to early retirement and financial independence, it’s not for everyone. There are several alternative paths to financial freedom, each with its own advantages and challenges.

Lean FIRE Vs. Coast FIRE

In Coast FIRE, you’re not actually retiring. Instead, you hustle earlier in life to frontload your retirement assets, then let compound interest carry you the rest of the way. You could then free up retirement contributions in your budget and use that money for other things, or downshift to a less stressful job.

To be clear, in Coast FIRE you’re still working. Lean FIRE is a higher wealth target, but lets you be fully work-optional.

Lean FIRE Vs. Barista FIRE

Barista FIRE is another alternative path to financial freedom. It involves saving enough to retire, then subsequently working less or part-time while continuing to engage in income-generating activities.

For many, Barista FIRE represents a gradual transition into retirement, offering structure and a sense of purpose.

Barista FIRE isn’t just about working part-time. It’s also about diversifying your income streams. This could involve part-time employment, entrepreneurship, or even real estate. For some, the decision to pursue Barista FIRE is motivated by a desire to focus on work that aligns with personal values and leads to satisfaction.

If you’re looking for a balanced approach to early retirement, Barista FIRE could be your ideal path.

Lean FIRE Vs. Regular FIRE

Regular FIRE serves as a middle ground between Lean FIRE and Fat FIRE, as is often considered a more traditional fire approach. It targets financial independence with a balance between living modestly and having extended financial coverage.

Those who follow the Regular FIRE path usually save less aggressively than Lean FIRE adherents but more so than those aiming for Fat FIRE. In online circles, this target number is typically $1 million to $2.5 million, although these numbers were established in the 2000s and may no longer be realistic.

The goal is a comfortable but not extravagant retirement fund.

Investment strategies for Regular FIRE often involve:

• A diversified portfolio of stocks, bonds, and other assets to grow wealth over time while managing risk.
• A balanced approach that allows for the occasional indulgence without derailing your financial goals.
• A lifestyle that includes some discretionary spending and comfort but avoids the excesses of a Fat FIRE lifestyle.

Lean FIRE Vs. Fat FIRE

For those who dream of a luxurious retirement, Fat FIRE is the way to go.

This approach targets a higher standard of living in retirement, which means you’ll need to save significantly more than you would with Lean FIRE or Regular FIRE – usually at least $2.5 million in assets.

Achieving Fat FIRE requires a disciplined approach to finances, high levels of income, and a strategic savings and investment plan.

The benefits of the Fat FIRE lifestyle are enticing. You’ll have the luxury of retiring without mandatory work and the financial freedom to provide substantial support to family members. It’s a path that requires more effort and resources, but the rewards are equally substantial.

If you’re aiming for a retirement filled with luxury and comfort, Fat FIRE might be the right path for you.

Books About FIRE

Books and blogs offer a wealth of knowledge and inspiration for your Lean FIRE journey.

“Your Money or Your Life” by Vicki Robin & Joe Dominguez is a foundational read that offers a unique perspective on money and time.

“The Simple Path to Wealth” by JL Collins simplifies the complex topic of investing for financial freedom.

Other notable reads include “Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence” by Jacob Lund Fisker and “Playing with FIRE” by Scott Rieckens. Both provide comprehensive FIRE strategies and engaging personal narratives that inspire and guide you on your financial journey.

Tailoring Lean FIRE to Your Life

Lean FIRE doesn’t adopt a “one size fits all” approach. Just as everyone’s financial situation is unique, so too should be their Lean FIRE plan.

Whether you’re single or have a family, in your 20s or in your 50s, you can tailor Lean FIRE to fit your life.

Adapting to Different Life Stages

As you transition through different life stages, it’s important to reassess your financial strategy and make necessary adjustments. This might mean:

• Saving more aggressively in your early years.
• Diversifying your investments as you grow your portfolio.
• Shifting towards more stable assets as you near retirement.

Ensure that your Lean FIRE plan remains relevant and effective regardless of what life throws your way.

Lean FIRE with Dependents

Pursuing Lean FIRE with dependents presents its own set of challenges. Children can significantly affect your Lean FIRE plans due to the costs involved in raising them and funding their education.

With careful planning and strategic choices, you can navigate these challenges. For instance, relocating to less expensive regions or countries can help maintain a low-cost lifestyle while providing for your family. Achieving Lean FIRE with dependents is not impossible, but it is tough.

It’s all about finding the right balance that works for you and your family.

The Impact of Lean FIRE on Society

The Lean FIRE movement extends beyond being merely a personal finance strategy. It’s a societal shift that challenges the conventional norms of work and retirement. By advocating for early retirement and financial independence, Lean FIRE is influencing societal views on the necessity of long-term employment.

This shift towards simplicity and financial independence is attracting younger generations, particularly millennials, who are seeking alternative ways to achieve financial security and redefine the concept of retirement. By teaching individuals to be content with less and focus on what truly matters, the Lean FIRE movement is paving the way for a future that values financial freedom over material wealth.

Maintaining a Lean FIRE Lifestyle

While the prospect of achieving financial independence and retiring early is thrilling, long-term planning is also important.

Maintaining a healthy lifestyle and focusing on preventive healthcare can significantly reduce medical expenses, which tend to rise as we age. Planning for taxes is another essential step in securing your financial future; consider a strategy like a Roth conversion ladder to access your 401(k) funds sooner.

Diversifying your income streams can provide additional cash flow during retirement. By taking these steps, you can ensure that your savings last throughout your retirement and that you continue to enjoy the financial freedom you worked hard to achieve.

Frequently Asked Questions

How Do You Calculate Lean FIRE?

To calculate your Lean FIRE number, multiply your annual expenses by 25. This will allow you to withdraw 4% per year from your portfolio relatively safely.

What Is the Minimum for Lean FIRE?

To achieve lean FIRE, it is advised to work until around 45 and have at least $1 million in after-tax investments generating $40,000 a year in passive income. This should enable you to live the lean FIRE lifestyle.

How Much Does It Cost to Reach Lean FIRE?

To achieve Lean FIRE, you would need a minimum of $1 million in savings to live on $40,000 a year or less.

What Is Lean FIRE Vs. Fat FIRE?

Lean FIRE involves retiring early but living a modest lifestyle, while Fat FIRE involves retiring early and living a more extravagant lifestyle. Coast FIRE refers to having enough savings for retirement, but still needing to work to cover living expenses.

What Are Some Strategies to Manage Unexpected Costs in Lean FIRE?

To manage unexpected costs in Lean FIRE, consider building an emergency fund, prioritizing personal health to prevent costly medical expenses and relocating to less expensive regions. These strategies can help you stay financially resilient.

The Takeaway

Embracing the Lean FIRE lifestyle offers the opportunity to achieve financial independence and retire early. It’s a journey that requires discipline, commitment, and a radical rethinking of traditional retirement norms.

Remember, financial freedom is not just about the destination, but also about the journey. ◆

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