Financial Independence, How Does it Work, and Which Path Is Right For You?

Traditional FIRE, Lean vs Fat FIRE, Coast FIRE, Barista Fire, there are enough models to make your head spin. Let’s break them down.

The “Traditional” FIRE (Financial Independence/Retire Early) is a relatively new concept gaining traction among today’s workforces. People are, understandably, tired of spinning their wheels to keep up with the Joneses. They end up trapped in a never-ending cycle of lifestyle inflation, a hedonic treadmill that seems impossible to avoid. Luckily, FIRE can offer the escape hatch you’ve been looking for and is more attainable than most realize. Thanks in part to the Trinity study, published in 1998, pioneers like Mr. Money Mustache developed an approach successfully replicated by many within the FIRE community.

The Trinity study, so named because it was written by finance professors at Trinity University, found that when managing retirement funds, a 4% withdrawal rate could effectively sustain a retiree for 40 years or more. When retroactively applied from the time period of 1925 to 1995, the study found that at any given time (from 1925 to 1995) you could retire, and if your annual withdrawal rate stayed at 4% of invested funds you can safely fund yourself for 40+ years 92% of the time. That success rate jumps to 100% when you maintain a 3% withdrawal rate. It also jumps to 96% success if your time horizon changes to 35 years with a 4% withdrawal rate.

Updated tests were run a few years ago in 2018, with even more encouraging information based on the addition of historical returns from 1995-2018. This model showed that, based on 1925-2018 returns, a 4% withdrawal rate would sustain a 40-year retirement 100% of the time. Many of these “Monte Carlo” models would leave you with more money than you started with.

What does this mean? It means that if you were to retire on the precipice of a recession or depression, you would still have an extremely high likelihood of maintaining your wealth and spending power throughout an extended retirement. Inflation is built into these models, so if you were to retire with a portfolio of 1,000,000 you could spend 4%, or $40,000 annually or the future equivalent for 40 or more years. In other words, your spending power would not change. This does not account for additional income you may enjoy, like social security or pension, or the reduced expenses of traditional retirement age, like a fully paid mortgage.

Coast FI

Coast FI, which may or may not include the Retire Early component, is when you front-load retirement investments until the point determined by a mathematical formula that you can “coast” and let compound interest take over. When people reach their Coast FI number, they may choose to pursue part-time work to cover their expenses, or they may change gears and find a job with less stress, more satisfaction, or better work-life balance. *Formula*

Barista FIRE

Barista FIRE is an interesting concept, and one that has been gaining momentum in the FI community. Using Barista FIRE, you would reach an FI number that would allow you to cover some expenses with an investment nest egg, while continuing to work part-time to cover the remainder. Most people who have retired early after reaching traditional FI find themselves pursuing income generating activities post-retirement. When this happens, they realize they could have retired from full-time work years earlier, bridging the gap with new income streams.

Have a small business you run on the side? Work in healthcare where ‘casual’ positions allow you to set flexible part-time hours and still be paid well? Barista FIRE might be for you.

Hybrid Approaches

I, like many others within the community, have developed a personalized hybrid approach. I’ve reached my Coast FI number and continue to work toward Lean FI. Once I reach Lean FI, I plan to change gears and step back from full-time employment. I plan on working, but not Monday through Friday. I work in emergency services, and because of that there are options to work casual part-time hours, while making decent money. Having a part-time option that would allow me to work 36+ hours per month, giving me the ability to pursue small business opportunities to further supplement my income.

Whether my income comes from hourly work, small business receivables, or some combination of the two, I plan to cover my expenses while I watch my investments grow toward a traditional FI number. My expenses will remain relatively low, as my house will be paid off in 2-3 years. My wife and I have overpaid our mortgage since purchasing our 3-bedroom 1,800 square foot home for 158,000 5 years ago. It’s a nice house, too. That is why I stress moving to affordable areas that still offer high quality of life. Mitigating the major expense of housing has allowed me to save and invest at a high rate without sacrificing a comfortable lifestyle.

Working in emergency services and healthcare have given me earning and purchasing power. Healthcare, objectively, is the best paying industry in my area, and many other rural areas across the country. Hell, some areas pay better than large metro salaries because recruitment and retention outside of large population centers is hard to do, and having done hiring and recruitment I can confirm.