Lean FIRE: How to Retire on Less
Lean FIRE means retiring early on a modest budget. It is the simplest version of FIRE: you spend less, so you need less saved, so you can stop working sooner. It is not about living without comfort. It is about keeping your costs low on purpose, so freedom comes years earlier.
What Lean FIRE means in numbers
Your FIRE number is your yearly spending times 25. Lean FIRE simply uses a smaller yearly spending number. That is the whole trick. A smaller spending number gives a smaller target, and a smaller target comes sooner.
| Yearly spending in retirement | FIRE number (spending times 25) | Monthly spending |
|---|---|---|
| $25,000 | $625,000 | $2,083 |
| $30,000 | $750,000 | $2,500 |
| $35,000 | $875,000 | $2,917 |
| $40,000 | $1,000,000 | $3,333 |
Monthly spending is yearly spending divided by 12, rounded to the nearest dollar. The table uses the 4 percent rule. Bengen found in 1994 that about a 4.1 percent first year withdrawal lasted 30 years with 50 percent stocks and 50 percent intermediate term government bonds. The 1998 Trinity study tested withdrawal rates over 30 year periods. Both studies used past market data. A Lean FIRE retirement that starts at 40 may need to last 50 years, not 30. That longer time frame is a real risk, and it is covered below.
Worked example: $25,000 of yearly spending
These are round hypothetical numbers. They are not a real household. The return used here is an assumption, not a forecast. This example uses a 7 percent annual return assumption.
- Step 1. Yearly spending is $25,000.
- Step 2. Multiply by 25. $25,000 times 25 equals $625,000. That is the Lean FIRE number.
- Step 3. Check the withdrawal. 4 percent of $625,000 equals $25,000 in the first year. Divide by 12 to get $2,083 per month.
- Step 4. Find the time. Saving $25,000 each year at an assumed 7 percent annual return grows to about $628,000 after 15 years. The growth factor for 15 years at 7 percent is 25.13, and $25,000 times 25.13 equals $628,250.
Lean and Fat FIRE side by side
| Lean FIRE | Fat FIRE | |
|---|---|---|
| Yearly spending | $25,000 | $100,000 |
| Monthly spending | $2,083 | $8,333 |
| FIRE number at 25 times spending | $625,000 | $2,500,000 |
| First year withdrawal at 4 percent | $25,000 | $100,000 |
The Fat FIRE target is four times the Lean FIRE target in this example, because $100,000 is four times $25,000. That gap is the price of a larger life. It also buys a larger margin for error. A $10,000 surprise bill is 40 percent of a year of Lean FIRE spending. It is 10 percent of a year of Fat FIRE spending at $100,000. The same bill hurts far more on a lean budget.
The risk of cutting too close to the bone
Lean FIRE works only if the lean budget is real and can last for decades. A budget that feels fine for one year can wear thin over 20 years. Prices rise. A roof needs work. A car needs replacing. Health needs change. A lean plan has little room for those costs.
Three tests help. First, live on the lean budget for a full year while you are still working. If you cannot hold it, the target is wrong. Second, add a buffer for costs you have not counted, such as home repairs and medical bills. Third, use a lower withdrawal rate for a long retirement. At 3.5 percent instead of 4 percent, $25,000 of spending needs $25,000 divided by 0.035, which equals $714,286, or about $714,000. That is $89,000 more than the $625,000 target at 4 percent. The extra saving buys room for a bad market year and a longer life.
Also plan for income after retirement. Many Lean FIRE savers earn a small amount from part time or seasonal work. Even $5,000 a year of income cuts the amount the savings must provide from $25,000 to $20,000. At 25 times spending, that cuts the target by $125,000, because $5,000 times 25 equals $125,000. A small income can be the buffer that makes a lean plan safe.
The healthcare gap before Medicare at 65
Health cover is the largest gap in most Lean FIRE plans. Medicare starts at age 65 for most people. If you retire at 45, that leaves 20 years to cover on your own. If you retire at 50, it leaves 15 years. An employer plan usually ends when work ends.
Cover bought on the health insurance marketplace can cost hundreds of dollars a month, even with a subsidy. The cost depends on income, age, and where you live. A lean budget that has no line for health cover is not complete. Put a real price in the budget, based on a quote for your age and area, and add it to yearly spending before you multiply by 25. If health cover costs $6,000 a year, the target rises by $150,000, because $6,000 times 25 equals $150,000.
Health costs also rise with age. A plan that works at 45 may not work at 60. Keep a separate fund for medical costs, and review the cover each year. Do not assume you will stay healthy. Plan as if you will need care, and be glad if you do not.
How to make Lean FIRE work
Lean FIRE fits people who are happy with a simple life for the long term. It fits people who can live in a low cost area, cook most meals, and keep housing costs low. It fits people who have a paid off home, low fixed costs, and a small amount of income after retirement. It does not fit a budget that depends on never having a surprise cost.
Education, not advice. This post explains an idea. It is not personal financial advice. Your income, taxes, health, and family needs are your own. Check the rules that apply to you before you act.
Sources
- Bengen, William P. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning, October 1994. Financial Planning Association
- Cooley, Philip L., Carl M. Hubbard, and Daniel T. Walz. “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable.” American Association of Individual Investors, February 1998. AAII Journal
- Investopedia. “Financial Independence, Retire Early (FIRE) Explained.” Investopedia
- Medicare.gov. “When does Medicare coverage start?” Medicare.gov
