Looking to retire early, but don’t necessarily have the income to save up for an affluent retirement? Lean FIRE may be the path you want to consider.
What is Lean FIRE? Lean FIRE is an expression meaning someone is Financially Independent (FI) by living on or near the bare minimum, and not spending on discretionary items.. They have enough money saved in order to stop working forever if they only spend on life’s necessities.
Now, there isn’t a hard and fast rule about how much money that is, or what counts as discretionary spending. It will change depending who you ask. I’ll cover some of the more common viewpoints, and help you determine how much you need to reach Lean FIRE status.
Where does the term Lean FIRE come from?
I went and looked in the dictionary, like a nerd, at find what the definition of lean is. You can see what I found by going to Merriam-Webster. Lean can be used a couple of ways, but the one we are interested in is when lean is used as an adjective. As an adjective, it had the following definitions:
- 1 : containing little or no fat
- 2 : lacking richness, sufficiency, or productiveness
- 3 : deficient in an essential or important quality or ingredient
Definition three doesn’t really apply, but the first two definitions there really describe how lean is being used when talking about Lean FIRE. I’ve bolded those parts that are of particular interest. Lean FIRE contains little or no “fat”, where fat is life’s extra. There is no fat, only the meat, which is what you need to survive. Lean FIRE “lacks richness” really sums it up perfectly I think. You have enough to make it through life, but not much more than that. With Lean FIRE, you don’t have enough money to buy fancy cars, or your dream house. Just enough to pay the bills.
How much do you need saved up before retiring?
The 4% Rule
If you’re like me, one of the first questions you ask yourself is, “How much do I need?” The second question is, “How fast can I get there?”
The most common rule of thumb is that you need to save up 25 times your annual expenses before you retire. This is also referred to the 4% rule because you could withdrawal up to 4% annually. If you are going to do Lean FIRE, the key is to get your annual expenses as low as possible.
The general rule of thumb is that you are able to live off 4% of your total retirement savings annually. So what does that look like if you are going Lean?
Here is an example Lean FIRE budget / annual expense sheet.
| Expense | Monthly Cost | Annual Cost |
| Mortgage ($240k @ 2.99%) | $1,166.67 | $14,000 |
| Utilities | $100 | $1,200 |
| Food (Including Restaurants) | $400 | $4,800 |
| Transportation | $100 | $1,200 |
| Cell Phone | $40 | $480 |
| Clothing | $25 | $300 |
| Other Shopping | $50 | $600 |
| Healthcare | $30 | $360 |
| Miscellaneous | $30 | $360 |
| Total | $1941.67 | $23,300 |
In this example, this person would need $23,300 per year to survive. That means they would need $582,000 ($23,300 * 25) before retiring if they followed the 4% rule.
The federal poverty level in 2020 for a single person is $12,760. So, this is a pretty cut-throat budget. This person has done everything they can to make their annual expenses as low as possible. Buying only essentials, living in an affordable place (definitely not in California!), and as a result of low income, they are offered low cost healthcare through the exchange.
As stated on healthcare.gov:
Income between 100% and 400% FPL: If your income is in this range, in all states you qualify for premium tax credits that lower your monthly premium for a Marketplace health insurance plan.
https://www.healthcare.gov/glossary/federal-poverty-level-fpl/
Reddit Lean FIRE
The leanfire Reddit community sets the yearly spending rate for Lean FIRE at $40,000 or less per year. Using the 4% rule, you would need $1,000,000 saved up before being able to consider yourself financially independent.
I consider this pretty generous, as the average American household income is between $55,000 and $60,000.
Tips for Lean FIRE
Pay Off Your House
The place you call home, your house, is normally a persons largest expense. Imagine how much less you would need saved for FIRE if you didn’t have a house payment or rent due each month?
Sure, property taxes will have to paid each year, but they are a fraction of your mortgage. So what does the budget look like once the house is paid off?
If we go back and look at the example, they had a mortgage of $240,000. Let’s assume they put 20% down, so the house is actually worth $300,000. Since they had a goal of Lean FIRE, they chose a location with low property taxes, 1% of the homes value. After the mortgage is paid off, they would have to pay $3000 a year in taxes still. A lot better than $14,000 or so a year.
Their annual expenses now become $11,300! Down $11,000 from the original $23,300. They cut their budget in half by paying off their house!
Using the 4% rule, they can now have the same comfort of living with only $275,000 saved for retirement.
Start Saving & Investing Now
Let the power of compound interest start working for you now! The sooner you start saving, the more time your money has to grow. As a side note, I do think paying off your house is a form of investing. I would do that first, although their are plenty of people who say it’s better to invest the money in other areas.
If your aiming for Lean FIRE, you need to have your expenses at low as possible. Paying off your house, as we already saw, dramatically cuts your expenses.
The best of us aiming for FIRE can put away 70-80% of our income into savings, once we have cut our expenses to a minimum. More average though would be only achieving a 60% savings rate. 60% of $70,000 is $42,000.
Let’s cut our example guy a little slack and assume he was getting certain life situations in order for the first ten years of his career (From age 20 to 30), and was only able to save $42,000 a year for 30 years (From age 30 to 60). Let’s put that into a simple compound interest calculator and see what we get.
High Savings Rate Calculation
Using a fairly conservative rate of 5%, you would have about $2.8 million. What if I assumed a more aggressive interest rate of 8%? That would result in $4.8 million.
If your goal was to save up less than a million, you could retire far earlier than 30 years. At 5%, it would take 16 years to save up a million. Most of us start working in our twenties. That means you could retire in 10 to 20 years while in your thirties or forties!
FI without the RE
And that reminds me… You don’t have to retire to be financially independent. There are lots of reasons people keep working once they are financially independent. They enjoy their job, they have good benefits (especially healthcare), they want more money to spend, the don’t want to be bored, perhaps they’re even scared. It is a huge life change after all.
Imagine how much more freedom you would have at work if you didn’t have to worry about taking risks. Many of us hold back because we are scared of failure, we need out job. But being financially free allows us to take those risks, which more often than not, pay off.
Lean FIRE Calculator
I really enjoy this early retirement calculator put together by Engaging-Data.com. You can find it on their website here.
This calculator will help you calculate how long it takes to get to some target amount of invested money using several factors that you are able to adjust. The calculator just uses the 4% rule on retirement spending, as well as historical economic data.
I like this calculator because it allows me to change most of the factors involved in the calculation. If you don’t like that particular calculator, I suggest searching around for one you do like. This Reddit thread has some good suggestions.
FIRE Terminology
There is some lingo that gets tossed around in the FIRE community. I didn’t know what a lot of the terms meant, and had to learn them over time and from the context they were used in. I’m going to make a short list, so you don’t have to do that with the words and phrases I’m using.
FI – Financial Independence.
Financial Independence means having enough money saved up so that you don’t have to keep work if you don’t want to. Your bills are covered. That doesn’t necessarily just mean having a pile of money saved up in your bank account.
FI can be done in a number of ways, however, it is very common to save up 25x of your annual expenses and have it invested. One you reach that point, a 4% withdraw rate should be enough live off for a very long time.
The other part that can compliment saving is passive income. Investing in real estate is a very common way of achieving passive income. Every dollar that comes in is a dollar you don’t have to withdraw from your savings.
RE – Retire Early.
For most people, retiring early means quitting your full-time day job before reaching the normal retirement age of 65.
However, it could mean different things to different people. Lots of people like to find something to keep them busy, and often that something produces income. That means they’re technically not retired, but hey, they’re doing what they want to do. Not what they have to do to survive.
FIRE – Financial Independence, Retire Early.
The combination of both FI & RE. This is becoming financially independent and retiring early. You have put in the hard work, now it’s time to pull the trigger and do whatever your heart desires.