£1M, £2M, £15M? FatFIRE isn’t a defined accounting term. It’s something that means different things to different people. But how much is enough?
Quick Rant: I don’t like it when, usually higher income, people quote that LeanFIRE is <£50k, FIRE is £50k>£100k and FatFIRE is £100k+ FatFIRE should really be based on your own perspective of what Fat actually means to you.
If you are starting your FIRE journey on £30k a year but want to be able to retire on £45k a year and you live in a Low Cost of Living area/country. That could be your FatFIRE. And conversely if you are starting out with an income of £400k a year but want to retire on a lower income, maybe £100k in a High Cost of Living area, that’s might be LeanFIRE for you. Then there is a grey area as one of the ways of achieving FIRE is GeoGraphic Arbitrage. So you can technically live a super luxury life in a country or area that has a Very Low Cost of Living with a LeanFIRE or FIRE income that was built up in an area with High Cost of Living. Does that mean you are LeanFIRE or FatFIRE? No idea! And you shouldn’t really care… Don’t get caught up on definitions! Definitions are there for trolls on the internet to pick holes in your plans and discourage you from your goals. Figure out what your FatFIRE Number is work out what your strategy is and get going!
Download tools that you need for this Article
Use the Free FatFIRE Calculator spreadsheet to help you.
- Please download Emma the free (and potentially paid) Budgeting App here that connects to all of your accounts and can help speed up the work in this post!
Lets start with working out how much you need now…
1. Work out what your current expenses are and group them
What are your current expenses? You can never know how much you can retire on if you don’t know how much you are spending. Work it out! I started out very simply by creating a spreadsheet with all my expenses.
Lo-Tech way gathering expenses using Excel and Bank Statements
I logged into each of my bank accounts (literally go through every single one of you personal accounts, PayPal, personal Credit Cards etc.) and started listing down all my direct debits, standing orders and recurring payments: mortgage, bills, insurance etc. For each entry in the statement I created a line in the Expenses tab on the spreadsheet.
Then I went through all my non-recurring expenses and summed up an average of my spend across different categories like: Lunch Money, Groceries, Commuting to work, Shopping (clothing, things etc.)
Hi-Tech (automated) way of gathering expenses using Emma
There are a number of budget tracking apps. I have tried quite a lot of them. I discovered Emma last year (2019) and have been using it ever since. It…
- Automatically groups up expenses into well known categories (needs occasional manual intervention then learns your preferences)
- Tracks recurring payments and subscriptions based on your data
- Automatically excludes transfers and payments of credit card bills
- Can track spending from payday to payday
- Comes with lots of additional discounts, cash backs and a points system for using the app
- Great intuitive and informative interface that draws you back in each day
- Can install using same account on multiple devices and is kept in sync – my favourite part!
My favourite feature of Emma: If you have a partner/spouse/other that you share your budget with, get them to install it too and share the login details so that you both are working off the same details.
Once installed, connect up your bank accounts. Emma will then collate all your expenses and categorise them. You may need to do some manual corrections, but the app will learn your changes and not bother you again in the future.
You can look at the “Subscriptions” screen to pick out your regular transactions and wider categories like Eating Out and Groceries in the “Analytics” screen. Populate the spreadsheet as you did in the Lo-Tech method.
Collate and categorise your expenses
Once the data has been populated you should have a spreadsheet like the one shown below. Partition the spreadsheet to show Essential vs. Luxury spending. Don’t spend too much time analysing what is luxury and not. Just put it somewhere for the time being and let’s worry about that later.
For each of the rows that you have put in, just indicate whether or not you intend to Live with that expense, Reduce it or Remove it altogether. I highly recommend spending a little bit of time then hypothetically making these changes to get a target current spend. This may mean that you go onto moneysupermarket.com or uswitch.com and find the best deals for your car insurance or electricity bill. Spend the time to do it!
This is the game changer! Identifying and categorising your expenses like this alone can save you £££. When I did this the first time round I found:
- £250 pm of savings by removing unnecessary subscriptions: Audible, Apple Music, Amazon Prime, Netflix, NowTV, Prime Music Unlimited, Kindle Kids, various apps with monthly fees, magazine subscriptions etc.
- £700 pm of savings from reducing my bills. I hadn’t shopped around at all so everything from my Energy, Phone, Mobile, Broadband and Mortgage could have been cheaper.
- A bunch of other places where I could reduce the expenses by changing the way I spent. E.g. take pack lunch instead of buy 2-course meals at Central London restaurants for lunch, reduced the amount of impulse buy shopping sprees we did each month etc.
All in all I saved a solid £1000 pm from regular expenses and then a further £300-£400 pm from being conscious of our Grocery and Shopping spend. Total = £1400 pm of savings. Thats £16,800 a year in savings! Thats a significant amount of money to invest. If I was to put that back into a Stocks and Shares ISA at 6% growth per annum, I would have £218,000 in the bank in 10 years and over £0.5M in 20 years! This is why this exercise is SUPER CRITICAL to your Financial Independence!
What about your Luxury Budget? How can you be Frugal yet live the Business Class Life? Find out more in our post on Luxury Budgets.
2. Tally up your income sources
In the downloadable spreadsheet, there is a “Income” tab. Add as many lines as you need to cover your income sources. Make sure you are working these out After Tax. Check out ListenToTaxman.com to work out what your after tax earning would be.
If this is a joint Calculation, put in both peoples income sources. If you don’t know what your bonuses are for the year, just put in a rough estimate (after tax). I normally go with a median value as a safe bet.
Note that the Pension Contribution is called out separately. This is so that we can correctly account for UK Private Pensions in the Calculation as you cannot draw down on them until you hit 55.
Tip: Make sure you exclude the pension amount from your base salary (including any contributory or non-contributory amount / matched amount). E.g. If you earn £100k and you company gives you 5% non-contributory pension with a 1:1 matched 5% on top. Then your base salary is £95k (as you are contributing 5% or £5k in order to get the match) but your Pension will be £5k (5% non-contributory) + £5k (5% your contribution) + £5k (5% matched) = £15k.
3. Calculate how much you can save each month and year
With your income and expenses now filled in, turn your attention to the “FatFIRE Calculator” tab. If you have excess money after your Expenses, work out how you want to invest that money. You can see that the pension contribution is highlighted in its own row. Change the numbers to reflect the deduction being made for your pension.
In the example we are investing in a Stocks and Shares ISA (All Share ETF) on a regular basis, putting in the Pension Contribution and adding to a savings account.
If it looks like you are not able to save too much. Are you spending too much money? Maybe go back and tweak your expenses. What about earning more money through other income sources and side hustles? What happens if I add more sources to the income tab? Play around with the numbers!
4. Forecast your FatFIRE number and Age of Retirement
Once you have set up your investment pots, you will be able to see the savings accumulate and grow every year in the first table. Each column is a year and represents the total value of investments, including growth, at the end of that year. E.g. 39th year column describes the amount that will be in your investment account the day before your 40th birthday.
The second table models Income on Retirement, but this is based on the amount that is in your investment account on the day of your birthday. E.g. If you retire on your 40th birthday, it will work out your withdrawal amount based on the investments accumulated to the end of your 39th year.
It may not be the most graceful way of modelling it. But for something that is quick and dirty it should suffice.
So what is your FatFIRE number and Retirement Age?
Retirement Age. This will be the year your income (from investments and side hustles) overtakes your expenses. The last row in the second table highlights this. It shows your net income increase depending on the year you decide to retire. Starting out very negative then turning positive. I have colour coded the row starting red and going to green when you are actually drawing more from your investments than your expenses. The breaking point is where the income is just greater than expenses is coloured in White.
FatFIRE Number. This is easy. Look at the age row for when you hit your breaking point (see above) and that is the age you can technically retire.
In the spreadsheet example (not reflected of mine – although I will be uploading my version of the spreadsheet soon, once I have anonymised it sufficiently)…
- FatFIRE number is £2,587,905 (£2.5 Million)
- Retirement Age is 59
- Retirement Income of £103,516 is now enough for annual expenses of £101,838.
You will also see your Savings Rate highlighted alongside the Expense Rate to the left of the table.
Inflation Sucks. Expenses are adjusted to rise by inflation. So it will feel like you are constantly chasing. But that’s unfortunately how you will have to model it to be absolutely safe. You should also notice that in the example we are not paying Capital Gains Tax (CGT)! That is because we are holding the investments in a UK ISA which is free of CGT and income tax.
5. Just the beginning
This is not the end. It’s just the beginning. Once you have a basic model represented in the spreadsheet, you can then play around with the numbers to try and work out what it would take to bring the Retirement date forward. Or for the income to be greater.
Add your ideal expenses in. You can also add in some expenses on top that you know you want to have in the future. You may want to pay for university fees, increase your holiday spend when you are older, join a super car club in your 40s etc. Struggling to justify your Luxury Spend or Struggling to let it go? Read our guide on Luxury Budgets to find out how we did it.
Have a play and let me know how you get on. Don’t forget to check out Emma to help you model your expenses and also manage your budgets going forward – the app is free but with this link you get free Pro membership for 1 month.