Learn how to calculate your FIRE number. Financial independence and early retirement (FIRE) is a lifestyle growing in popularity. And this is unsurprising: Who would not want to live a life free of mandatory work? However, despite the FIRE movement, many people still overestimate how much money they need to say ‘goodbye’ to the nine-to-five work life.
Monethalia’s aim is to make FIRE accessible to everyone and this includes dispelling the myths about the need for millions of pounds (or dollars). My FIRE number (amount needed to be financially independent) is £350,000 and below you can find out your number.
To ensure Monethalia stays free of charge, this post contains affiliate links.
What is financial independence early retirement (FIRE)?
Being financially independent means that you possess a sufficient amount of money to never work again in your life. Thus, you are not dependent on making money. Instead, you can quit your job and retire early.
How to calculate your FIRE number
The 4% rule
The most popular way to calculate the amount of money needed to achieve FIRE (your FIRE number) is the 4% rule. It is based on the results of the Trinity Study which concluded that it is safe to withdraw 4% per year from an investment portfolio without ever depleting it.
However, there are a number of limitations to this:
- The withdrawal rate is based on historical data
- The study only observed a limited time frame of 30 years
- Even the study authors conclude that a more cautious approach is warranted
- Your life, your circumstances and your future are unique
Limitations do not mean the 4% rule is useless. It does mean that you have to be attentive and should not blindly follow guides.
More flexible withdrawal rules
Monevator recently published a brilliant article on choosing safe withdrawal rates. In summary, the article advocates that your withdrawal rate should depend on a number of variables:
- How long your portfolio needs to last
- What you are invested in
- Success rate or risk tolerance
Based on this, most of us should end up with a long-term withdrawal rate of somewhere between 3% and 4%.
Calculate your fire number
Once you know your safe withdrawal rate, you can calculate how much money you need. The easiest approach is to base this on your annual expenses. Annual expenses are defined as your total annual spending.
- Multiply monthly expenses by 12 to obtain annual expenses
- Divide annual expenses by your safe withdrawal rate (0.03 for 3% or 0.04 for 4%)
- The result is your FIRE number
This is a simplified calculation that assumes your annual expenses will stay the same, no matter what happens. To account for differences, simply use your future expected annual expenses instead of your current expenses.
If you are not interested in reaching FIRE, you can work out the amount of savings you should have at your age and use this as your target.
FIRE calculators are there to help with calculating your FIRE number. These will give you a more individualised number.
There are several different calculators available:
Networthify is a very simple calculator. It is ideal for beginners and those who quickly want to check their progress. You can adjust your safe withdrawal rate under “more options”. However, its biggest drawback is that you cannot distinguish between current and future expenses.
This effectively renders the calculator useless for those who aim to drastically change their lifestyle after reaching financial independence.
Playing with FIRE
Playing with FIRE is a calculator similar to Networthify. The key difference is that it accounts for asset allocation. Whereas you have to manually calculate your average interest for the Networthify calculator, Playing with FIRE does the job for you.
On the downside, it is less useful if you want to use a safe withdrawal rate other than 4%.
The Millennial Money FIRE calculator uses dollars as currency. You can just ignore the currency symbol as the underlying calculation remains the same regardless of your currency.
This calculator has the advantage that it takes into account any side income you may make post-FIRE. This is important if you have passive income sources like a blog or rental property. You can also enter set future expenses, for example, if you want to pay for your children’s university education.
Other than that it is fairly limited, although it is fun to play with the sliders.
FIRE Age is probably the most versatile FIRE calculator. It does not care about your current expenses. Rather, it is based on future expenses and current savings. This avoids problems with differences between current and future expenses.
As the calculator is simple, it does not account for everything but it is still a useful tool.
The When Can I retire? calculator from Engaging Data looks daunting at first. However, if you progress through the rows from left to right, it is actually much simpler than it appears.
This calculator accounts for asset allocation and you can distinguish between stocks and bonds. Plus, it also allows you to distinguish between current and future annual expenses.
How to calculate your fire number summary
There are multiple ways to calculate your FIRE number. The traditional 4% rule, long seen as the gold standard, becomes increasingly replaced with other, more flexible methods.
To ensure you are on the right path, you can use one (or more) of multiple FIRE calculators. FIRE calculators have their limitations but are useful tools to gauge your progress and estimate your FIRE number.
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