The acronym FIRE stands for “Financial Independence, Retire Early”. It’s a movement that has exploded in popularity in recent years. More recently, we’ve seen the release of a trilogy on financial independence in Quebec ( Liberté. Un éveil à l’indépendance financière ) and the launch of a Canada-wide documentary series on TV5-Unis TV(Jeunes et retraités). In this article, we look back at the definition of the FIRE movement, but above all, we explore the different variations of the FIRE movement.
Basically, the definition of the FIRE movement is very simple: increase your income, reduce your expenses, save and invest the difference in assets so that you can retire at a young age. It’s a challenge, but it’s possible. What’s more, this movement shares elements with frugalism and minimalism in some respects.
When it comes to investing, followers of the FIRE movement will often opt for stand-alone, passive investing, using an asset allocation ETF purchased from an online brokerage platform such as Wealthsimple Trade, Questrade or Qtrade Direct Investment.
However, this formula does not apply to everyone. Some people prefer to tighten their belts and leave their jobs as quickly as possible. Or, at least, the traditional world of work. On the other hand, there are people who love their jobs and want to continue working, but who are still interested in financial independence, because they want to be free of financial stress. They also want the freedom to choose! For example, to say “no” to a job they don’t like or a project that doesn’t interest them.
And so several variations on the FIRE movement were born…
The FIRE movement is all about freedom. But the precise definition differs from person to person. For some, it means financial security (financial independence). For others, it means “Bye Bye Boss” (early retirement). And in between, there are a multitude of meanings.
So there are many variations on the FIRE movement. But which one is right for you? Read on, as we explore the different types of FIRE. You’ll be able to determine which one you prefer, and then set a clear and concise goal.
In the original version of the FIRE movement, people maximize savings and investment for retirement. They will sometimes adjust their lifestyles (cutting back on spending) or find ways to increase their income in order to accentuate their investments. Followers of the FIRE movement are generally people who are also interested in frugalism.
They aim to achieve an investment portfolio approaching 25X their annual expenses, in order to withdraw a retirement income similar to their current expenses. Theoretically, the assets amassed should suffice for the rest of their lives (4% rule).
The goal is traditional retirement, but above all, to achieve it as quickly as possible.
The “FIRE Number” is the amount of money you need to have accumulated in order to disburse comfortably for the rest of your life. This figure is around 25 times your expenses. If you’re worried about running out, you can aim higher!
The first variation of the FIRE movement is: Lean FIRE. The person seeking to achieve Lean FIRE aims to accumulate enough assets to cover basic expenses. In fact, these individuals tend to live very frugal lifestyles and want to maintain these habits in retirement.
By being very minimalist, there is no need to set aside a large amount. In addition, since this individual has a lower than average cost of living, it is often easier to invest the money saved. Do these people deprive themselves to lower their annual expenses so much? Sometimes yes, but often no. Some people just don’t have a very high standard of living without having to restrict themselves.
Lean FIRE shares many of these principles with other movements, such as minimalism and frugalism.
The second variation of the FIRE movement is Fat FIRE. In contrast to Lean FIRE, the Fat FIRE individual usually plans for an above-average cost of living, both now and in retirement.
For example, most people are limited in the number of vacations they can take. Globetrotters at heart are likely to travel more and better in retirement! Therefore, in order to have this lifestyle, the amount accumulated needs to be higher, “fatter”.
These people may also simply want Fat FIRE to feel comfortable with their disbursement strategies (regardless of stock market fluctuations) and limit their risk of running out of money in retirement.
The third variation of the FIRE movement is Barista FIRE. This type of financial independence is based on an investment portfolio to partially support oneself, then working part-time to make up the missing income.
The origin of the term “Barista” comes from the fact that a job at Starbucks would be enough extra income. Plus, they offer medical insurance even if you work there part-time!
So the investment portfolio itself is not high enough to achieve traditional FIRE. On the other hand, it allows you to:
And most importantly, to enjoy life a little more since the wallet doesn’t need to be as big as for other types. It’s a pretty interesting lifestyle!
For example, a person with a cost of living of $40,000 would need to accumulate $1,000,000 to achieve traditional FIRE (25X annual expenses). By aiming for the Barista FIRE, this same person could decide to halve his target. Each year of “retirement”, she could then withdraw $20,000 from her $500,000 investment portfolio and work part-time to cover the shortfall.
The fourth variation of the FIRE movement is Coast FIRE. This variation is based on the snowball effect. We work hard to shape a solid snowball, then put all our energy into bringing it to the top of the mountain. Then you watch it roll and grow exponentially with no further effort.
The idea behind Coast FIRE is to accumulate a large sum of money as quickly as possible, then let compound interest do its magic. At some point, you won’t need to keep saving, as the portfolio will grow and reach the FIRE Number on its own. In the meantime, it’s important not to disburse these investments in order to reach the projected amount, and to have confidence in our returns.
Let’s take the example of the person with a cost of living of $40,000 who needs to accumulate $1,000,000 (25 X $40,000) to reach the traditional FIRE. If she manages to accumulate $315,000 at age 35, she’ll have more than $1,000,000 by age 65. Their money will have grown with an ultra conservative 4% return for 30 years. During these 30 years, savings are no longer necessary and we simply have to work to meet our current cost of living.
Like the Barista FIRE, the Coast FIRE can make choices with a certain freedom and less stress.
Here’s an online calculator to work out how much you’ll need to save to reach Coast FIRE.
In Canada, there are many ways to save and invest to increase your wealth:
With a Registered Retirement Savings Plan (RRSP), your money grows tax-free, and your withdrawals are taxed at your marginal tax rate.
In a Tax-Free Savings Account(TFSA), your money also grows tax-free. But withdrawals are not taxed. Unlike an RRSP, the TFSA does not imply tax deductions.
With the Tax-Free Savings Account for First-Time Home Buyers(FHSA), your money grows tax-free, and your withdrawals are tax-free for the purchase of a qualifying first home. Not to mention tax deductions for your contributions. With a FHSA, the money you’ve saved won’t be available (liquid) when you retire. However, this savings vehicle will have enabled you to obtain tax benefits during your journey to financial independence (FIRE), in addition to being used to purchase a real estate asset.
In non-registered accounts (excluding RRSPs and TFSAs), your capital gains will be taxed only on the sale of your investment (when realized), while your interest income and dividend will be taxed from year to year. RRSPs and TFSAs should generally be maximized before turning to non-registered accounts.
When we talk about RRSPs and TFSAs, we must understand that they are investment vehicles, not investments. A vehicle is no better at one bank or on one platform than another. It all depends on what you choose to put in it:
Investment decisions are up to you. But to invest in these financial assets, you’ll need to open a brokerage account with an online broker, for example:
The importance of using the savings vehicles mentioned above lies in the disbursement strategy. In fact, when we talk about accumulating our FIRE figure, it will be made up of a combination of : RRSPs, TFSAs and non-registered investment accounts. In other cases, we could also be talking about rental property that generates positive cash flow. But to simplify our explanations and examples, we’ll limit ourselves to stock market investments.
For example, when disbursing our one-time income of $40,000, this amount will be virtually net of tax if :
All figures in this article are fictitious and simplified for illustrative purposes. The best person to analyze your situation, with all the factors to consider, is a financial advisor or planner.
When it comes to the FIRE movement, there’s no single solution. There is something for everyone! For some, financial independence (the “FI” in FIRE) is the most important thing. For others, early retirement (the “RE” in FIRE) is just as important.
We hope that one of the variations of the FIRE movement presented in this article matches your values and financial objectives. To each his own strategy and life plans!
Here’s some interesting reading, including several blogs from Quebec’s FIRE community:
The acronym FIRE stands for “Financial Independence, Early Retirement”. The FIRE movement is based on the following principles: increase your income, reduce your expenses, save and invest the difference in assets (stock market or real estate) so that you can retire at an early age. It’s a challenge, but it’s possible.
The figure required to be FIRE (the FIRE Number) is the equivalent of 25X your annual expenses. For example, if your annual expenses are $40,000, you need to accumulate $1,000,000 in investments.
According to the 4% Rule, you must accumulate an investment portfolio equivalent to 25X your annual expenses in order to maintain the same pace of life in retirement and not run out of money.
Savings are here:
