Is this Lifestyle Inflation or Do We Actually Want Fat FIRE?

We’re increasing our 2022 budget! Although inflation is playing a part in this decision, the majority of the increase is for discretionary spending. When drafting our 2022 budget, we’d already added some extra “fun money.” However, after reading Die with Zero and reflecting on our life situation, we’ve recently decided it wasn’t enough. All this has me thinking… is this lifestyle inflation, or do we actually want to live a Fat FIRE lifestyle?

After taking a closer look at our Q1 spending and how we’d like to spend our money this year, we’ve decided to boost our original 2022 spending budget by $8,000.

We also increased our budgeted income amounts. Mr. RFL’s work promotion came earlier and was more lucrative than we’d expected. Additionally, investment income is up year-to-date from our budgeted amounts.

These changes mostly offset, keeping our expected after-tax savings rate relatively steady around 80%.

Here’s a break out of the changes we’re making to our 2022 budget:

Is this just lifestyle inflation, or do we actually want to be Fat FIRE?

We’ve never been frugal for the sake of being frugal, or to the point that our decisions were solely based on money.

Sometimes it’s fun to see if we can reign our spending in. However, we always stop if it feels like a sacrifice.

Often we find we’re just as happy, as was the case when we decided to cut back on convenience take-out a few years back. Sure, the decision saved us (a lot of) money. But our primary reasons for the change related to our health and the realization that we were only ordering take-out because we were too tired or lazy to cook at home. We haven’t missed out on any mind-blowing food experiences.

Rather than buying the cheapest food at the grocery store, we buy organic, high-quality food, because it aligns with our values and health goals. However, I still want to pay the lowest price possible for that healthier food.

Finding great deals and ways to save money in all areas, without sacrificing, thrills me.

Our spending has recently increased

I’ve noticed that our spending has increased lately. We’re starting to reconsider spending more money in some of the areas that we’d previously cut back on.

I’m not sure why. I don’t feel like we’ve been sacrificing or missing out because of the money saving decisions we made.

Perhaps it’s just a pent-up desire to travel, socialize, and dine out after being couped up for so long during the pandemic. Or, this could be lifestyle inflation resulting from Mr. RFL’s promotion and bigger than expected increase in salary.

But maybe… just maybe, it’s actually a sign that we’re craving a more expensive lifestyle than we originally thought.

Deep down, we might really want that fancier (more expensive) house. Not bigger. We both agree that we want to downsize our next home. But we still want a lot of land, nice views, an open concept, a huge high-end kitchen and a nice master suite. I want to live in a great community. Although we won’t care about the commute anymore, we will also care about having high-quality schools. These things cost money.

Do we need to increase our FIRE number?

Honestly, this is a question that I’ve been grappling with lately.

Are these increases just a little lifestyle inflation while we’re making extra money, or is this a sign that we really want a fat FIRE lifestyle?

Or perhaps the overachiever in me just wants to set a new goal now that we’ve crossed the finish line. I do love goal-setting.

Just because you reach financial independence, doesn’t mean you have to stop working.

It just means you’re free to make life decisions that are no longer based on a paycheck. That freedom is the biggest appeal of the FIRE movement, in my opinion.

Unless we decide that we need a much higher FIRE number, it ultimately won’t matter too much.

Let’s take a look at the numbers anyway

Recently our financial independence portfolio topped $1,150,000.

According to the “4% rule”, we could withdraw $46,000 in our first year of early retirement.

This is more than the $40,000 we previously budgeted for our early retirement costs.

If we use the more conservative 3.3% recommended in a recent Morningstar report, the allowable withdrawal would fall below our budget to $37,950.

That said, I think Morningstar’s rate is too conservative for our circumstances. Our younger age, willingness to be flexible in down markets, and percentage of income generating assets will all allow us to use a higher withdrawal rate in early retirement. If the market tanks, we can either reduce our spending and/or earn more, as needed.

Even if we selected a conservative 3.5%, we’d still be right around our budgeted annual expense at $40,250.  

That’s great, but should the budget be MORE than $40,000?

Maybe?  Only time will tell.

Luckily, we don’t have to make any decisions today since we’re not planning to draw down on our portfolio for a couple more years.

However, this is a good reminder that choosing a FIRE number isn’t a one-and-done activity. It’s an iterative process that should be continually reassessed. We like to revisit our FIRE number at least annually.  

Comparing our 2022 budget to our FIRE budget

As a reminder, our current budget differs from our expected FIRE budget in many ways.

The biggest line items that will change are our mortgage interest and preschool costs. Both of these line items will go away in early retirement and account for almost $8,000 of our 2022 budget.

Additionally, although we are increasing our 2022 budget by $8,000, the majority of this increase is intentional.  There is only a small portion of the increase attributed to inflation, with the rest representing more “fun” money or being more generous.

I still feel pretty good about the basic living costs within the FIRE budget we created, but we have additional buffer room given our current investment balance.

The question now is… “Do we want to increase our discretionary spending long term”?

Some of our budget increases this year, such as the in the “shopping” category are for big one-time purchases, which won’t occur every year. We’ll occasionally upgrade electronics, accumulate more tools, or need to replace furniture and household goods in the future. But this won’t occur at the same rate and there’s only so many things that we want or need to accumulate. I believe $2,000 – $3,000 is a more appropriate budget, rather than the $7,000+ we’re planning to spend this year.  

Other increases fall along the lines of lifestyle inflation or Fat FIRE.

We’ll certainly enjoy dining out more frequently and travelling more. But do we need to spend more to be happy? Probably not. It’s hard to say what the right answer is, but I imagine we would be fine flexing our spending to our circumstances.

While we’re still making money and have already reached a point where we feel financially independent, it no longer seems necessary to aim for an after-tax savings rate above 80%*.   

_{*Excludes charitable giving}

Here’s a look at a potential revised FIRE budget, with modest increases for both inflation and discretionary spending.

I don’t know if we need a budget this high, but it’s good to consider alternatives.

Our home equity buffer has increased

On a final note, the equity we have in our primary residence has continued to increase. Real estate values have sky-rocketed in the Phoenix metro, boosting our home’s value with it.

Our current early retirement plan includes capping the price of our next house at the amount of equity we receive when selling this one. As that equity number continues to grow, so do the odds that we’re able to find a house we love below that price in our next hometown. Any difference could then be invested to further increase our nest egg.

After accounting for our remaining mortgage balance and a conservative estimate for selling costs and repairs, I think we’d currently walk away with between $750,000 – $800,000 if we sold our home today. That could buy a really nice house in any of the places we’re considering!

Having this buffer gives us more confidence in using the 4% rule to determine our FIRE number.  

So, what’s next?

While Mr. RFL is still working and we aren’t drawing down on our portfolio, we certainly have the wiggle room to inflate our spending and indulge a bit.

We will also continue to build our investment portfolio, which will provide more options as it grows.

But is this all actually a sign that we should have picked a higher target? Is this lifestyle inflation that will subside once we retire, or do we really want Fat FIRE?

I don’t know.

We’ll continue to monitor our budget and retirement desires as we continue along on our journey… and keep you updated (of course).

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