In this video, I talk about my desire to pursue FAT FIRE and how to let go of retirement being an age versus a number in our lives. Find out how I’ll retire in my late 30s or early 40s later. I’ll answer What is FIRE? What are 5 types of FIRE? How long it takes to FIRE? And stay until the end when I share my plan to achieve FAT FIRE.
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Hi, I’m Jessica and I love talking about financial freedom after experiencing burnout early in my pharmacist career. We talk passive income and simplifying on this channel to combat stress and burnout. If you haven’t seen my burnout story or our debt-free journey to pay off >$385,000 in student loans, please click those video links below.
What is FIRE?
F.I.R.E. stands for: Financial Independence Retire Early
I’m interested in the first component of FIRE. Financial Independence or Financial Freedom. The Retire Early part is optional. I prefer the term Work Optional.
Being financial independence means time freedom to me. I will choose how I spend each hour of my day. That may include work such as my full-time W2 job, it may include my businesses or it may include being flexible with seasonal work or taking mini-retirements or mini-sabbaticals.
It sounds pretty good, right? You may be asking, how can I do this too? Do I need to work until 65 and live on social security? Why is retirement a number and not an age we work towards? Let’s answer those questions today.
First, you need to know a few numbers to prepare for FIRE:
- Annual Expenses
- Annual Income
- Net Worth
- Savings Rate
What are the 5 types of F.I.R.E.?
- Traditional or Regular: you have reached a level where your assets pay your current living expenses
- Lean: tighter budget and aim to live under $40,000 per year
- FAT FIRE: living on $100,000 or more per year – this could be from lifestyle preferences, city location preferences, travel preferences. Taking the calculation of multiplying by 25 of your yearly expenses, this would be $2.5 million or more invested to achieve FAT FIRE
- Barista: kind of like part-time FIRE where you have saved enough to only need to work part-time to generate income from work, this could mean working at a coffee shop for the income and/or health insurance benefits
- Coast: having enough money invested at a young age that you no longer need to add more to your investments because of the power of compounding. Over the years that you wait for your investments to grow from compounding, you will continue to work and coast to FIRE.
How long does it take to F.I.R.E.?
This is based heavily on your savings rate, current net worth and a couple assumptions.
Savings Rate: How much you save/invest divided by your income. This is where personal finance gets “personal.” Some people in the FI community calculate this based on gross income (pre-tax income) and some calculate based on net income (gross income – taxes paid). You will need to define this for yourself.
Goal: Accumulate 25 times annual expenses if we take the 4% rule of thumb into account. If our goal is to withdraw 3.5% instead, we would accumulate 28.5 times annual expenses. If our goal is to withdraw 3% instead, we would accumulate 33.3 times annual expenses.
4% Rule of Thumb comes from the Trinity Study that ran simulations to see how much you can safely withdraw from an investment portfolio over 30 years without running out of money. The simulation took into account inflation but only ran for 30 years. So people within the FIRE community use a 3%, 3.5% or 4% rule of thumb when planning for this. If you plan to retire very early with no other income sources, you may have a chance of running out of investment money after 30-40 years withdrawing.
Rate of Return: Assume a 7% inflation adjusted return from the stock market year over year.
Based on these assumptions, let’s save your annual expenses are $100,000.
This is a simplified plan. Many of us have savings rates that change over time. You may start off with a lower income and a lower savings rate, increase both over the first 5-10 years of your career and then decrease one or both as life transitions happen (children or house buying).
My Plan to FAT FIRE as a Pharmacist:
I chose FAT FIRE because I plan to stay in a high-cost of living area (HCOL) of Los Angeles, CA and enjoy some luxuries in life with travel, a future house and future family expenses. I also chose this route because I do not plan to rely on social security benefits and I have no pension so I’m assuming 100% of my expenses would be paid from my investment account.
My current annual expenses are shown here: $35,000-40,000 per year based on these calculations. This includes my Survival category with my share of the housing expense (we rent), my half of food and my own car which is mostly gas, insurance and yearly maintenance. The rest are Optional, Cultural and Extra categories.
Annual Expenses: Mine will be over $100,000 so my minimum goal is to accumulate $2.5 million in investment or retirement accounts.
Savings Rate: My savings rate goal is 70-85% per year.
Current net worth and Income: Due to respect for my family’s privacy I will not reveal our exact income. If we base my calculation on savings rate and this simple chart, I will be able to retire in 4-8.5 years at 70-85% savings rate. If we base this calculation on my goal to invest $2.5 million, the calculation would more heavily factor in income and current net worth.
Median salary of a Pharmacist in California is $156,000 according to Salary.com in 2021. Let’s round down to $150,000 annual salary, current net worth of $0 and calculate years to FI with these assumptions. It would take 12.5-14.5 years to achieve this.
Median salary of a Physician in California (non-primary care, specialist) is $350,000 according to Salary.com in 2021. The range will heavily depend on specialty and practice in an academia versus private practice and partner status. Let’s take $350,000 for one assumption and $500,000 for one assumption.
6.5-8 years to achieve this on $350,000
5-6 years to achieve this on $500,000
Now you can see that these assumptions to NOT include any additional small business or side hustle income. You know that we have over 7 income sources through these means that will increase our savings rate (assuming all income from these sources is saved or invested) and annual income.
As you can see from these examples, retirement is NOT an age. It’s based on your PERSONAL numbers and goals. Realizing this, we do not have to wait until age 65 to retire. We choose our path forward and how we spend our days working for someone else, working for ourselves or taking breaks throughout life.