A FIRE number can set you free. What’s yours?
In Financial Independence, Retire Early (FIRE) culture, you’re working toward what is known as your FIRE number — the amount of money at which you can embrace a work-optional lifestyle. A napkin-math calculation for this number is to multiply your annual expenses by 25, sometimes known as the 4% rule.
Use the slider below to see what your FIRE number would be based on various monthly expense numbers, according to the 4% rule.
Approximate Your FIRE Number
The FIRE Number: What to Keep in Mind
The numbers above might feel intimidating at first. Let’s all get on the same page about what they mean.
First, it’s important to remember that a FIRE number is different from how much money you need to retire. We’re playing big here.
Your FIRE number is how much money you’ll need to have in investments — whether in your 401(k), Roth IRA, brokerage, or other accounts — to live off the income those investments generate and never touch the principal. In theory, you could be retired for 100 years, and it wouldn’t matter: your principal, untouched, would remain the same.
Even if you don’t want to retire early, your FIRE number can still help you plan your financial future. Many people only want to partially retire, or dip in and out of the workforce throughout their career. The FIRE number is a way to estimate how much passive income will be produced from your investments, so you know exactly how much you need to earn to close the gap.
For most, the FIRE number is… a lot of money. It can feel intimidating at first.
Remember that, at its core, a FIRE number calculation helps you determine approximately how much passive income will be generated from your retirement savings and investments at any given time.
The FIRE number isn’t just a destination. Think of it as a planning tool to project how your wealth will grow as you enter your 30s, 40s, 50s, and beyond, based on current saving and spending habits.
Whatever your reason for finding it, the FIRE number is one of the most thrilling calculations you’ll ever make in your personal finance journey. But to get an exact FIRE number and action plan for becoming work-optional, there are some other factors that you need to take into consideration — factors that many personal finance influencers and enthusiasts miss.
Here are some other factors to know that aren’t included in the calculations above.
FIRE Number Factors You Might Be Missing
The biggest factor that gets missed in FIRE number calculations is year-over-year inflation.
Inflation has been in the news often recently due to its record highs, the highest year-over-year increases in 40 years. But inflation isn’t inherently bad. A little year-over-year inflation, around 2%, is considered normal and healthy.
Let’s say you calculated your FIRE number back in 1995, when the cost of a gallon of milk was $2.50, not the $4.41 it is today. You calculate all your expected retirement expenses in 1995 prices, and invest for the next 27 years in order to produce enough passive income to become financially independent.
You’d fall short – by a lot. That’s because the dollar inflated by an average of 2.51% between 1995 and 2022, resulting in a 95.55% increase overall. If you planned your retirement based on 1995 prices, you’d be only a little over halfway to your goal in 2022. Yikes.
It’s a risk to calculate your FIRE number in today’s dollars, and then assume that number will remain constant.
Pensions and Social Security
That last one was a bit of a bummer, so let’s talk about another factor that might make your FIRE number easier to reach.
When you hit a certain retirement age, you may have new streams of income that unlock, such as Social Security or work pensions. Having these extra income streams means you won’t need your investments to generate as much passive income each month, which will lower your FIRE number.
Americans are not eligible to take Social Security until they’re at least 59.5. The Social Security Administration has a program on its website that will let you see how much you can expect in Social Security payments, based on the taxes you’ve paid to-date into the program. If you’ve been paying taxes for years, know that you’ve been paying into the Social Security fund, and you’ll be able to reap the benefits of that fund later.
If you have a home, you’re building wealth. Although your home can’t be an income source — unless you were to sublet or rent out part of your home — having your mortgage paid off will change your expected monthly expenses in retirement.
When possible, your amortization schedule can and should be factored into your overall FIRE number calculations, because it will account for when you have extra money freed up after your mortgage is paid off.
Not Retiring Early
Many FIRE enthusiasts don’t actually want to retire early. They just want to have peace of mind that they’re making the right personal finance decisions in early and middle age.
You can have a great life on Coast FI or Barista FI. You know you’ll have enough money as you age, and you’re financially freed up to only do the work you really want to, which for some is more enticing then never working again.
Be honest. Will your expenses go up as you age?
Here’s an important distinction: the FIRE number is based on the expenses you will have when you are no longer working, not the expenses you have today. These numbers may be similar or markedly different.
Perhaps you have a mortgage now that will be paid off by the time you leave the workforce. Or maybe your three kids, who are in elementary school right now, will be adults by the time you retire. And nearly everyone should take into consideration the fact that healthcare costs rise as you age.
It’s hard to anticipate what your expenses will be years or decades from now. But if you know that some of your expenses today will not be expenses in the future, you should factor that into your FIRE number calculations accordingly.
Get Your Most Accurate FIRE Number
A FIRE number can change your life.
But not taking into consideration factors like inflation, social security, and lifestyle creep can throw your FIRE number off by hundreds of thousands of dollars. No one wants that.
Fortunately, NextAdvisor is developing a downloadable financial independence calculator of our own — one that will account for all of these variables and more in a single clean, easy-to-use spreadsheet, reviewed and endorsed by multiple Certified Financial Planners (CFPs).
Join our waitlist and you’ll be the first to know when it goes live — and also receive an offer for a special, early adopters-only discount.
Join Our Forthcoming FIRE Calculator Waitlist
- Calculate a safe, accurate FIRE number
- Factor in inflation and cost of living
- Include your mortgage (if you have one)
- Calculate various FI benchmarks
- Toggle explanations of terms on/off
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