4 Types of Financial Independence Retire Early (FIRE) Strategies

The FIRE movement began in the US, where one strives to increase his income, save a large portion of it, so he is able to to achieve financial independence as soon as possible.  Once financial independence is reached, one can have the freedom of choice to retire, or do minimal work to pass time.  As how one decides to achieve FIRE may differ based on one's character, habits and how they want to spend their early retirement years, we shall examine 4 different FIRE strategies that one can pursue.

1)     Lean Financial Independence

Lean financial independence is favoured by individuals who require an investment portfolio that is able to generate an income stream to cover only the essential expenses.  Essential expenses includes needs such as housing, food, transport and utilities.  One who pursues lean financial independence are usually minimalist and frugal by nature.  This means that generally the investment portfolio required for lean financial independence is relatively small, due to the tendency of the individual to spend less money.

Illustration:

For the context of a single staying in Singapore, the cost of essentials for a retiree is approximately SGD 1,400.00 ~ SGD 1,500.00 per month based on a report from The Straits Times published in 2021. Based on the 4% withdrawal rule (read up on “4% Rule”), the portfolio size required will range from SGD 420K to SGD 450K.

Advantage of Lean FI:

a) Since a relatively smaller portfolio is required, Lean FI can be achieved faster than other strategies, especially regular FI and Fat FI.

b) In the event of any crisis such as job loss, individuals will not have much problem meeting basic budgetary obligations.

Disadvantage of Lean FI:

a) In the event of loss of active income from day job, individuals will have to forgo discretionary budgeting for entertainment and vacations.

b) In the event of market crashes, the portfolio value is reduced substantially.  This will impact the budgeting severely due to the lack of buffer in Lean FI.   If 4% withdrawal is maintained, the portfolio may deplete faster than expected, which severely impacts retirement budgeting at the later phase.  If the 4% withdrawal rate is reduced to 3% or even 2% to preserve the portfolio, the current monthly budget may create near term strain in finances.

For more details regarding Lean FI, read “What is Lean FIRE”.

2)     Regular Financial Independence

Regular Financial Independence is favoured by individuals who require an investment portfolio that is able to generate an income stream to cover his total annual expenses.  This allows the individual to retire, while maintaining the standards of his current lifestyle.  This is the most common strategy that individuals practice, and is usually done with the 4% withdrawal rule in mind.

Illustration:

For the context of a single staying in Singapore, the average expenses should comfortably be approximately SGD 2,500.00 ~ SGD 3,000.00 per month.  Thus, based on the 4% withdrawal rule, the portfolio size required will range from SGD 750K to SGD 900K.

Advantage of Regular FI:

a) Current lifestyle can be maintained even without active income.

b) In the event of market crashes, even when the portfolio value is reduced substantially, individuals can temporarily switch to Lean FI by lowering withdrawal rate to 3% or even 2% to ride through the tough times.  This preserves the portfolio, and basic budgetary spending will not be badly affected, though entertainment and vacations need to be cut.

Disadvantage of Regular FI:

a) A much larger portfolio will be required compared to Lean FI, thus more time will be required to build up this massive portfolio before the individual can begin enjoying the regular FI journey.

b) A shorter duration to enjoy the regular FIRE.

3)     Fat Financial Independence

Fat Financial Independence is favoured by individuals who wants an investment portfolio that is able to generate an income stream that is more than sufficient to cover his total annual expenses, which includes all forms of discretionary spending.  This allows the individual to retire with a higher standard of living than his current lifestyle.  This is the most extravagant strategy that individuals practice, and it enables the greatest financial flexibility in the retirement years.

Illustration:

For the context of a single staying in Singapore, the average expenses should comfortably be approximately SGD 2,750.00 per month (the mean from illustration under Regular FI).  Fat FI will mean the individual has a passive income of at least 1.5 to 2 times that amount, which is SGD 4,125.00 ~ SGD 5,500.00 per month.  Based on the 4% withdrawal rule, the portfolio size required will range from SGD 1.23M to SGD 1.65M.

Advantage of Fat FI:

a) A lifestyle better than current on can be maintained even without active income.

b) In the event of market crashes, even when the portfolio value is reduced substantially, individuals can still stick to 4% withdrawal rule, without any need to cut back basic budgetary spending.

c) Funds will be available to fulfill retirement dreams like longer and further vacations.

Disadvantage of Fat FI:

a) A significantly huge portfolio needs a lot of time to build.

b) The physical and mental stress accumulated during early years of working life in exchange for a huge paycheck (required to build the huge portfolio) may be detrimental to health in later years.

For more details regarding Fat FI, read “What is Fat FIRE”.

4)     Barista Financial Independence

Barista financial independence is practiced by someone who strives to build up a sufficiently large investment portfolio that is able to generate an income stream to cover a portion of the monthly expenses, while the difference is supplemented by the income from a part time work that is less stressful/ demanding.  This is a good strategy for individuals who like to remain in the workforce and yet have options to do the work they desire, with minimal need to worry about the monthly income.

Illustration:

For the context of a single staying in Singapore, the average expenses should comfortably be approximately SGD 2,750.00 per month (the mean from illustration under Regular FI).  Thus if an individual can find a part time job that pays around SGD 800.00 ~ SGD 1,200.00 per month, the annual amount that needs to be covered by income from portfolio will range from SGD 18,600.00 ~ SGD 23,400.00.  Thus, based on the 4% withdrawal rule, the portfolio size required will range from SGD 465K to SGD 585K.

Advantage of Barista FI:

a) Since a relatively smaller portfolio is required, Barista FI can be achieved faster than other strategies, especially regular FI and Fat FI.

b) In the event of market crashes, even when the portfolio value is reduced substantially, individuals can temporarily increase their active income from part time jobs, or reduce withdrawal rate to 3% or 2%.  This preserves the portfolio, basic budgetary spending will not be affected, though entertainment and vacations may need to be minimized.

c) Part-time work helps individuals to stay active mentally and physically in the work force, albeit with much lower levels of stress and commitment.  Easier for individuals to pass their time as well.

Disadvantage of Barista FI:

a) In the event of loss of active income from part time job, individuals will have to minimize discretionary budgeting for entertainment and vacations.

For more details regarding Barista FI, read “What is Barista FIRE”.

There is another strategy out there called the Coast FI. However after reading through the details, it is a strategy that allows one's investment portfolio to grow via compounding, without the need to inject more capital after some time.  However, this strategy does not enable one to retire early.  Hence I will not include this strategy in my discussion.   For anyone interested in the details regarding Coast FI, read “What is Coast FIRE”.

The existence of 4 different strategies of FIRE (and 5 different FI strategies) shows that there is no “one size fits all” approach.  It all depends on individuals' personal liking and choices.  One thing for sure, regardless of the strategy of choice, one who chooses to pursue FIRE hopes to attain financial independence, and the choice to retire early way before Singapore's retirement age of 62.  Current generations have deviated from the practice of our forefathers, to work till retirement age.  Instead, work-life balance has gain importance in our generation.   This is exceptionally important for young couples who have started a family, and wishes to spend more quality time with their children during their growing-up years.  FIRE is definitely a feasible strategy to achieve this.

Personally, I hope to achieve Barista FIRE (hence the name of my blog) by age 40.  By then I would love to attain the state of semi-retirement, where I will return to my home country to further reduce my expenses.  At the same time, being able to do some part time work that I like (Yup, hope to do something less stressful as I am feeling drained after 12 years of doing the same thing) and not having to worry if I have enough to meet my monthly expenses just sounds great!  More importantly, I hope to return back to my home country to spend more quality time with my family, and participate in more family gatherings.

What about you?  Is any of the strategies above your cup of tea?  Do check out the links above to have a deeper understanding of the different approaches.  May you find one that suits you best.  At the meantime, Barista FIRE, here I come...!