You know what FI/RE is and you’re sold. This is the life for you. But did you know there are several different types of FI/RE? Read on to find out which iteration best fits you and your lifestyle!
FI/RE stands for Financial Independence, Retire Early. The 3 main tenants of this concept involve:
- Saving a massive amount of your income (usually 50% or more)
- Living well below your means
- Investing heavily in low cost index funds
The end result will have you retiring several years prior to the traditional retirement age of 65+. While this initial concept was developed in the 90s, the FI/RE movement now has many different paths towards the common goal of financial independence
The Standard Approach To FI/RE
When FI/RE was first conceived, it was based on the 4% rule, which meant that you would have to save 25x your expected annual retirement expenditures, because you’ll be withdrawing 4% of your portfolio each year. The goal annual retirement expenditure was also based on national averages. This standard approach to FI/RE is our baseline.
Example: If you plan to spend $60,000 annually in retirement (this is the average), you’ll need $1,500,000 in your portfolio, per the 4% rule.
Think FI/RE, but on a budget. People who opt in to Lean FI/RE will typically have an expected annual retirement expenditure amount of $40,000 or below. If your current expenses are low, and you don’t plan on increasing them by a lot in retirement, this might be the most fitting types of FI/RE for you.
Example: If you plan to spend $30,000 annually in retirement, your portfolio would need to reach $750,000, per the 4% rule.
You achieve coast FI/RE when you have enough money invested at an early enough age that you no longer need to invest any more to reach financial independence by the traditional retirement age between 65-69. This type of FI/RE is great for 1) people who are not in a rush to retire early, but want to ensure they are set financially for retirement, and 2) tracking your progress.
Example: If your FI number is $1,000,000, you can stop investing once you hit $182,000 by age 30. If the money is not taken out of the accounts, it will grow to $1,000,000 by age 65.
This is FI/RE, but ballin’, meaning this is for people who want to live lavishly. People who pursue Fat FI/RE expect a high annual expenditure, usually upwards of $100,000 per year. We’re talkin’ carros del año, trips always, no restrictions on luxury items.
Mentally, we at YQD are here…(our wallets and portfolios say otherwise but…)
Example: If you plan to spend $100,000 annually in retirement, you would need $2.8 Million invested to achieve a 4% annual withdrawal rate.
Barista FI/RE, or Slow FI/RE
Think FI/RE, but hybrid. Under this type of FI/RE, you are still saving for a specific amount following the 4% rule. However: you don’t want to grind away at work during what some may call some of the best years of your life. Instead, under Barista FI/RE, you’ll have the option of quitting your day job, withdrawing 4% of the portfolio you have built up so far, annually, and supplementing the income that’s left to be covered with your side hustle or another job you would enjoy (that might not pay as much!)
Key thing here is choice and freedom. By building up a bit of a reserve and ensuring you’re on the right track, you could leave a toxic workplace in pursuit of a job that you are more excited about. This also gives you an idea of what life in FI/RE could look like
As you can tell, there are many different types of FI/RE. Just like personal finance, this is personal too. To pick the FI/RE you want to achieve, it is best to analyze current spending and, from this number, predict what your expenditure should be. Your FI/RE number might overwhelm you. Break it down further, split it into some of the other FI/RE styles. You can do this!