The FIRE movement promises a surefire way to help you retire below the national average retirement age of 64 and be financially independent. But first, you should know your FIRE number, or the amount of retirement money that you need to have invested to live off the returns. Here’s how to calculate it. Consider working with a financial advisor about how to create a financial plan that will empower you to retire when you want to.
What Is a FIRE Number?
FIRE is an acronym that stands for Financial Independence, Retire Early. Those who follow the FIRE movement work hard to change their lifestyle so that they can retire earlier than most. Depending on when you start, your income or your goals, you may become work-optional as soon as your 40s.
The strict savings habits and strategic investment in the FIRE movement are designed to help you reach your FIRE number. That’s the total value of assets necessary to live on a passive income.
It’s worth noting that your FIRE number can change depending on different factors. These include your expected retirement age, investment returns and life expectancy. So, if you plan on retiring earlier, your FIRE number will be higher because you’ll need to save more money to cover a longer retirement. The same goes for those with longer life expectancies. However, your FIRE number may be lower if you expect higher investment returns.
How to Calculate Your FIRE Number
You’ll run into a few different numbers in the FIRE movement. For example, some proponents claim that the best move is to have $1 million flat. They believe that is enough money to retire on. From there, you can live on something like an estimated $40,000 a year. Alternatively, there are equations you can use to find a more personalized number. The first and most popular equation is: FIRE number = 25 x your annual expenses.
This formula is based on the Trinity Study, the better-known name for a 1998 paper titled “Retirement Savings: Choosing a Withdrawal Rate that is Sustainable” published by three finance professors at Trinity University. The study led to what we now know as the 4% rule. Essentially, this rule supports the theory that if you withdraw 4% from your savings annually during your retirement, adjusted for inflation every year following the first, then you will have a sustainable long-term passive income.
So, this first formula, known as the 25x rule, is an estimate of how much money you’ll need in total to safely rely on the 4% rule. However, that might not be the right rate for you.
An alternative formula is:
FIRE number = annual expenses / safe withdrawal rate
Why Does Your FIRE Number Matter?
A FIRE number, and hitting it, can matter for a multitude of reasons. For one person, it’s the difference between working long-term at a stressful corporate job and part-time at a passion project. For another, it’s the freedom from living paycheck to paycheck for the rest of their life. Or the ability to look forward to their senior years.
Your FIRE number gives you a goal to work toward that allows you to live comfortably. You can fill time formerly devoted to working. Instead, you can explore alternative sources of passive income.
Is Early Retirement Right for You?
FIRE may not be the right avenue to retirement for you, even if you’d like to retire early. Some critics of the FIRE movement argue that it’s only attainable for the upper class. In particular, there are concerns that the target group is mostly white and male, with high-paying jobs. Even some supporters who don’t fit in the larger demographic agree there’s a lack of diversity in the FIRE movement (although there are prominent figures, like Tanja Hester, author of “Work Optional,” trying to change that).
Lack of diversity makes it hard for those with complex lives to follow the same guidelines others may find easy through FIRE. Your life may require a list of unique expenses that make it difficult to cut back in the same way.
Additionally, FIRE doesn’t necessarily account for unexpected expenses. You may encounter serious illness in the future, or your investments may take a drastic hit. If so, your preplanning may go out the window since you only allotted so much in your retirement. However, while the FIRE movement may not work for you, that doesn’t mean you should give up on retiring earlier. You just need to plan accordingly.
One way to make early retirement a reality is to implement strategies that can help you cut expenses. These may include cancelling unnecessary subscriptions and services, living below your income level or moving to a location with a lower cost of living. You may also look for ways to boost your income by starting a side business or taking on freelance work, and making financial investments for long-term growth and retirement income.
The FIRE movement is only one pathway to financial independence. For some, the strict savings and budgeting habits may align well with their goals. For others, it may ask for too much restriction. So, while working to achieve a secure retirement is worth the work for some people, it might not fit into a lifestyle you can tolerate.
You can always take away certain advice from the movement without following it. Building up your nest egg and keeping track of your annual expenses are good habits to form. However, if you want an alternative path to early retirement, consider speaking with a financial advisor. They can help you define your goals and build a plan for you that takes your situation into account.
Tips for Retirement Planning
- Retirement planning and meeting specific retirement goals can be difficult on your own. You may want to work with a financial advisor to help put you on the right path. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Get ahead of the game and learn how much you’ll need by using a retirement calculator. If you’re wondering how to reach that goal number, consider investing in an employer-sponsored 401(k) program.Photo credit: ©iStock.com/kupicoo, ©iStock.com/Geber86, ©iStock.com/yongyuan