A Review of the 4 Types of FIRE Strategies In Today's High Inflation Environment

About a year ago, I have written an introductory post regarding the 4 different types of Financial Independence Retire Early (FIRE) strategies, namely Lean FIRE, Regular FIRE, Fat FIRE and Barista FIRE, where their pros and cons were being discussed.  I believe all 4 strategies have their supporters, and personally I am striving towards Barista Fire.  However, I think as the environment changes (especially now into a high inflationary environment), it will be prudent for us to relook into these 4 strategies to see how well they work and what rectifications may be required.

For today's discussion, I will be using the expenses tabled by Money Smart as per 2023 inflationary environment:

1)    Lean FIRE

For Lean FIRE, sky high inflation is probably the greatest enemy.  If near term expenses increase from SGD 1,500.00 to SGD 1,670.00 per month, this 11% increase is going to deplete the portfolio faster than expected.  In my opinion, Lean FIRE, as the name suggest, has the least buffer against unforeseen circumstances, hence it's the hardest to navigate through uncertain times like high inflation as it is almost impossible for individuals to further cut back on spending, which are likely all on necessities.  The more worrying fact, as we all know, is once prices of food and necessities increases, it almost never drop again.  The most that one can hope for is prices of goods remain stagnant for longer periods even as inflation tames in future.  

Based on a conservative 2.5% inflation rate moving forward, with a annual portfolio return of 5%, a SGD 450K portfolio can last for 37 years with SGD 1,500.00 monthly expenses.  However, the increase to SGD 1,670.00 per month will allow the portfolio to last for only 31 years.  This would probably mean that individuals embarking on Lean FIRE will need to adopt the Barista FIRE approach to find some form of part-time income that can help to cover some of the expenses, so that the portfolio will not be negatively impacted to a great extent. 

2)    Regular FIRE

For Regular FIRE, it offers more flexibility than Lean FIRE.  As the near term expenses increase by SGD 3K to SGD 3,180.00, which is a more acceptable 6% increase, it can be dealt with by slight changes (or "sacrifices") in lifestyle spending in the short term, which should be rather manageable to individuals.

Based on a conservative 2.5% inflation rate moving forward, with a annual portfolio return of 5%, a SGD 900K portfolio can last for 37 years with SGD 3K monthly expenses.  However, the increase to SGD 3,180.00 per month will allow the portfolio to last for only 34 years.  This reduction is not too significant in my opinion, and changes can be made to minimize the impact on the portfolio.  Individuals can reduce their expenses in transport by taking less Grab and equivalent, and take public transport instead.  Recreation expenses can also be reduced, by going for such activities once every 2 months instead of monthly, and that would shave off the additional expenses easily, and hence result in minimal to no impact on their portfolio. 

3)    Fat FIRE

For Fat FIRE, it offers significant flexibility, but it depends on whether the individual embarking on Fat FIRE is willing to compromise.  Based on the table above, the monthly expenses of a "high-end" individual is a shocking SGD 11,324.00, but I think that is not the expenses someone on FIRE (not even FAT FIRE) will incur.  As such, I am going to boldly assume that the current expenses of an individual embarking on Fat FIRE will be approximately 60% of that amount, which is SGD 6,800.00.  

Based on a conservative 2.5% inflation rate moving forward, with a annual portfolio return of 5%, a SGD 1.65M portfolio can last for 37 years with SGD 5.5K monthly expenses.  However, the increase to SGD 6,800.00 per month will allow the portfolio to last for only 27 years.  This reduction is definitely detrimental to retirement plans, but as mentioned earlier, if the individual embarking on Fat FIRE is willing to compromise, there will be no issue at all.  The easiest route to take is to reduce their expenses on accommodation by downgrading or relocate to a cheaper neighbourhood.  A slight reduction in expenses will go a long way.  The least desirable route to take should be to convert from Fat FIRE to Regular FIRE for 8 years, before reverting back to Fat FIRE.  This "endure the bitterness first, taste the sweetness last" approach will allow the portfolio to last for 35 years.

4)    Barista FIRE

For Barista FIRE, in my opinion, it offers the most flexibility as individuals embarking on this path are still employed, or doing some part-time/ freelance work that brings in some form of income monthly.  That is the main reason why I opt for this path, and is working towards this goal.

Based on a conservative 2.5% inflation rate moving forward, with a annual portfolio return of 5%, a SGD 585K portfolio can last for 31 years with SGD 2,750.00 monthly expenses, and SGD 1,200.00 monthly income from part-time/ freelance work (lasting for the 1st 15 years only).  However, the increase in monthly expenses to SGD 2,920.00 (a similar 6% increase as regular FIRE) will allow the portfolio to last for 29 years, which is not a significant reduction.  This impact can be eradicated by getting one more freelance work/ side hustle to bump up the monthly part-time/ freelance income to SGD 1,450.00, or more undesirably, increase the duration of part-time/ freelance work from 15 to 20 years.  If none of these are acceptable, a reduction in expenses on transport, entertainment or travel will also do the job, minimizing any impact to the portfolio.

To wrap this up, I believe staying flexible and nimble with the finances is the main priority of one pursuing FIRE.  In times of high inflation, my personal opinion is that those embarking on Lean FIRE will be most impacted, as they probably have to return to the workforce one way or another to continue to build up their portfolio to recalibrate the 4% rule to the higher expenses required.  For other FIRE strategies, the effects of high inflation will be more manageable as there are more ways and means to navigate through the tough times, while keeping to their "retire early" status.  

Regardless of the strategies used, proponents of the FIRE strategy should be financially responsible individuals, for them to get to where they are.  Hence I think despite the tougher macroenvironment, FIRE practitioners will be able to adapt to the various circumstances.  It's just a matter of how easily one can steer through the "difficult times".  Cheers to all who has achieve FIRE, and all the best to all FIRE pursuers like myself, may we get there sooner than we expect.  Barista FIRE, here I come...!