Understanding Fat FIRE and Other FIRE Concepts

If you've come across this Fat FIRE calculator, you likely already have some knowledge about FIRE (Financial Independence / Retire Early). FIRE is a financial milestone where your investments generate enough returns to cover your living expenses, allowing you to live off these returns indefinitely and pursue your passions without needing to work.

Fat FIRE

Fat FIRE is a variant of FIRE, which involves accumulating a larger nest egg to enjoy a more luxurious lifestyle without financial sacrifices. As depicted in the personal wealth spectrum, achieving Fat FIRE takes longer but offers the greatest personal freedom.

There is no strict threshold for Fat FIRE, but for practical purposes, let's define it as having sufficient wealth to generate an annual income of $100,000. According to the US Bureau of Labor Statistics, the average US household spent about $50,000 to $60,000 on living expenses in 2019, excluding pensions and social security. To ensure a comfortable lifestyle, doubling this average to $100,000 seems reasonable. Using the 4% rule, this requires a $2.5 million investment portfolio to provide an annual $100,000 income.

Other FIRE Milestones

• Lean FIRE: Typically involves an annual retirement withdrawal of less than $40,000, necessitating an investment portfolio of around $1 million using the 4% rule.
• Regular FIRE: Falls between $1 million and $2 million in net worth.
• Fat FIRE: Defined by an investment portfolio starting at approximately $2.5 million, providing an annual income significantly higher than Lean FIRE.

Personalizing Fat FIRE

The exact amount needed for Fat FIRE varies greatly depending on individual circumstances, such as location, family size, and lifestyle expectations. For instance, a family in the San Francisco Bay Area will require a higher net worth compared to a single person living in the Midwest. Ultimately, determining your Fat FIRE number is a personal decision based on your specific needs and goals.

Calculating Your Fat FIRE Number

To calculate your Fat FIRE number, you'll need to determine how much you plan to spend annually in retirement and divide this by your Safe Withdrawal Rate (SWR):

Fat FIRE Number = Annual Spending / SWR

The SWR, often recommended at 4%, is the percentage of your net worth you can withdraw annually to cover living expenses without depleting your savings. The 4% rule, based on the Trinity Study, suggests a high probability of sustaining your retirement fund over a 30-year period with a balanced portfolio of stocks and bonds.

Using the Retirement Simulator

This interactive calculator helps visualize the growth of your net worth on your journey to FIRE. To use it, follow these steps:

1. Input Your Data: Enter your current age, contributions, and annual spending in retirement.
2. Annual Retirement Spending: Estimate your annual expenses in retirement, which might be lower than your current spending due to factors like Medicare coverage and paid-off mortgages.
3. Current Net Worth: Sum up your assets including stocks, bonds, cash, and retirement accounts, excluding real estate unless you plan to sell it for retirement funds.
4. Adjustments: Modify investment return rates, inflation rates, and SWR to see how these changes affect your net worth over time.

Explaining FIRE Variations

• FIRE (Financial Independence / Retire Early): Achieving enough investments to live off the returns indefinitely, allowing for early retirement and lifestyle freedom.
• Fat FIRE: Aimed at those wanting a higher standard of living in retirement, requiring a larger investment portfolio.
• Lean FIRE: Focuses on minimalistic living, needing a smaller investment portfolio for basic expenses.
• BaristaFIRE: Combines part-time work with investment returns to achieve financial independence, reducing the amount needed for retirement.
• SlowFIRE: Gradually saves and invests over a longer period, allowing for a slower transition to financial independence.
• Coast FIRE: Reaching a point where existing investments can grow to cover retirement needs, allowing one to scale back work without additional savings.
• Flamingo FIRE: A hybrid approach where one works part-time or takes mini-retirements while gradually building up to full financial independence.

The Mathematics

The basics of calculating your net worth:

A = P × (1 + n)^t

Where A is the final amount, P is the principal (initial amount), n is the annual growth rate, and t is the time in years. Your net worth is recalculated yearly, considering factors like take-home pay, spending, and investment returns adjusted for inflation.

Accounting for Inflation

Inflation is integrated into the calculator by subtracting the inflation rate from the investment growth rate, providing an inflation-adjusted return. This ensures all projections are in constant dollars, simplifying your retirement planning by automatically accounting for cost-of-living increases.