How to calculate your FIRE number

How much money would you need to retire today and never have to work again?

If you’re planning to retire at 65, that number may seem distant and amorphous. You’re saving as much as you can today so you can enjoy life as much as possible when you eventually quit your job.

For supporters of the Financial Independence, Early Retirement, or FIRE movement, this number is much more concrete. “Your FIRE number is the amount of money you have to live on for the rest of your life,” says Grant Sabatier, creator of financial site Millennial Money and author of Financial Freedom.

For many prospective early retirees, calculating this number involves a simple shortcut: “The way you calculate your FIRE number multiplies your expected annual expenses by 25 times,” says Sabatier, who has achieved financial independence at 30 If you multiply that $40,000 by 25, you get $1 million.”

“That million dollars is essentially how much money you need to achieve financial independence and live on that amount of money for the rest of your life.”

As with any other one-step financial calculation, the FIRE number calculation is based on several assumptions and will vary depending on your financial situation. Here’s what retirement experts say you need to know to figure out how much money you’ll need for retirement.

The math behind calculating the FIRE number

The calculation of the FIRE number is rooted in the so-called “4% rule” made popular in an influential 1998 research paper known as the “Trinity study”. The research involved examining past market performance to determine a safe withdrawal rate in retirement.

The bottom line: retirees could take 4% per year, adjusted for inflation, out of a portfolio of stocks and bonds 99% of the time without running out of money.

“Unfortunately, that was a period of 30 years, and most early retirees today need their money for 30 to 50 years,” says Sabatier. “But thankfully, the updated calculations now show you can live on 3.5% to 4% of your money,” and your portfolio will likely continue to grow over the decades.

When calculating your FIRE number, remember that the multiple of 25 is really just an easier way to divide by a 4% RTP. Going back to Sabatier’s earlier example, if you plan to spend $40,000 a year in retirement, divide by 0.04 to get your $1 million.

As Sabatier points out, some recent studies suggest that if you’re hoping for a longer retirement, it might be wiser to aim for a lower withdrawal rate. Morningstar researchers estimate the safe payout rate to be somewhere between 3.3% and 4%, which takes into account factors such as relatively low yields in the bond market and relatively high valuations on stocks (which tend to dampen future returns).

“In general, if you have a portfolio balance and plan to stretch your withdrawals out over 40 or 50 years, you have a better chance of success if you start with a lower withdrawal rate,” said Christine Benz, director of personal finance and retirement at Morningstar .

If you’re looking for that same $40,000 annual income and want to withdraw 3.3% a year from your portfolio instead of 4%, your FIRE number jumps to more than $1.2 million.

Although your FIRE number can serve as a guide to when you may be able to retire, preparing for a life outside of work takes a lot more planning than a simple calculation. What you choose to spend now in retirement may be vastly different from reality when you get there. And twists and turns in your portfolio might require you to be flexible about how much you can withdraw in one year versus the next.

If you’re calculating your FIRE number and feel overwhelmed by a huge number, remember that you don’t have to hit them all at once, says Sabatier.

“I might need $2 million to be financially independent, but instead of focusing on that, I’m focusing on saving six months of expenses. Then a year. Then two years,” he says. “Take the expenses for one year at a time. People end up getting distracted by that huge number.”

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