Starting your financial independence journey can be daunting. Having a number at the finish line to guide you can make all the difference. Read on to learn how you can calculate your FIRE number.
One of the driver’s of 2021’s “Great Resignation” is higher job disatisfaction. If you’re another one of the millions of people feeling like they just want to get up and quit, you are not alone. Perhaps that’s one thing the pandemic showed us: our priorities. That’s where FIRE can come in—financial independence, retire (or rest!) early. It’s time to calculate your FIRE number.
You can definitely pack up your stuff one day and quit your job without a plan. Another option is to plan for a point in your life where you no longer have to work—instead, you’ll be financially independent. Work optional. Before the traditional retirement age of 65. So how do you know when you’ve reached this point? That’s where your FIRE number comes in..
What Is FIRE?
At its core, FIRE’s core concepts include:
- High savings rate
- High investment rate
- Intentional budgeting
The basic premise is that you build up your investment porfolios high enough, to where compoud interest will do the rest of the work for you and continue building up your investments even more. Eventually, you will be fully financially independent, because you will have built your portfolio to a level that can sustain all future expenses. Your FIRE number is thus the account balance that you hit before you can start your safe withdrawal practices.
Assessing Your Lifestyle Requirements
Thankfully, the FIRE space has become even more nuanced over the last few years. Whereas before, it was traditionally seen as something reserved for six-figure [male] earners, nowadays, we are seeing different forms of FIRE status that cater to different lifestyle needs.
These different forms include Lean FI, which is on the extra frugal side of annual spending, to Fat FI, which is on the more luxurious and lavish side of spending. You will determine which style of FIRE suits you the most.
As we jump into starting to calculate your FIRE number, we first need to outline our annual expenses. Some of the categories you will include are:
- Housing— mortgage or rent, home insurance, electricity, utilities, etc.
- Transportation— car expenses, public transportation, car maintenance, gas, parking
- Meals— groceries, eating out
- Health—insurance, hygiene products
- “Fun” stuff— hobbies, outings, experiences
Write all of these down and try to develop a macro-level view of all your expenses and how much you may need in a given year.
Whether you choose to include only the fixed, necessary expenses, or include some wiggle room for fun experiences, these decisions will infleunce which FIRE path makes the most sense to you.
To properly document your FIRE journey and progress, it is also important to understand your net-worth. For that, we reommend conducting a personal finance self-audit, which will require you to document any and all debtsyou may have
The Trinity Study
So how do we actually find our FIRE number?
In the late 1990s, a group of three financial professors based in Trinity College produced a report that outlined safe withdrawal rates in a portfolio, “safe” being that the portfolio would remain intact after thirty years of a consistent withdrawal. This accounted for inflation and was compiled of an equal split between stocks and high-grade corporate bonds.
As a formula, this would look like:
Annual Expenses x 25 = FIRE Number
As an example, let’s say after listing all of your expenses, you identify that you have an annual spending rate of about $60,000. Under the model of the Trinity Study, you would do:
$60,000 x 25, which gives us $1,500,000 as our FIRE number. Once our portfolio hits that number, you would become financially independent, because now your portfolio would be providing you with the income you may need (based on your portfolio).
The Trinity Study only takes a look at 30 year windows. While this might be standard for many FIRE enthusiasts, we also need to consider:
- 30 years might not be your framing
- Risk tolerance (i.e., maybe you don’t want to invest in bonds anytime soon)
- Is 4% too much in a given year?
So what are some alternative ways?
While 4% (or x25) is the traditional rate that FIRE-followers use, this same study also proposed a 3% annual withdrawal rate, which would be a more cautious rate than the traditional 4%.
Let’s say your $60,000 in annual spending is, now, instead divided by our new withdrawal rate of 3%.
$60,000 ÷ .03% = $2,000,000
The key to nailing down your FIRE number is, yet again, setting some intentionality around reflecting on how we use our money. If we want to plan for an investment and savings account that we can start tapping into by the time we’re 35, that’s a whole 40+ years we have to think about. While it is impossible to foresee what your annual expenses will be a few years from now, what is possible is having control over the kind of lifestyle we want to have.
To start your FIRE journey:
- Make sure you understand the core concepts of FIRE
- Assess your lifestyle desires and requirements
- Run a personal finance self-audit
- Explore what a 3% and a 4% annual withdrawal rate can look like for your portfolio
Want to learn more about FIRE?
Check out our video training to learn the basics of FIRE and how to start your journey towards financial independence!
Check Out Our Podcast Episodes About FIRE
- Episode 103. How To Pursue Intergenerational Wealth with FIRE | Mahi Amaha, Black Womxn Are Wealthy
- Episode 84: How To Work Less & Live More with Slow FI | Jessica of The Fioneers
- Episode 76. How To Buy Back Your Freedom With FIRE | Jamila Souffrant, Journey To Launch
- Episode 69. How To Pursue FIRE As A Couple With Different Income Levels | Gay Husbands On FIRE
- Episode 58: How To Retire Early and Live An Intentional Life | A Purple Life
- Episode 31: Why Achieving Financial Independence Matters For Communities of Color | Julien and Kiersten Saunders of rich & REGULAR