The Financial Independence, Retire Early (FIRE) movement is followed by those who want to quit working before reaching traditional retirement age.
Rather than stepping away from a career in their mid-60s and starting to receive Social Security benefits, they look for ways to gather enough savings to retire earlier and then live off the earnings of their investments.
FatFIRE is a version of the FIRE movement. It involves higher levels of savings and income in retirement than FIRE does. To understand how FatFIRE works, it can be helpful to know:
— How much money is enough to do FatFIRE.
— Pros of FatFIRE.
— Cons of FatFIRE.
— What to consider before starting FatFIRE.
What Is FatFIRE?
While the FIRE concept typically focuses on thrift, FatFIRE promotes abundance. The goal is to have enough funds to enjoy freedom and flexibility when you retire early.
To follow the FatFIRE plan, evaluating regular expenses is the first step. Set up a plan to reduce spending now and start investing. Many people follow a strategy that involves creating multiple sources of income during retirement.
[Related:How to Retire on $500K]
How Much Money Is Enough for FatFIRE?
The exact amount you build into a nest egg and use for your lifestyle will depend on your income and preferences.
“Once you know your number, you can start to create a timeline for making FatFIRE happen,” says Samantha Hawrylack, co-owner of the blog How to FIRE in Glenmoore, Pennsylvania. “A common rule of thumb is that you should aim to save at least 50% of your income if you want to achieve FatFIRE.”
Many people set the figure of $2.5 million saved for FatFIRE, and then withdraw 3% or 4% from their investments each year. If you have $2.5 million in savings and take out 4% each year, you’ll have $100,000 of annual income.
Some FatFIRE followers decide that they would like to live on more income and have higher levels of savings. “You should save at least $5 million in order to live off the interest while living a comfortable life,” says David Hampshere, founder of Purple Egg Real Estate in Niceville, Florida. Hampshere belongs to a FatFIRE social community.
[Related:The Pros and Cons of Early Retirement]
Pros of FatFIRE
Perhaps the biggest advantage of FatFIRE is the financial freedom to not have to work. In fact, your standard of living may be higher in retirement than it is during your working years. This is especially true if you live on less while working to set aside as much as possible.
When you retire, you might be able to eat out more often or pursue new hobbies. You’ll also have the benefit of time and can plan out your days as you wish. You might opt to spend more days with family and friends or volunteer at a local charity.
There are additional perks that draw workers to the FatFIRE movement.
Some people might want a way to support a travel lifestyle or help cover child-raising expenses. Others may be interested in purchasing luxury goods, owning a large home (or several residences) in retirement or living in a city that has a high cost of living. If there are loved ones to support, such as an aging relative that lives with the family, the FatFIRE concept could be appealing as well.
Cons of FatFIRE
While the future advantages can add up, it may be difficult to save the necessary amount. In addition to setting aside millions, there is the time factor: It may take 20 years or longer. And if unexpected events occur, you may have to change your plans and use the savings to cover short-term expenses.
After retiring, you might realize it costs more than you expected to maintain your lifestyle. You could find yourself in tricky situations, especially if family members or friends request financial help. Some people miss the social connections that come with work, and it can be difficult to find a new role and pursue meaningful activities.
[See: 12 Ways to Avoid the IRA Early Withdrawal Penalty.]
What to Consider Before Starting FatFIRE
Thinking about your long-term goals and plans for retirement may help you decide whether FatFIRE is right for you. If you enjoy being around co-workers and having a routine, it might be difficult to face days with no commitments after retiring early. It could be also hard to relate to peers who are still working or schedule events with co-workers who are still regularly on the job.
If you decide that financial freedom is important to you, it can motivate you to look at your current earnings and savings.
“You’ll need to make sure you’re maximizing your income potential,” Hawrylack says. “This means working to increase your skills and earning potential and making smart financial decisions that will help you save as much money as possible.” You can then set up a plan to follow and evaluate your FatFIRE strategy each year to ensure it still meets your goals.
Reviewed on Aug. 3, 2023: This article was previously published at an earlier date.
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What Is FatFIRE? originally appeared on usnews.com
