How to Calculate Your FIRE Number
Your FIRE number is the amount you need saved and invested before you can retire early. It is the main number in a FIRE plan. How much you save each month and how long the plan takes both follow from it. The good news is that it is simple to work out. It is your yearly spending times 25.
The formula in plain language
Start with what you spend in a year. Not what you earn, and not what you think you spend, but what actually leaves your accounts in a typical year. Multiply that number by 25. The answer is your FIRE number.
The 25 comes from the 4 percent rule. If you can live on 4 percent of your savings each year, you need 25 times that amount saved. One divided by 0.04 equals 25. The 4 percent rule is a guide, not a promise. Bengen found in 1994 that about a 4.1 percent first year withdrawal lasted 30 years with 50 percent stocks and 50 percent intermediate term government bonds. The 1998 Trinity study tested withdrawal rates over 30 year periods. Both studies used past market data. They did not test retirements of 50 years, and they did not promise future returns.
Worked example: $50,000 of yearly spending
These are round hypothetical numbers. They are not a real household.
- Step 1. Yearly spending is $50,000. That includes housing, food, transport, and health costs. It also includes tax, because tax is spending too.
- Step 2. Multiply by 25. $50,000 times 25 equals $1,250,000. That is the FIRE number.
- Step 3. Check the withdrawal. 4 percent of $1,250,000 equals $50,000. Divide by 12 to get the monthly amount. $50,000 divided by 12 equals $4,167 per month.
- Step 4. Check the logic in reverse. If you spend $50,000 a year and your savings are $1,250,000, the first year withdrawal is $50,000 divided by $1,250,000, which equals 0.04, or 4 percent.
Use the same steps for any spending level. Change the spending number, and the target changes with it. A small rise in spending makes a large rise in the target. Each extra $10,000 of yearly spending adds $250,000 to the FIRE number, because $10,000 times 25 equals $250,000.
What the numbers look like
| Yearly spending | FIRE number (spending times 25) | Monthly spending |
|---|---|---|
| $40,000 | $1,000,000 | $3,333 |
| $50,000 | $1,250,000 | $4,167 |
| $60,000 | $1,500,000 | $5,000 |
| $80,000 | $2,000,000 | $6,667 |
| $100,000 | $2,500,000 | $8,333 |
Monthly spending is yearly spending divided by 12. The figures are rounded to the nearest dollar.
Use your real spending, not a guess
Most people understate their spending. One off costs add up. Car repairs, gifts, travel, and medical bills all count. A good test is to look at 12 months of bank and card statements. Add up all the money that left your accounts. Subtract money moved to savings. The rest is spending.
Include costs that start after you stop work. Health cover is the main one. An employer plan may end when work ends. A plan bought on your own can cost far more, and it lasts until Medicare starts at age 65. Include tax on withdrawals from retirement accounts. A $50,000 withdrawal from a traditional retirement account is not $50,000 to spend. Tax takes a share first.
What the rule misses
The rule of 25 gives a target. It does not set a date. It does not tell you how much to save each month. It also assumes the 4 percent rule holds for your time frame. If you retire at 40, your money may need to last 50 years, not 30. A longer time frame needs a lower withdrawal rate, a larger target, or income after retirement. The Social Security Administration notes that a 65 year old can expect to live about 20 more years on average, and many live longer. Plan for a long life, not an average one.
Fees also matter. A 1 percent yearly fee cuts the money that stays invested. Market falls early in retirement matter too. Taking out $50,000 after a market fall takes a larger share of what is left. That is why some people use 3.5 percent, or 28.6 times spending, for an early retirement. At 3.5 percent, $50,000 of spending needs $50,000 divided by 0.035, which equals $1,428,571, or about $1,429,000.
Recheck your number each year
Your FIRE number is not fixed. Spending changes. Prices rise. Health needs change. Check the number each year with fresh spending data. If spending rises by $5,000, the target rises by $125,000. If spending falls by $5,000, the target falls by the same amount. Small changes in spending move the target a lot, because of the times 25 step.
Try the FIRE number calculator
Use this calculator to work out your own FIRE number from your yearly spending and withdrawal rate, using hypothetical numbers.
Education, not advice. This post explains a calculation. It is not personal financial advice. Your income, taxes, health, and family needs are your own. Check the rules that apply to you before you act.
Sources
- Bengen, William P. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning, October 1994. Financial Planning Association
- Cooley, Philip L., Carl M. Hubbard, and Daniel T. Walz. “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable.” American Association of Individual Investors, February 1998. AAII Journal
- Investopedia. “The 4% Rule: What It Is and How to Use It.” Investopedia
- Social Security Administration. “Life Expectancy Calculator.” SSA.gov
