How to Calculate Your Fire Number – Retire Early
I didn’t start thinking about retirement until I was 33.
I was unemployed, married with two kids, renting an expensive living area, and suffering from a global pandemic. Fortunately, I had some money invested in retirement accounts with previous employers from my twenties. But my husband? Well, he was 32 years old without a dollar in his 401(k) or IRA.
Less than a year later, we’re now well on our way to becoming voluntary at age 47. This is how fast a FIRE number can change your life.
What is a fire number, and why am I on this journey
FIRE stands for Financial Independence, Retire Early. It’s a movement that encourages people to live below their means so that they have more money to invest in early retirement or work part-time. The higher your savings rate and the percentage of income you don’t spend, the faster you will choose a business.
Before getting to know FIRE, I thought retirement was something only people with pensions at age 65 could do.
Now, I know that retirement doesn’t magically happen at a certain age, but when we can pay our annual expenses out of passive income.
Simply put, your FIRE number is the amount you need to invest in order to live off these returns and stop working.
On the other hand, knowing this number left me and my husband anxious. I was scared, wondering if we would ever be able to retire because we didn’t start investing consistently until our 30s. But at the same time, it was possible.
When I calculated how much we would need to invest to retire early, my husband and I began to view FIRE as a game that makes retirement planning fun. We knew that even if we didn’t hit the early retirement goal, we’d still be on the right track to retire at some point—and given that we had loved ones who couldn’t say the same, we were eager to at least get started.
How to calculate your fire number
Once I learned that retirement can happen at any age, I needed to determine our personal FIRE number: the total value of assets we would need to accumulate in order to live from passive investment income. While searching for the best way to calculate this number, I came across the Trinity study, the source for the well-known 4% base, and this simple formula for calculating your FIRE number:
Annual expenses x 25 = fire number
So for example, if your living expenses are $4,000 per month, your annual expenses are $48,000 and your FIRE number is $48,000 multiplied by 25, or $1.2 million.
However, after some additional digging, I felt more comfortable with a different withdrawal rate and chose to calculate my FIRE number based on this formula:
Annual expenses ÷ 0.03 = fire number
In this case, the $4,000 monthly expense would equal the FIRE number of $48,000 divided by 0.03, or $1.6 million. (If you need help tracking expenses, check out this Google spreadsheet. It can help you calculate your monthly and yearly spending.)
This second formula is based on a more recent study from Trinity University. The professors used historical market data to study sustainable withdrawal rates based on different stock and bond allocations for different retirement prospects. The researchers found a 100% chance that someone with a portfolio with at least 50% equity could safely withdraw 3% of their investment for 40 years without exhausting their investment, which is why we divide by 0.03.
Once I had the FIRE number formula, I calculated our projected annual expenses at retirement by listing our current monthly expenses. I looked at how much my family currently spends on household expenses, meals, personal care, health care, transportation, and community care.
household expenses: Mortgage/rent, utilities, cable, internet, general maintenance, household supplies, property tax and insurance, credit card payments
meals: Grocery, Drinks, Eating Out
personal careApparel, products, hobbies, subscriptions, childcare, pet care
health care expenses: Health insurance, out-of-pocket payments, dentistry, eyeglasses/contact lenses, life insurance
communicationsCar insurance, maintenance, fuel, registration
community care: Gifts, charitable donations, remittances, etc.
Once I found our monthly expenses, I multiplied them by 12 to find out our annual expenses.
To get confused by this many, I decided to calculate the range of the FIRE number. On the low end, if my husband and I move to a lower cost area with annual expenses of $60,000, our FIRE number is $1.5 million. On the higher end, if my husband and I stay in a high-cost living area with annual expenses of $120,000, our FIRE number is $3 million.
We invest this early retirement money in both our tax benefit accounts and a taxable brokerage account. In order to reduce our current tax liability, we contribute the maximum amount to our 401(k) and Individual Retirement Accounts. However, since we will need to access our funds before age 59 and want to avoid paying penalties for early withdrawals, we also invest in low-cost index funds under a taxable brokerage account.
Others on their fiery journey
Your reason for pursuing FIRE, your FIRE number, and your path to FIRE will reflect your values and preferences in building wealth. The Zeledon family, better known online as ourjourneywithless, has a more adventurous approach to investing. They decide to follow FIRE because they want to maximize their time together. Instead of investing in the stock market, they mostly invest in real estate to generate semi-passive income during retirement.
“We plan to have cash-producing properties in Mexico and the US so we don’t have to trade dollars for hours,” said Victor Zeledon, a FIRE enthusiast who trains others on how to secure their short-term rentals. . “Ideally, we’ll have four to five rentals that we’ll live in and also rent out so we can fund our early retirement.”
By being very deliberate in their purchases, the Zeledons are now a single-income family since Adriana retired from her 9-5 job to homeschool her 9-year-old son. Victor plans to retire in the next five years at the age of 40. By moving to Mexico and using their long- and short-term rents to make ends meet their $36,000 annual expenses, the Zeledon family is another example of how purposefully making an income can lead to early retirement.
Know that you can retire at any age as long as you have the income to do so. Calculate your FIRE number and create a plan to generate different passive income streams that can support a voluntary lifestyle of work. If you get confused, consider creating a FIRE number range. Make sure your goal reflects your values and lifestyle preferences. Ultimately, even if you don’t retire at a young age, calculating your FIRE number is a great way to start planning for retirement.