Lean FIRE: How to Retire Early on a Smaller Budget
Master the art of early retirement by living lean and maximizing your hard earned savings
You don’t have to wait until your golden years to retire. Even on a modest income, you can retire years or decades early through Lean FIRE.
Financial Independence, Retire Early (FIRE) is a financial movement focused on saving, investing, and frugality, aiming to retire years earlier than expected. Achieving financial independence means relying less on your day job for income and instead, living the life you want without letting work get in the way.
There are a few subsets of the FIRE movement, including Lean FIRE. WorkMoney lays out how to hit Lean FIRE and who it works best for.
What Is Lean FIRE?
Lean FIRE is part of FIRE that focuses on living on a very lean budget. Like traditional FIRE, Lean FIRE is about aggressively saving and investing, but with extreme frugality—living in a low-cost area, traveling little, and driving an older car.
Lean FIRE means paying the least for essentials to maximize savings and investing. For example, living in an apartment instead of a large house, or using public transit or carpooling instead of owning a car.
Calculating Your Lean FIRE Number
Lean FIRE doesn’t target a set retirement figure. Instead, you multiply your annual expenses by 25, using the 4% rule: withdrawing 4% from your portfolio each year for 30 years.
Let’s say your annual expenses are $25,000, and that’s what you plan on spending in retirement. You’d calculate: $25,000 x 25 = $625,000
Your Lean FIRE number is $625,000, or the amount you need to retire early. You can adjust based on your expected budget. So if you plan to spend $40,000 annually in retirement, your Lean FIRE number would be $1 million.
Preparing For Lean FIRE: Cutting Major Expenses
Most people’s biggest expenses are housing, transportation, and food. The Bureau of Labor Statistics says over 33% of income goes to housing, 17% to transportation, and 13% to food.
Housing
Look for ways to significantly cut your housing costs to get close to 25% of your total retirement budget. Consider options like:
House hacking, or renting out a room or unit to earn extra income.
Downsizing to a smaller, less expensive home, potentially an apartment or tiny home.
Move to a low-cost-of-living area while still maintaining your current income.
Geographic arbitrage — living in low-cost areas to stretch your dollar — can also help you hit your Lean FIRE goals. You can do this domestically or internationally, depending on whether you want to live abroad. Your dollar in coastal cities won’t go as far as it would in rural areas. You can use geographic arbitrage to lower your cost of living and hit Lean FIRE sooner.
Cutting $500 monthly from housing saves $6,000 a year, meaning you need $150,000 less invested to reach Lean FIRE.
Transportation
Households spend about $1,110 a month on transportation through car payments, maintenance, and gas. If you have a car payment, try paying it off so you can start putting more money towards your investments. You can also trade it in for a less expensive model to avoid car payments. Keeping your car regularly maintained prevents costly repairs.
If you can, go car-free so you don’t have to worry about car insurance, tag renewals, and ongoing maintenance costs that can get in the way of your financial goals. You can use a bike, an electric bike, or public transit to drastically reduce transportation costs.
If you’re considering moving to save on housing costs, look for walkable cities or areas with reliable public transportation.
Food
Households spend an average of $847 a month on food, even as many folks focus more on buying food for home than dining out.
Reducing food costs comes with a lot of careful consideration, like:
Meal planning for the week or month
Cooking at home and meal prepping
Eating smaller portions to extend meals
Buying staple grocery items in bulk
Grocery shopping with cash so you avoid impulse shopping
Growing a small garden and eating what you grow
Managing food cuts also depends on your household. It might be harder to cut costs if you have children or other family members living with you, but it’s still possible. Enlist everyone's help with planning and cooking meals so the responsibility doesn’t fall solely on you. You can also see if you qualify for SNAP and other government benefits, so your dollar goes even further as you shoot for Lean FIRE.
There are ways you can cut down other costs, too. Use Arbor to lower your energy bills and potentially save almost $600 a year. Upside gets you real cash back from doing your normal shopping on essentials, like groceries and gas.
Healthcare changes
Aside from the major expenses, you’ll need to consider how your healthcare coverage will change while in Lean FIRE.
If you’re planning to leave your regular day job that comes with health insurance and benefits, you’ll need to find a replacement plan. ACA tax credits are based on modified adjusted gross income (MAGI). Since many Lean FIRE households have low taxable income, they may qualify for premium tax credits, reducing health insurance costs.
Keep in mind that subsidies aren’t available for folks who earn 400% above the federal poverty level, or $62,600 for a single filer. You may also want to apply for Medicaid if your income stays below 138% of the federal poverty level.
Accessing Retirement Funds Without Facing Penalties
Withdrawing from a Traditional 401(k) or IRA before you reach 59 ½ years of age triggers a 10% income tax plus an early withdrawal penalty. Most people have their retirement funds in these tax-deferred accounts.
One strategy early retirees use to access retirement savings before age 59½ is a Roth conversion ladder. This involves converting a portion of a Traditional IRA or other pre-tax retirement account to a Roth IRA each year.
While you'll generally owe income taxes on the amount converted, Roth conversions themselves are not subject to annual Roth IRA contribution limits. Once a conversion has been in the Roth IRA for at least five years, the converted amount can typically be withdrawn without the 10% early withdrawal penalty
You’ll pay income tax on the conversion, which is what you would’ve paid if you had contributed to a Roth account in the first place, since Roth accounts tax contributions and Traditional accounts tax withdrawals. Pay special attention to your tax bracket, as this impacts how much you’ll convert each year and what you’re taxed on the following year.
Roth conversions come with a 5-year waiting period, meaning each conversion must remain in the account for at least 5 years before you can withdraw funds. Because of this, you should start a conversion ladder at least 5 years before you plan to withdraw from it.
The Bottom Line
Reaching Lean FIRE isn’t a faraway myth — it’s an attainable goal you can work towards, even if you have a modest income. Your “enough” is different from someone else’s, and it’s important to remember that what you need to live comfortably for the rest of your life isn’t what others need, and that’s OK.
Making big changes to your budget and lifestyle can seem scary, but it comes with a big reward. Financial freedom isn’t about earning more. It’s about needing less. You don’t have to deprive yourself, but rather, self-reflect on what matters most to you. Then make changes to help yourself get there.
