Determining Your FIRE Number

The Financial Independence, Retire Early (FIRE) number is a beacon of financial freedom based on your lifestyle and financial goals. It's the total amount of money you need to accumulate to uphold your lifestyle indefinitely without needing additional income from full-time employment. Once you've accumulated assets equivalent to your FIRE number, you are considered "financially independent," with the potential to retire, should you choose.

So what is the FIRE number, and how can you determine your own? And, perhaps more importantly, what are the potential limitations of the FIRE number concept?

The Rule of 25 and the 4% Rule

The concept of the FIRE number is largely grounded in two intertwined principles: the Rule of 25 and the 4% Rule. These concepts are interconnected, each serving to validate the other.

• The Rule of 25 - This principle suggests that you must accumulate savings equivalent to 25 times your annual expenses to achieve financial independence. This figure is based on the idea that your investments will generate enough returns to cover your living expenses yearly.

• The 4% Rule - This rule, also known as the Safe Withdrawal Rate, is a guideline that recommends withdrawing no more than 4% of your portfolio in the first year of retirement. Future withdrawals should be adjusted for inflation. This rule is designed to safeguard your savings for a 30-year retirement period.

These two rules mirror each other. If you multiply your annual expenses by 25, you get the same result as dividing those expenses by 4% - that's your FIRE number.

How to Calculate Your FIRE Number

Calculating your FIRE number involves several steps that demand a clear understanding of your current financial state and a projection of your future needs and wants.

• Track Your Expenses - The foundation of your FIRE number calculation lies in accurately knowing your annual expenses. A meticulous record of all your expenditures, from fixed outflows like rent, mortgage payments, utilities, insurance, and car payments to variable costs like groceries, entertainment, travel, and discretionary spending, is paramount. Also, factor in occasional but inevitable expenses like home maintenance, healthcare, or emergency costs.

• Estimate Future Changes - With your current annual expenses in hand, it's time to project any expected changes in your post-retirement life. You'll pay off your mortgage or plan to travel more by then. You may expect a reduction in work-related expenses like commuting but foresee an increase in healthcare costs. Adjust your annual expenses figure to mirror these anticipated changes.

• Apply the Rule of 25 - Now, take the projected annual expenses and multiply this number by 25. This product is your preliminary FIRE number.

• Consider Additional Factors - Life isn't always predictable, and your FIRE number needs to account for this uncertainty. Healthcare costs can escalate as you age, your dream of extensive travel could increase your retirement expenses, or you might plan to support your children or grandchildren financially. Each factor can impact your FIRE number and should be carefully considered in your calculations.

Limitations of the FIRE Number

As helpful as the Rule of 25 and the 4% Rule are, they are general guidelines based on historical data. It's crucial to remember that these are not foolproof rules. Market volatility, significant life events, and shifts in your lifestyle or spending habits can all influence the sustainability of your FIRE journey.

In addition, the 4% Rule assumes a 30-year retirement period. If you plan to retire significantly earlier, you might need to consider a more conservative withdrawal rate to ensure your savings last your entire lifetime. In that case, accumulating more than 25 times your annual expenses would be required.

Calculating and striving towards your FIRE number is a dynamic process, not a one-time event. Significant changes in your lifestyle, financial aspirations, or the economy might necessitate recalibration of your FIRE number. This process calls for regular reassessment and modification of your FIRE number.

Moreover, remember that personal finance is, indeed, personal. The FIRE movement is not a one-size-fits-all approach, and your FIRE journey should reflect your individual lifestyle preferences, financial circumstances, and life goals. Variations of FIRE, such as LeanFIRE, FatFIRE, and BaristaFIRE, each have their unique impact on your FIRE number.

Lastly, while achieving your FIRE number can provide financial freedom, it's crucial to consider non-financial aspects of early retirement. Preparing yourself mentally and emotionally for this significant life transition is as important as financial preparedness.

The Takeaway 

Working with a financial advisor could be beneficial in navigating these intricacies. They can provide tailored advice and strategies per your circumstances, risk tolerance, and life goals. Your journey toward financial independence is unique, and a personalized roadmap is key to reaching your FIRE number. The FIRE movement is about more than just attaining a number. Still, a comprehensive lifestyle change and your preparations should mirror this holistic approach.