FIRE (Financial Independence, Retire Early) is a movement that has gained massive popularity among people who want to achieve financial freedom and retire early. At the core of this movement is the concept of your “FIRE number,” which is the amount of money you need to save and invest to achieve financial independence. Once you reach your FIRE number, your investments can generate enough income for you to live comfortably without having to work.
In this blog, we’ll break down the steps to calculate your FIRE number in a simple, easy-to-understand way. Whether you’re just starting on your financial independence journey or you’re curious about the idea of retiring early, this guide will help you figure out the best way to determine your FIRE number.
1. What Is a FIRE Number?
Your FIRE number is the amount of money you need to accumulate in savings and investments to generate enough income to cover your living expenses for the rest of your life. It’s the key figure that determines when you can stop working and start living off your savings.
The calculation is based on a common rule in the FIRE community called the 4% rule. This rule suggests that if you withdraw 4% of your total savings each year, you should have enough money to live on for 30 years or more, assuming your investments continue to grow.
For example, if you save $1 million, you could theoretically withdraw $40,000 per year (4%) to cover your expenses. However, everyone’s FIRE number is different because it depends on your unique lifestyle and spending needs.
2. Step-by-Step Guide to Calculating Your FIRE Number
Step 1: Calculate Your Annual Expenses
The first step in calculating your FIRE number is figuring out how much money you spend each year. This will give you a clear picture of how much you need to cover your living expenses once you retire.
To calculate your annual expenses, look at your current budget and track all your spending categories, such as:
- Housing (rent, mortgage, property taxes)
- Groceries and dining out
- Transportation (gas, insurance, public transit)
- Utilities (electricity, water, internet)
- Insurance (health, life, home)
- Entertainment (movies, hobbies, vacations)
- Miscellaneous (clothing, gifts, etc.)
Be as thorough as possible and try to include every category of expense. If you don’t currently have a budget, look back at your bank statements from the past few months to get an estimate of your average monthly spending, and then multiply that by 12 to get your annual expenses.
Let’s say your total annual expenses come to $50,000.
Step 2: Apply the 4% Rule
Once you know how much you spend each year, you can use the 4% rule to calculate your FIRE number. The 4% rule assumes that you can safely withdraw 4% of your investment portfolio each year without running out of money over time.
To find your FIRE number, simply multiply your annual expenses by 25. This is because 4% is the same as 1/25, so multiplying your annual expenses by 25 gives you the total amount you need saved to live off 4% each year.
FIRE number formula:
Annual expenses × 25 = FIRE number
Using our example of $50,000 in annual expenses:
$50,000 × 25 = $1,250,000
So, if you spend $50,000 per year, you would need to save $1.25 million to retire and live off your savings.
Step 3: Adjust for Your Personal Circumstances
While the 4% rule is a good starting point, it’s important to remember that everyone’s financial situation and retirement goals are different. Here are a few factors to consider when calculating your personal FIRE number:
1. Lifestyle Adjustments
Will your expenses change in retirement? For example, you might pay off your mortgage, downsize your home, or spend less on transportation if you no longer commute to work. On the other hand, you might want to travel more, which could increase your expenses.
Review your future plans and adjust your FIRE number based on any changes in your spending.
2. Healthcare Costs
Healthcare can be a significant expense in retirement, especially if you retire before you qualify for government programs like Medicare. Make sure to factor in additional healthcare costs, including insurance premiums, out-of-pocket expenses, and potential long-term care needs.
3. Taxes
Remember that taxes can reduce the amount of money you have available to spend in retirement. If you’re withdrawing from a tax-deferred retirement account, such as a 401(k) or traditional IRA, you’ll owe taxes on that money. Be sure to account for taxes when determining your FIRE number.
4. Inflation
Inflation erodes the purchasing power of your money over time, meaning that $50,000 today may not buy as much in 20 years. Some people choose to adjust their FIRE number upward to account for inflation, though investments like stocks generally outpace inflation over the long term.
3. Other Variations of FIRE
The FIRE community has developed several variations of the traditional 4% rule to suit different financial goals and lifestyles. Depending on your preferences, you might want to aim for one of these alternative FIRE goals:
Lean FIRE
Lean FIRE is for those who plan to live a minimalist or frugal lifestyle in retirement. It involves saving less money because your annual expenses are significantly lower. For example, if you only need $30,000 per year to live comfortably, your FIRE number would be:
$30,000 × 25 = $750,000
Lean FIRE allows you to retire earlier, but it may involve making significant sacrifices to your lifestyle.
Fat FIRE
Fat FIRE is for those who want a higher standard of living in retirement. If you plan to spend more than average on luxuries like travel, dining out, or hobbies, you’ll need to save more to support that lifestyle. For example, if your annual expenses are $80,000, your FIRE number would be:
$80,000 × 25 = $2,000,000
Fat FIRE requires a larger savings goal but provides more financial flexibility in retirement.
Barista FIRE
Barista FIRE is a hybrid approach where you save enough money to partially retire but continue working a part-time job or side gig to cover some of your expenses. This reduces the amount of money you need to save, as you won’t rely solely on your investments.
For example, if you need $50,000 per year but plan to earn $20,000 from part-time work, your FIRE number would only need to cover $30,000:
$30,000 × 25 = $750,000
4. Stay Focused and Track Your Progress
Once you’ve calculated your FIRE number, it’s important to stay motivated and keep track of your progress. Reaching financial independence can take years or even decades, depending on your savings rate, income, and investment returns.
Tips to stay on track:
- Increase your savings rate: Try to save a larger portion of your income, especially if you get a raise or bonus.
- Invest wisely: Focus on long-term, low-cost investments like index funds or ETFs that can grow steadily over time.
- Minimize lifestyle inflation: As your income increases, resist the temptation to spend more. Instead, put that extra money toward your FIRE goal.
Conclusion
Calculating your FIRE number is the first step toward achieving financial independence and retiring early. By understanding your annual expenses, applying the 4% rule, and adjusting for personal factors like lifestyle changes and healthcare costs, you can set a realistic target to work toward.
Whether you aim for Lean FIRE, Fat FIRE, or a hybrid approach, the most important thing is to stay disciplined, continue saving, and invest for long-term growth. With a clear FIRE number and a solid plan in place, you can achieve financial freedom and design the life you want.
