How to calculate your FIRE number

How much money do you need to retire today and work again?

If you’re planning to retire at age 65, that number may seem distant and amorphous. You save as much as you can today so that you can enjoy life to the fullest when you finally leave your job.

For supporters of financial independence, early retirement or FIRE, this number is more concrete. “YOUR FIRE number is the amount of money you need to live on for the rest of your life,” says Grant Sabatier, founder of the financial website Millennial Money and author of Financial Freedom.

For many early retirees, calculating that number comes with easy shorthand: “The way to calculate FIRE is to multiply your expected annual expenses by 25 times,” says Sabatier, who reached financial independence in his 30s. If you multiply $40,000 by 25, you get a million dollars.”

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

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

The math behind FIRE number calculation

The calculation of the FIRE number is based on the so-called “4% rule,” popularized in an influential 1998 research report known as the “Trinity Study.” The research included an examination of past market performance to determine a safe withdrawal rate in retirement.

The bottom line: 99% of the time, retirees could withdraw 4% a year, adjusted for inflation, from their stock and bond portfolios without running out.

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

When calculating your FIRE number, remember that a multiple of 25 is actually an easier way to divide by a 4% withdrawal rate. Going back to Sabatier’s earlier example, if you intend to spend $40,000 a year in retirement, divide by 0.04 to arrive at your million dollars.

As Sabatier points out, some newer research suggests it may be wiser to aim for a lower withdrawal rate if you’re hoping for an extended retirement. Morningstar researchers peg the safe withdrawal rate at 3.3% to 4%, taking into account factors such as relatively low yields in the bond market and relatively high stock prices (which tend to dilute future returns).

“In general, if you have a portfolio balance and plan to stretch the cash for 40 or 50 years, starting with a low withdrawal rate gives you a higher probability of success,” says Christine Benz, director of personal finance and personal finance. Retirement planning at Morningstar.

If you’re looking for the same annual income of $40,000 and plan to withdraw 3.3% per year from your portfolio instead of 4%, your FIRE number will be more than $1.2 million.

While your FIRE number can serve as a guide to when you can retire, preparing for life outside of work requires more planning than a simple calculation. What you plan for retirement now may be very different from the reality once you get there. And turns in your portfolio may require you to be flexible about how much you can withdraw in one year versus the next.

If you calculate your FIRE number and find yourself overwhelmed by a large number, remember that you don’t have to get there overnight, says Sabatier.

“I might need $2 million to be financially independent, but instead of focusing on that, let me focus on saving for six months. Then one year. Then two years,” he said. “Take one year’s worth of spending at a time. In the end, that big number distracts people.”

Register now: Get smarter about your money and your career with our weekly newsletter

Don’t miss: This 37-year-old quit his job and now earns $10,000 a month with passive income: ‘I wanted to be my own boss’

Source link